NFTs are having a moment. Searches for "non-fungible token" on Google have surged since 2020 and some NFTs are selling for hundreds of thousands of dollars. So what are they and how do they work?

The basics.

  • A non-fungible token (NFT) is a digital asset that identifies something unique.
  • NFTs can identify artwork, collectibles, concert seat assignments, lottery tickets, or anything that is not fungible.
  • It is a special type of token that is different from fungible tokens like bitcoin.

Defining fungibility.

Before you can appreciate NFTs, it is essential to be clear about what is and is not fungible. Good synonyms for fungible are "interchangeable" and "replaceable."

  • A dollar is fungible; if you lose a $1 bill and I give you another, you maintain the same value. A gallon of distilled water is replaceable with another gallon of distilled water. An ounce of gold is interchangeable with another ounce of gold. These items are fungible.
  • The Mona Lisa is non-fungible. There is only one painted by Leonardo da Vinci and held by the Louvre museum in Paris. That authentic original can't be replaced.
  • In the same way, an NFT cannot be replaced. Unlike bitcoin, I can't give you an NFT to replace your NFT, because there is only one token with its particular, unique properties.

How NFTs are used.

  • You can buy an NFT to own unique sports cards, real estate, artwork, or even sneakers. When you purchase the NFT, your ownership is cryptographically secured. The rights of the token are provable and auditable. No one owns another NFT that can replace your coin; it is unique.
  • Moreover, NFTs can represent both tangible and intangible items. If the item is natively digital (such as a video game costume), the tokenization process is easy. If the item is physical, then the ownership rights to that item (for example, a property deed) will have to be tokenized and tied into the NFT.
  • Although the tokenization of real-world assets is beyond the scope of this introductory explainer, there are various services that assist with this legal process.

What is ERC-721?

  • The vast majority of NFTs are Ethereum's (ETH) ERC-721 tokens.
  • The ERC-721 standard enables developers to easily deploy NFTs while ensuring compliance with the broader ecosystem, including crypto exchanges or wallet services like MetaMask.
  • A small minority of NFTs have used Ethereum's ERC-1155 standard, and even fewer have used protocols by non-Ethereum blockchains like EOS, NEO, or Tron.
Coin with Ethereum logo.

Why is there so much hype?

Many celebrities have begun to notice the NFT market. Art collectors have amassed small collections. Property owners are discussing the benefits of tokenization with their lawyers. Marketplaces for exchanging NFTs are growing, with more auctions occurring weekly.

Interest has grown in digital artists, such as Beeple, and NFT auction houses, such as OpenSea. Television personalities like Mark Cuban are advertising their NFTs. Individual NFTs are selling for hundreds of thousands of dollars. In all, the industry is growing and maturing alongside a booming market in crypto generally.

In summary...

  • Unlike bitcoin or other cryptocurrencies, NFTs cannot be directly exchanged with one another.
  • NFTs are not interchangeable – even NFTs on the same platform, game, or collection.
  • ERC-721 is currently the most popular standard for deploying an NFT; these tokens can be purchased in Ethereum transactions and are secured by the world's second-largest blockchain.
  • Owning an NFT means you own something unique, irreplaceable, and provably scarce.

About the author: Aaron Wise is an Associated Press fanboy, eye-strained news terminal watcher, and bitcoin follower since $1. Temporarily listening to news squawk boxes in Florida while awaiting the construction of cryptopia.