If you’ve been on the internet these past few weeks, you’ve likely seen or heard mentions of NFTs. NFTs have become an increasingly popular buzzword lately – but what are NFTs exactly, and how do they work?

In this article, we’ll be going over what NFTs are, how exactly they work, as well as their current and potential applications in the future.

Understanding NFTs

First and foremost, let’s get a working definition of what exactly is an NFT.

What differentiates NFTs and cryptocurrencies is the non-fungible aspect of NFTs, hence the name. Non-fungible means that NFTs are individually unique and cannot be directly exchanged for one another.

Each NFT contains information that allows it to be easily verifiable and can be traced back to the original creator. Another way to think of NFTs are like digital signatures that can serve as a way to prove authenticity and ownership of a digital asset.

As with any commodity, the value of an NFT is determined by supply and demand. In the current market, NFTs are still relatively scarce while the demand from collectors and investors is high. This means people are willing to pay high prices for them.

An NFT can also have a unique valuation that is dependent on the digital properties they represent, which can vary depending on the highest bidder. For example, one of the most notable NFTs was for a CryptoKitty named Dragon that was valued at 600 ETH.

As we prefaced above, NFTs represent a unique digital property that provides the owner proof of ownership. They can represent works of art, items in a video game, a tweet, or literally any digital property you can think of.

In the current market, the majority of NFTs are built using the Ethereum-based token standards known as ERC-721 or ERC-1155.

These tokens enable developers to easily launch NFTs on the Ethereum blockchain as well as ensure their compatibility with the ecosystem of dApps (decentralized apps) that can interact with the NFT.

In many ways, NFTs work and function similarly to cryptocurrencies – they are run on a blockchain and are validated by the digital ledgers on the network. This gives them the same properties that are synonymous with cryptocurrencies, such as privacy, accessibility, and security.

Additionally, NFTs are characterized by the following features:

Verifiable

Historical ownership of NFTs are validated and stored on the underlying blockchain that they run on. This allows any NFT to be authenticated without having the need for third parties.

Indestructible

The environment in which NFTs are stored in – on blockchain networks via smart contracts – means that the tokens are virtually impervious to replication or disintegration. Their ownership is also immutable, meaning that users actually own the NFT as opposed to the companies or entities that created them.

Indivisible

NFTs exist exclusively as a single, whole item and cannot be split into smaller denominations like Bitcoin satoshis, or Ethereum gweis.

The prospect of being able to authenticate a digital property has many potential groundbreaking applications in the future.

The advent of NFTs opens up the possibility of commodifying digital properties, ranging from artwork, photographs, tweets, video game items, or any digital creations you can think of.

Imagine having a digitally signed autograph of your favorite artist, or a one-of-a-kind digital artwork from Banksy – NFTs can be crafted to represent these items, and provide proof of immutable ownership within the token through a cryptographic hash function.

For digital creators, being able to create artwork and sell directly to a global audience without having to rely on galleries or third parties is a game-changer. This means they’ll be able to keep larger portions of any sales they make compared to having to cut a percentage of their profit to third parties.

This works the same way for digital properties with royalties. The artist can have a specific set of conditions programmed into the NFT so that they automatically receive a percentage of profit whenever those conditions are met.