What is an NFT? (NFT meaning explained)

What is an NFT? (NFT meaning explained)

An NFT, short for a non-fungible token, is the latest cryptocurrency phenomenon to rock the world. Celebrities, musicians, and creative people creating NFT art are embracing the digital token trend, especially because it’s a way to gain full ownership of their easily replicable online content.

The beauty of NFTs, however, is that anyone can convert their digital assets into them. Whether it’s a song, video clip, drawing, or digital art (NFTs can be truly digital), this convergence of blockchain and creativity is an exciting prospect. So exciting, in fact, that nearly $400 million worth of non-fungible tokens have been traded on NFT marketplaces over the past three years.

Is all this a mystery to you? No worries! We’ve written this in-depth guide to tell you everything you need to know about non-fungible tokens, starting with explaining what non-fungible tokens are and how they work.

NFTs, Explained: What They Are and How to Create Digital Art Tokens

1. What is an NFT?

An NFT is a digital asset that represents intangible (online-only), or tangible (real-world) objects such as art, music, in-game items, GIFs, designer sneakers, signatures, videos, and more.

NFTs which stand for Non-Fungible Tokens are bought and sold exclusively online and are created with the same underlying software as most cryptocurrencies like Ethereum. The big difference is that cryptocurrencies, like physical money, can be traded or exchanged for each other (thus, fungible), while an NFT cannot be equally traded for another NFT, therefore making it “non-fungible”.

2. How to Create NFT Art

NFTs are created or “minted” in the ERC-721 protocol on the Ethereum blockchain, making them unique.

When someone purchases an NFT, they have exclusive ownership of it, as an NFT can only have one owner at any given time. This ownership is managed through a unique ID and metadata, which cannot be replicated by any other token.

NFTs are created through what is known as a smart contract. These smart contracts assign ownership and control the transferability of non-fungible tokens. When a person mints an NFT, they apply code stored in smart contracts that follow different standards, such as ERC-721. This data is then added to the blockchain through which NFTs are managed.

Additionally, the original creator or owner may store certain information in the metadata of an NFT. For example, an artist may include their signature in the NFT of their artwork as a method of signing their work.

When someone creates or mints an NFT, the token goes through the following steps:

NFTs also have special qualities, which make them unique from other digital assets:

• Once minted, a non-fungible token is assigned a unique identifier that is directly tied to a single Ethereum address.
• They cannot be directly exchanged for other tokens. This makes them different from cryptocurrencies, for example, where 1 ETH equals 1 ETH
• Each NFT has an owner, which is easy to verify
• Because they reside in Ethereum, they can be bought and sold on any Ethereum-based NFT marketplace.

As an owner of an NFT:

• Ownership of an NFT’s unique token is transferred to your wallet via your public address
• This unique token proves that your copy of the digital file is the original, while your private key is proof of ownership of the original.
• The content creator’s public key acts as a certificate of authenticity for your NFT’s digital assets
• No one can change or tamper with your NFT in any way
• You can sell or hold your NFT for as long as you want

As the originator of an NFT:

• You can sell your NFTs on any NFT marketplace or through a peer-to-peer method
• You earn royalties every time your NFT is sold
• You can easily prove that you are the creator with your NFT’s public creator key
• You determine how rare your NFT is by either creating a single version of it, creating numerous copies of it, or creating multiple variations of it, thereby determining its value.
• Even if hundreds of thousands of copies of your asset exist, each NFT has its own unique identifier and ownership

The scarcity, or rarity, of NFTs, is an important factor in the manufacturer’s decision-making. This scarcity is what gives a non-fungible token its value.

A creator may want to mint only one version of their digital art, for example, so it remains a rare collectible. Alternatively, a creator may choose to make several copies of their digital art for circulation.

The scarcity of an NFT is also public information.

Many marketplaces, such as foundations, allow royalties to be programmed into NFTs, which help creators automatically earn a set amount as their work is sold from owner to owner. Currently, this is a developing concept, as setting up the process can be inaccurate and complicated. Royalties carry great significance for NFT creators but allow them to maximize their earning potential.

3. What are NFTs used for?

NFTs are used for a variety of digital and non-digital assets, including digital art, gaming items, domain names, physical items, and investments and securities.

Digital Art
You can think of an NFT as our digital age’s version of rare art. Digital art is the most common way that NFTs are used in the current market. Owning an NFT means having personal ownership of an image that can often be replicated online. Common examples of non-fungible tokens include popular memes from the 2010s, as well as recently produced digital artwork.

NFTs create a way for creators to get the profits and earning potential they deserve for their digital content. Platforms like social networks leverage a creator’s work in exchange for exposure. However, exposure alone does not pay an artist’s bills. Even after a non-fungible token is sold, the original creator can receive royalties.

Although NFTs can still be replicated, ownership of the original content keeps the value dependent on market demand. Therefore, when NFT content is copied or shared, it only gains more value.

Gaming items
In addition to content creators, NFTs have gained popularity in the gaming industry, especially with game developers.

In many games, you have the option to pay real money to purchase “upgrades” or additional items to enhance your gaming experience. By introducing NFTs with this concept, you will have the opportunity to resell the items purchased in the games after you finish

This is attractive to game developers because, similarly to digital content creators, they can receive royalties when their creations are resold.

This opens up a huge new market with multiple tiers that don’t stop at the height of a game’s popularity. Digital goods purchased in-game can prolong a game’s lifespan, as they have the potential to become beloved memorabilia that will continue to be shared and sold in the future.

Making Ethereum addresses more memorable
Ethereum Name Service (ENS) uses NFTs to create an easy-to-remember digital address or domain. It can be compared to a website domain name, which allows an IP address to be more memorable.

Just like website domains, ENS domains have value depending on how long, relevant, and easy to remember they are The ideal way to trade ENS names is to use NFTs to transfer ownership without requiring domain registry oversight.

Physical items
This may seem counter-intuitive as NFTs are commonly associated with digital products. However, the tokenization of physical items is slowly but surely developing.

Cryptocurrency is already growing in our society, and soon it will be one of the most common ways to make secure, big-ticket purchases without the need for a facility. Since NFTs are a digital record of product ownership, we will be able to link them to our physical assets such as real estate, jewelry, and rare items. With this, you will be able to transfer ownership of your property instantly in exchange for a crypto payment.

Of course, this concept has not yet developed as a digital NFT, but recent projects show great promise that it is growing.

Investments and Securities
Decentralized finance (Defi) is a new financial technology built on the secure distributed ledgers used by cryptocurrencies. Currently, you can use cryptocurrencies as collateral to borrow money with Defi applications. However, since not everyone owns a large amount of crypto needed to put down as collateral, NFT-backed loans have also come into the mix.

NFT creators can allow others to own a portion of their digital tokens without having to purchase the entire thing. Known as fractional ownership, this concept allows an NFT to have “shareholders”, thus encouraging more buyers and sellers. This gives people a greater opportunity to own and profit from their favorite items

Along with the NFT marketplace, fractional tokens can also be bought and sold on decentralized exchanges (DEXs). The number of fractions of a digital asset will affect its overall value.

It is believed that in the future, decentralized autonomous organizations (DAOs) will exist for NFT shareholders, allowing them to securely coordinate and manage their shared assets.

4. How to buy an NFT

If you are considering buying an NFT, you may be wondering where to start. Fortunately, buying NFTs is not as complicated as it seems Here are four easy steps to buy non-fungible tokens.

• Step 1: First, you will need a crypto wallet that is compatible with Ethereum, as well as some cryptocurrency in the form of Ether (ETH). Note that many NFT platforms charge what are known as “gas fees” for minting a token as well as selling and buying NFTs. Therefore, make sure you have extra ETH to cover these fees. You can buy ETH on a crypto exchange such as Coinbase Global. To do this, you’ll need to download two separate apps: Coinbase, which you’ll use to buy your ETH, as well as Coinbase Wallet, where you’ll send your ETH after buying from Coinbase. Both can be downloaded from the App Store or Google Play.
• Step 2: After downloading the Coinbase wallet (or other applicable wallets), it will provide you with a set of simple set-up instructions. This wallet is a place to keep your cryptocurrencies and send or receive them. Additionally, it serves as your gateway to an ever-expanding collection of crypto apps. To browse NFTs on a computer instead of your phone, download the Coinbase Wallet extension for Chrome.
• Step 3: Next, connect your wallet to an NFT marketplace of your choice by following the platform’s prompts. There are many NFT marketplaces to choose from, as we will reveal in the next chapter.
• Step 4: Now that your wallet is set up, it’s time to browse available NFTs. The opportunities are endless, ranging from basically free to hundreds of thousands of dollars or more for a rare item. Some items are sold through an auction, while others can be fetched immediately with a “Buy Now” button. Once you buy an NFT, you can access it through your crypto wallet. It will stay here until you decide to sell it.

5. NFT FAQs

To cover any other questions you may have about NFT industry topics, we’ve answered frequently asked questions below.

What does it mean to mint an NFT?
Minting an NFT is how your digital asset becomes a part of the Ethereum blockchain. In the same way that metallic coins are created before being circulated for public consumption, NFTs are digital tokens that are “minted” after creation. When your digital asset is represented as an NFT, it can be bought and sold as a non-fungible token within the NFT market. Its trading history can be tracked digitally when it is sold to another owner or collected again down the track.

How are NFTs valued?
The value of an NFT can vary greatly depending on the digital asset available. As NFTs become a popular method of acquiring and selling digital artwork, their value depends on the demand of the artist as well as past sales of the relevant NFTs.

How are NFTs taxed?
NFTs are primarily taxed at Internal Revenue Service (IRS) collectible rates. Therefore, digital artworks acquired for less than a year are taxed at up to 37%, while those held for longer than this period are taxed at a minimum rate of 28%. Furthermore, if an NFT is purchased using cryptocurrency, the buyer will be subject to capital gains tax on the gains made on their digital coins.

What is Ethereum?
Ethereum is an open-source blockchain network that enables users to create, publish, monetize and use business, financial services, and entertainment applications on the platform. It uses its own cryptocurrency, called Ether (ETH), and is second only to Bitcoin in market value.

The Ethereum platform is home to numerous decentralized apps, known as dApps, that serve a variety of purposes. Due to its distributed nature, the Ethereum blockchain is considered a very secure platform. Additionally, an important component of Ethereum is smart contracts, a concept that originated within the network. These smart contracts are self-executing contracts. They contain the terms of the contract between a buyer and a seller written directly within lines of code. It is this unmatched security that allows ETH to continue to use value.

What is a crypto wallet?
Crypto wallets enable users to send, receive and spend cryptocurrencies such as Ethereum and Bitcoin. They keep your cryptocurrency access password (known as a private key) secure but accessible. A crypto wallet itself does not hold money like a normal wallet. Technically, your cryptocurrency holdings exist on the blockchain. Instead, your crypto wallet serves to hold your private keys, which act as proof of ownership and enable you to access your currency. Crypto wallets can come in physical or digital forms, such as hardware or mobile apps.

NFTs have an exciting future
NFTs are the new kid on the blockchain, but there’s more to their meteoric rise than meets the eye. While cryptocurrency trends have come and gone, experts predict that NFTs are firmly here to stay.

As you’ll learn in this guide, NFTs have taken the simple concept of cryptocurrency and allowed it to evolve. They represent a step forward in reinventing our traditional financial system, combining the digital representation of physical assets with the convenience of a tamper-resistant blockchain.

Converting a physical asset to a digital one simplifies the process and eliminates the need for middlemen. As NFTs become more sophisticated and incorporated into our financial infrastructure, there is no end to how we create, acquire and sell products.