How does NFT work

If you ever Google “how does NFT work”, you’ll find plenty of articles with explanations that will leave you scratching your head. In this article, I’ll explain to you how NFTs work, in a simple, easy-to-understand way.

Ever saw an amazing piece of art online and found an NFT button underneath it instead of a ‘Buy Now’ prompt? Did it make you wonder what an NFT is and how does it work?

Despite being around for more than half a decade and finding numerous applications, NFTs are still difficult to understand for most people like you and me.

Moreover, even those who understand what NFTs are, are baffled by how they work. This piece will cover what NFTs are, how they work, and what they are used for.

NFTs – What are they?

NFT or Non-Fungible Token is a unique token or data unit that is stored on a blockchain.

An NFT is linked to a digital asset and certifies its ownership by storing associated information on the blockchain.

Therefore, every NFT has its value and can be used to trade or sell associated digital assets.

As the name suggests, NFTs are non-fungible, which means that they are not interchangeable.

So, for example, an NFT linked to a particular artwork can’t be exchanged with another NFT associated with a song or a scientific invention.

Also, unlike cryptocurrency, NFTs are not available in unlimited supply. Instead, they are either unique or produced in limited numbers.

Uses of NFTs

In the first quarter of 2021 itself, NFTs sales have crossed $2 Billion. Digital art sellers have been the earliest adopters of NFTs and continue to be the highest earners.

Although the most popular and successful use of NFTs has been in the arts and collectibles category, they are finding increasing applications elsewhere. Some of the gaining categories are:

1. Movies & Feature Films

Full-length feature films and documentary movies are released as NFTs directly or after their theatrical run is over.

2. Movie merchandise

Movie merchandise such as posters, artwork, stickers, and tickets are also sold with NFTs. In many cases, the associated artists also receive royalties through such sales.

3. Soundtracks

Original movie soundtracks, songs, and musical creations are also released as NFTs, sometimes even directly through the artist’s social media account.

4. Memes

Famous memes and tweets (news source) have also been sold as NFTs. Although this category is limited, from time to time, it attracts the interest of novelty collectors.

5. Sports merchandise

Sports highlight clips are also sold as NFTs, finding successful applications in basketball and other sports.

6. Physical products

NFTs can be attached to physical products and sold as a value-add. This application is gaining prominence in the fashion segment.

7. Patents

Licensed use of patents is also distributed through NFTs.

The patent owners retain ownership of the underlying asset or invention, while the NFT permits the buyer to use the patented technology commercially.

How does NFT work

To understand how NFTs work, you need to understand the underlying functioning of blockchain technology.

(Pic courtesy – Ledger)

Blockchain is a distributed or decentralized, public ledger on which transactions of different kinds can be recorded.

For cryptocurrency, these transactions are financial. For NFTs, these transactions or data record the nature, location, and ownership of tangible and intangible assets.

Now, the copies of these NFT linked digital assets like artwork, music, stories, films, videos, etc., are still available online. But what an NFT buyer gets is exclusive ownership of the original asset.

At the same time, the creator of the asset can retain its copyright, patent, or any other IP right, while selling the right for personal ownership.

Similarly, the license to commercially use a digital asset can also be distributed through NFTs.

While most NFTs are located on Ethereum Blockchain, other blockchains have also introduced their own NFTs.

You can buy NFTs using cryptocurrency or even standard currency. But to store NFTs, you need a digital wallet.

You can purchase NFTs from NFT stores, NFT marketplaces, or individual creator sites where some of their digital assets can be available as NFTs.

With the built-in data protection of blockchain technology, the ownership and transaction records of NFTs are much safer than physical ownership.

But before investing, remember that their off-chain storage can lead to link-rot and death, resulting in information loss.

How do you make money with NFT?

NFTs can be bought and sold for a profit. In less than 6 months, Miami-based art collector Pablo Rodriguez-Fraile flipped a Beeple digital art piece about 1,000 times! But not all NFTs are equal. (Source)

How do NFT tokens work?

An NFT is a digital asset that links ownership to unique physical or digital assets like artwork, real estate, music, and videos. Fungible objects are easily exchangeable since their value is not related to their rarity.

What is the most expensive NFT ever sold?

EVERYDAYS: THE FIRST 5000 DAYS is the most expensive NFT (and one of the most costly artworks) ever sold. It was sold for $69.3 Million. (Source)

Summary

In conclusion, NFTs are becoming an increasingly popular way of selling and owning digital assets. Despite recent price drops, the public awareness of NFTs and inclination to buy is on the rise.

However, before you make that decision, understand completely how NFTs work and choose a secure platform to buy and store them.