What Is an NFT? a Guide to Non-Fungible Tokens

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• A non-fungible token (NFT) is a unique digital asset that represents ownership of real-world items like art, video clips, music, and more.
• NFTs use the same blockchain technology that powers cryptocurrencies, but they’re not a currency.
• While NFTs have sold for millions, they’re highly speculative assets that aren’t for everyone.

The non-fungible tokens (NFTs) art and collection craze has taken the world by storm as one of the hot “must-have” items of the digital age. Over the last few years, investing in riskier digital assets like cryptocurrencies and NFTs has become increasingly normalized, and remains a hot topic of debate.

Some influencers and mainstream celebrities have publicly jumped on the NFT trend not only as investors but also as artists. Paris Hilton, Snoop Dogg, Ellen DeGeneres, and Tony Hawk are just a few examples of celebrities who released their own minted NFT artworks and collections for trading.

But what makes these digital assets so valuable? How are NFTs made? Are they safe to invest in, and why are people paying so much to own them? 

Here’s everything you need to understand about NFTs, how they are made, and who should invest in them. 

What is an NFT?

NFT stands for “non-fungible token.” At a basic level, an NFT is a digital asset that links ownership to unique physical or digital items — such as works of art, real estate, music, or videos. NFTs are bought and sold along the blockchain (the same technology behind cryptocurrencies), and are usually purchased with cryptocurrencies too, like ether (the main currency used to purchase NFTs).

NFTs can be considered modern-day collectibles. They’re bought and sold solely online, don’t have a physical equivalent, and represent digital proof of ownership of any given item. Since NFTs are securely recorded on a blockchain, there’s a level of insurance that assets are one-of-a-kind as this technology can also make it difficult to alter or counterfeit NFTs.

As NFTs for digital artwork have sold for millions of dollars, to say they’re popular could be an undersell. But sales rapidly dropped after the FTX fallout and the 2022 bear market that stirred the US economy.

Between June 2021 and June 2022, NFT sales hit $29 billion. According to the Balthazar NFT Marketplace, the NFT trade volume in April 2023 was around $1.54 billion, which is a 22.5% drop compared to March. As of now, the projected total revenue is projected to be under $21 billion in 2023. 

“By creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital,” says Solo Ceesay, co-founder and CEO of Calaxy. “To compare it to traditional art collecting, there are endless copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign the ownership of the original piece.”

To really get a handle on NFTs, it’s helpful to get familiar with the economic concept of fungibility.

Highest NFT sales

Selling NFTs has been a lucrative business in the art world. Unfortunately, NFT sales took a hit in June 2022 with the bear market and falling more than 80% (to around $167 million) from its peak of nearly $1 billion in January. Here are some of the highest NFT sales from the last few years.

Sales in 2023:

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Sales in 2022:

• The pseudonymous artist referred to as Pak sold “Clock” on February 9, 2022, for around $53.7 million (16,593 ETH), making it the second-highest NFT sale recorded.
• Matt Hall and John Watkinson (aka Larva Labs Studio) sold “Crypto Punk #5822” for around $23.58 million (8,000 ETH) on February 11, 2022. 
• Larva Labs Studio also sold “Crypto Punk 5577” for $18.68 million in 2022.

Sales in 2021:

Other people may be able to make copies of the image, video, or digital item that you own when you buy an NFT. But, similar to buying a unique piece of art or limited-series print, the original could be more valuable.

How NFTs work 

Many NFTs are created and stored on the Ethereum network, although other blockchains (such as Flow and Tezos) also support NFTs. Because anyone can review the blockchain, the NFT ownership can be easily verified and traced, while the person or entity that owns the token can remain pseudonymous. 

Different types of digital goods can be “tokenized,” such as artwork, items in a game, and stills or video from a live broadcast — NBA Top Shots is one of the largest NFT marketplaces. While the NFT that conveys ownership is added to the blockchain, the file size of the digital item doesn’t matter because it remains separate from the blockchain.

Depending on the NFT, the copyright or licensing rights might not come with the purchase, but that’s not necessarily the case. Similar to how buying a limited-edition print doesn’t necessarily grant you exclusive rights to the image. 

As the underlying technology and concept advance, NFTs could have many potential applications that go beyond the art world. For example, a school could issue an NFT to students who have earned a degree and let employers easily verify an applicant’s education. Or, a venue could use NFTs to sell and track event tickets, potentially cutting down on resale fraud.

What does it mean to mint an NFT?

Simply put, minting an NFT means you are turning a digital file (like a JPEG, GIF, or PNG) into a digital asset or crypto collectible on the blockchain. When your unique token is published on the blockchain, you’ll be able to sell it. You’ll need to pay a small amount of cryptocurrency to mint an NFT.

You can create a collectible as a single image or as multiple images. Depending on the marketplace you use to host your NFT, you may be able to add a name, description, and other metadata to your token. You’re also able to set royalty amounts on your NFT, which are percentages you will make from every subsequent sale on the secondary market.

How to buy an NFT 

You can buy, sell, trade, and create NFTs from online exchanges or marketplaces. The creator or current owner may choose a specific price. Or, there may be an auction, and you’ll have to bid on the NFT. Here are some of the most popular NFT marketplaces:

• Foundation: A community-curated marketplace that requires creators to be invited by other creators who are already part of the platform.  
• Nifty Gateway: An art-focused marketplace that works with big-name brands, athletes, and creators. 
• OpenSea: One of the first and largest marketplaces where you can find NFTs for a wide-range of collectibles. 
• Rarible: Offers a range of NFTs with an emphasis on art. Uses its own RARI token to reward members.
• SuperRare: A marketplace that focuses on curating and offering digital art.

The sign-up process can vary depending on the marketplace. Generally, you’ll buy NFTs using a cryptocurrency, such as ether (Ethereum’s native cryptocurrency), although the price may also be listed in dollars. Depending on the marketplace, there may be different fees associated with each transaction.

Risks of investing in NFTs

The high-priced and headline-making NFT craze is also attracting scammers and fraudsters, so investors should beware. Some may try to sell you something and tell you it’s an NFT when it’s not. Others might claim they have the right to sell an NFT of a piece of work they don’t own and didn’t create. Some of the most common acts of fraud in the NFT marketplace include:

• Wash trading: The act of inflating the price of a digital asset like an NFT or cryptocurrency by buying and selling assets through multiple accounts and manufacturing a heightened appearance of demand. 
• Impersonations and fake NFTs: Impersonators will create a duplicate of a popular NFT to fool potential buyers into thinking they are buying the real deal. 
• Rug pulling: When an NFT seller/developer promotes future features that can be applied to a digital asset and lures investors to invest in the project. After which, the seller/developer backs out of the project and retreats with the project funds. 

What is considered one of the largest NFT scams was a rug pull scheme in 2022. Le Anh Tian, the founder of Baller Ape Club, launched the collection only to delete the project’s entire website, launder the project’s $2.6 million investor funds, and transfer it across multiple blockchains (aka chain-hopping). Le Anh Tuan was charged by the Department of Justice with conspiracy to commit wire fraud and conspiracy to commit international money laundering on June 30, 2022. The lawsuit has yet to be fully resolved. 

The best way to avoid getting scammed is to thoroughly research and fact-check information before buying or selling an NFT. 

Should you invest in NFTs?

While there may be many practical applications for NFTs in the future, they’re primarily used with digital art today. 

“For creators, NFTs create a seamless way to sell digital art that might not have much of a market. Additionally, there are ways in which creators can get paid fees for each subsequent sale of the art,” says Ceesay. “On the flip side, collectors are able to speculate on digital art as well as have bragging rights on rare collectibles on the chain.”

If you’re considering purchasing an NFT as an investment, know that there’s no guarantee it will increase in value. While some NFTs sell for thousands or millions of dollars, others may remain or become worthless.