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What is a Non-Fungible Token (NFT)? | Ledger

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Non-fungible tokens (NFTs)  represent a transformative force in the crypto landscape, reshaping how we perceive and value digital assets.

The origin of NFTs can be traced back to 2014, although they exploded into popularity much later in 2021, specifically with the introduction of the ERC-721 token standard on the Ethereum network. This breakthrough made creating non-fungible tokens much easier, opening the door to new ideas from less tech-savvy creators. In short, it allowed digital artists to create and distribute their own NFT collections. This sparked a whole creator economy, cutting out the middlemen that typically dominate artistry in the physical world.

But since then NFTs have transcended their roots, permeating various industries beyond art. Digital creators, including musicians, game developers private members clubs use NFTs as a way to monetize their crafts. But before we dive into the details, what are NFTs exactly?

A non-fungible token, or NFT, is a blockchain token with a unique value. They can represent anything, from digital collectibles to membership cards to in-game items and metaverse land. The possibilities are almost endless.

But to understand fully, let’s start with fungibility. To explain, a fungible item can be replaced with another identical unit. A good example of something fungible is the United States Dollar, or in fact, any fiat currency. One dollar is always worth one dollar, whether it comes in the form of a note or a coin, thus dollars are fungible.

NFTs are non-fungible because you can’t swap one for another identical copy: each token has a different value. Think of each NFT as a painting from a famous artist. Despite using the same materials, the same brushes, and having been painted by the very same hand, no two pieces of work have the same price. That’s basically how NFTs work too: their value depends on what they offer and how much the buyer is willing to pay.

To understand what gives them value, let’s take a look at some of the use cases of NFTs so far.

Of course, as a representation of something unique, NFTs can come in many forms and have a near-infinite number of use cases. However, these are some of the most common uses for NFTs so far:

One of the most popular uses of NFTs is as a distribution method for digital art. Since these tokens are unique, they can represent unique pieces of digital art. This allows digital artists to distribute their works themselves through decentralized NFT marketplaces. NFTs also allow you to build conditions that guarantee creator royalties.

Plus, since the blockchain is decentralized, NFT holders truly own their pieces of artwork. Using a non-custodial wallet, only you have access to your accounts, meaning your artwork is only yours to enjoy. With these benefits, there is now a thriving crypto art culture consisting of many notable digital artists including Beeple, Fewocious, and Justin Aversano.

NFT collectibles have been extremely popular since their explosion into the mainstream in 2021. While NFT collections such as CryptoKitties and CryptoPunks were around for much longer than that, this era defined the rise of NFT collectibles.

While there are many ways to launch a collectible project, one of the most popular formats is a “10k collection”. Typically these collections will have a set of attributes, such as bodily parts on a base character, which will be chosen at random to guarantee each NFT is unique. This type of collection was pioneered by the CryptoPunks but later made famous by the Bored Ape Yacht Club. Since then, there have been countless collectible drops with every theme imaginable.

NFTs are not all about showing off art or collectibles. They are also useful! Using NFTs, several protocols now offer you the chance to mint your own web3 domain.

Essentially, a web3 domain allows you to personalize a crypto account. Setting up a web3 domain will allow others to send you crypto without copying down your blockchain address. This is great for helping your friends find the correct account and avoiding any potential mistakes copying down blockchain addresses. Web3 domains also make up a part of your digital identity!

Popular web3 domain services include ENS domains and unstoppable domains on the Ethereum network. Then there are also Tezos Domains, offering .tez addresses for the Tezos network.

NFT can represent in-game items for blockchain games, such as weapons, power-ups, vehicles, characters, and more. This is a game-changer for gamers. In traditional games, buying a digital item means giving a centralized game studio your funds. If you don’t want to play that game anymore, the digital item stays within the platform and your money is long gone.

But when your in-game items are NFTs, you can sell them to someone else and use those funds to buy items for a game you still play. Plus, when you buy an in-game item, you’re paying the creator of the item rather than a centralized company, helping power the decentralized creator economy.

Not only that but since NFTs operate using smart contracts on decentralized networks, you can also program them to have interesting functionalities. For example, using the item could burn (destroy) the NFT, or lock it up using a cool-down timer until it can be used again.

Another interesting use of NFTs is to represent parcels of land in blockchain metaverses. Most blockchain metaverses offer a limited supply of land plots. Typically, they will also allow you to build what you’d like on your property, whether that’s creating a digital experience or using it for advertising. They encourage user-generated content and even let you monetize your plot.

Good examples of metaverses offering land as NFTs include The Sandbox, Decentraland, and The Otherside.

NFTs work differently on different chains, but typically they rely on smart contracts. For more complex or data-heavy NFTs, they may also use an off-chain data storage system. Let’s see how these pieces work.

Smart contracts are at the core of most NFTs. In short, they provide the framework for executing functions automatically—without a middleman. But they don’t just power NFTs, they are also responsible for the operations of all sorts of blockchain apps including NFT marketplaces and DeFi platforms.

Smart contracts are essentially just computer programs, but instead of running on one computer, they operate using a blockchain’s network of nodes. To do so they require a virtual machine. That’s why Bitcoin doesn’t have smart contracts: Bitcoin doesn’t have its own virtual machine.

Ethereum, on the other hand, uses the Ethereum virtual machine (EVM). While it was built specifically for Ethereum, many chains now use the EVM, which means many NFTs across multiple networks follow the ERC-721 or ERC-1155 smart contract standard. This allows developers to build projects on multiple chains with ease. In some cases, it also allows for some level of interoperability.

Although your NFT is stored on the blockchain, that doesn’t mean all of its data is too. While some NFT collections store their data on-chain, this can become costly and can cause network congestion for some blockchains. Minting a high-quality image directly on the blockchain requires a lot more data storage than some simple text. To avoid exorbitant fees to mint and transfer these more complex NFTs, many projects opt to host their images using decentralized data storage services.

Some examples of these services include Arweave and IPFS. Using these services, you can mint an NFT with a link to the asset hosted off-chain. This lessens the burden on the chain. However, some will argue that these NFTs are less decentralized and immutable, as typically the person who initiates the off-chain storage will have the power to change the image linked to the NFT.

Today, there are NFTs on countless networks; far too many to list here! However, below you’ll find some of the most popular networks for NFTs currently.

Ethereum was the first crypto network to support NFTs. Since its launch in July of 2015, its ecosystem of apps has only increased. While NFTs have been possible since Ethereum’s launch, they catapulted into popularity around 2021.

Building upon the ERC-721 contract pioneered by CryptoKitties, variants of this smart contract have emerged, allowing for new capabilities. Take the ERC-1155 contract, for example, which introduced a way to create semi-fungible tokens. These types of assets were a game-changer for in-game items, allowing you to create multiple copies of a token whilst retaining programmatic capabilities.

There are also several experimental contract standards such as; ERC-721a which reduced the gas fees needed to mint large batches of NFTs, and ERC-404, which allows for native fractionalization.

Today, the Ethereum network is still the most popular chain for NFTs, hosting some of the biggest NFT collections. Cryptopunks, Bored Ape Yacht Club, and Moonbirds are all Ethereum collectibles. Ethereum also supports some of the biggest decentralized metaverses such as Decentraland and The Sandbox.

The first NFT project on the Solana network launched in 2021 and was named Kreechures. In short, it is an RPG that uses NFT characters you can level up. Since then, Solana NFTs have come a long way, with collections thriving across multiple genres. Some of the biggest NFT projects you will find in the Solana ecosystem now include Frogana, Claynosaurz, and STEPN.

The NFT ecosystem on Tezos is mainly geared towards artists and individual creators. As such, the chain has attracted a lot of upcoming digital artists, particularly in the generative art niche. For example, one of the most popular generative art platforms, fxhash, launched on Tezos.

Minting NFTs on the Tezos network is much cheaper than on most networks, and there’s a huge ecosystem of participating creators. Not only that, but there are a range of Tezos NFT marketplaces to choose from.

Although it doesn’t support smart contracts, the Bitcoin network has a couple of alternatives to NFTs. Bitcoin ordinals were first introduced to the network in 2023 via the Ordinals Protocol. Created by Casey Rodarmor, this protocol allows you to inscribe pieces of Bitcoin with rich data such as text or images.

Then, there is also the Bitcoin STAMPS protocol. In short, these Bitcoin assets are much like Ordinals, apart from all of their data being stored on-chain. However, it’s important to note that neither of these protocols allows for self-executable functions. So while you can create a token similar to an NFT on the Bitcoin network, they are not quite the same.

If you want to manage your NFTs, you’ll need a crypto wallet. Bear in mind that wallets are usually chain-specific and even when they work with multiple chains, you may need to check if they support NFTs too.

Typically, interacting with a mint or NFT marketplace will require a software wallet, also known as a hot wallet. These types of wallets are free and easy to use. They are also most people’s first type of wallet. Popular examples of software (hot) wallets include MetaMask, Phantom, and Rabby.

However, it’s important to note that using a software wallet alone also comes with a risk: allowing hackers to access your accounts. To explain, software wallets store your private keys on their host device, i.e. your computer or smartphone. These types of devices are vulnerable to malware due to their constant connection to the internet, thus trusting them with valuable assets is a no-go. To benefit from their connectivity while keeping your private keys (and thus your assets) safe, the best solution is to connect your hardware wallet to a software wallet. This allows you to get the best of both worlds.

Hardware wallets store the private keys to your accounts offline, completely separate from your smartphone or laptop and its internet connection. While software wallets risk revealing your private keys via your internet connection during the signing process, hardware wallets sign transactions offline in a tamper-proof environment. As remote hacking attempts are rife in the industry, hardware wallets are an invaluable piece of kit.

If you need to use a software wallet to access a web3 platform or service, it’s recommended you use it in tandem with a hardware wallet. Luckily, Ledger devices are compatible with a wide range of software wallets across multiple chains. For example, for the Ethereum network, you can connect your Ledger to MetaMask. Then for Solana, you can connect your Ledger to Phantom. Ledger devices even connect to wallets capable of storing Bitcoin Ordinals, such as Leather (Hiro) wallet.

With these two pieces of tech working together, managing NFTs is seamless—and it doesn’t require forfeiting your custody or security.

Today, you can find NFTs on multiple chains, each with its own ecosystem of marketplaces, minting sites, and NFT-compatible wallets. In some cases, NFTs operate across multiple networks too.

In short, NFTs are an integral part of the crypto ecosystem. With their wide range of use cases, they offer new and innovative ways to activate communities, create digital identities, and provide benefits for their users. From novel uses like in-game items to more serious use cases like web3 domains, NFTs have changed the course of crypto history.

But of course, with the growing ecosystem of NFTs comes new challenges, namely avoiding hacks and scams. That’s why protecting your NFTs with a security-focused wallet is so important. Luckily, Ledger offers the tools you need to keep your non-fungible assets safe. With a Ledger device, you can avoid online threats, such as malware; and physical threats, such as physical hacking. This is thanks to Ledger’s security model, comprising cutting-edge hardware components such as the Secure Element chip it uses to store private keys offline. Plus a Ledger device’s capability of generating a near-infinite number of accounts lets you segregate your crypto assets into accounts designated for different tasks, allowing you to protect your main holdings from potentially malicious smart contract functions.

In short, a Ledger device is the single tool you need to access the NFT ecosystem with security and peace of mind. So what are you waiting for? Get yourself a Ledger device and start protecting your NFTs with secure self-custody—because if not self-custody, then why use crypto in the first place?

Just like standard ether (ETH) and Ethereum tokens, NFTs can be transferred from one address to another. But it’s important to note that the transaction fee is always paid in Ether since NFT tokens are usually indivisible by nature and cannot be used to pay gas fees.

To buy and sell NFTs, you will need to use an NFT marketplace. There are countless NFT marketplaces to choose from, but typically they are only compatible with a limited number of blockchains. For example, Magic Eden supports Ethereum, Solana, and Polygon NFTs; plus it also supports Bitcoin Ordinals. Then if you want to buy or sell Tezos NFTs, you’ll need to use a Tezos-specific NFT marketplace such as Objkt.

Of course, you’ll also need to use an NFT-compatible wallet to connect to these platforms, typically a software wallet. As you likely already know, the best way to ensure your security is to connect your hardware wallet to this account, thus protecting your private keys (and your assets along with them).

To create an NFT you’ll need to either write a smart contract, get someone to write a smart contract for you, or use an NFT minting service. If you’re inexperienced, the latter is your best option; and luckily you have plenty of options to choose from. Most NFT marketplaces, including OpenSea, Magic Eden and Nifty Gateway, offer a minting service. However, it’s important to note that the fees to mint on each platform will vary, as will the type of NFTs you can create and the chains they are compatible with. If you want to know more, make sure you check out our full guide on how to create an NFT.

An NFT allowlist is a method of creating an exclusive group of people permitted to mint NFTs from a specific project. Essentially it’s like a digital guestlist, only allowing certain people to access a contract. If you want to understand the inner workings of the process, check out the full article on allowlists. But to keep it brief, it’s a way to bring more exclusivity to an NFT project, prioritizing holders of particular NFTs or those that complete certain tasks over the general crypto population.

NFTs are unique and thus can vary in their rarity, desirability, and utility: their values rely on speculation, supply and demand, and several other factors. Like collectibles in the physical world, NFTs are worth as much as somebody is willing to pay for them—which can be a considerable sum. Famously, Beeple’s “Everydays: The First 5000 Days” sold for a whopping $69.3M; with only the Merge by Pak eclipsing those figures since, selling for $91M in 2021.

Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video all about creating – and selling – your very own piece of history.

Jem started her web3 journey in journalism, running the NFT news site NFTevening. Since then, she became enamoured with power blockchain technology has to revolutionize multiple industries–not just art! Now, she helps the Ledger Academy with Editorial Content and SEO.

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