What does NFT mean - Understanding Non-Fungible Tokens

Main points - NFTs represent ownership of digital assets through blockchain technology - They are unique and cannot be directly exchanged in the same way as regular currency - NFTs create new revenue models for digital creators and new collecting opportunities.

The basic definition of NFT means

When searching for what NFT means, it is primarily about understanding the term “non-fungible.” This term describes something that is entirely unique and cannot be directly replaced by something else of the same value.

In contrast to fungible assets like money or regular cryptocurrency tokens, which all have the same value and can be exchanged freely, non-fungible assets are unique in their own right. A 100-kroner bill can be exchanged for another 100-kroner bill without any loss of value - they are identical. However, a drawing painted by one artist cannot be directly exchanged for another drawing by a different artist, even if both may be priced at the same amount, because they have different characteristics and origins.

A non-fungible token is therefore a cryptographic proof of ownership of exactly such something unique - a digital asset that lives on a blockchain and can only belong to one person at a time.

How do NFTs work on a technical level?

NFTs are built on blockchain technology, which functions as a decentralized database that cannot be altered afterwards. This technology ensures that when an NFT is created, and when it changes ownership, there is an immutable record of the entire history. This means that anyone can verify who owns the NFT and where it originated from.

Behind every NFT are so-called smart contracts - self-executing computer programs that automatically enforce rules without the need for intermediaries. They enable NFTs to be created, managed, and sold without centralized control.

To ensure that NFTs function consistently across different platforms, standardized rules called token standards are used. The main examples are ERC-721 on the Ethereum blockchain network and BEP-721 on the BNB Chain. These standards precisely define how NFTs should be created and managed.

When a digital artwork or object is turned into an NFT, the process is called “minting” (imprint). Here, the digital file is converted into a token with a unique identifier on the blockchain. When you buy an NFT, you are buying the essence of this unique token identifier and thus the exclusive right to control the asset.

Practical Applications of NFTs Today

Digital artworks and collectible art

NFT art has revolutionized the way artists can earn. Instead of selling physical art, an artist can now create digital works as NFTs and retain the originality of each piece. Collectors can purchase these works, display them in digital galleries, trade them with others, or even rent them out. This opens up entirely new economic opportunities for both established artists and new talents.

Computer-based games and virtual worlds

In gaming, NFTs have become useful for representing rare items, player characters, or virtual land. Players can trade these assets with each other and, in some cases, earn real money from their gaming performances. This creates an ecosystem where gaming becomes a potential source of income.

Tickets to events

Organizers of concerts, sporting events, or conferences can issue tickets as NFTs. This provides an immutable proof of ownership that cannot be easily forged. Furthermore, tickets can be resold directly between individuals without intermediaries, and they can be linked to exclusive content or VIP access.

Earning through NFT staking

Some platforms allow NFT owners to “stake” their tokens as collateral and receive rewards in return. This means that one can hold onto their NFT while simultaneously earning passive interest - similar to the cryptocurrency staking system.

Notable examples of successful NFT projects

CryptoPunks was launched in 2017 and is considered one of the very first and most influential NFT collections. The project consists of 10,000 algorithmically generated pixel art characters, each with unique traits. Many well-known individuals have used CryptoPunks avatars, and the project set the standard for the entire NFT industry.

Bored Ape Yacht Club (BAYC) offers 10,000 hand-drawn ape figures with various traits. Owners gain access to exclusive content and events, blending art collection with experiences. This has made BAYC a cultural phenomenon among NFT enthusiasts.

Decentraland is a virtual world built on the Ethereum blockchain, where users can buy, sell, and trade virtual land and items like NFTs. The platform is at the forefront of the development of the so-called metaverse.

Common Misunderstandings About NFTs

Myth: NFTs are completely secure

Although the blockchain underlying NFTs is very secure, NFTs are not immune to all risks. There is still a danger of phishing attacks, and smart contracts can have vulnerabilities that hackers can exploit. Additionally, the market may be filled with counterfeit NFTs or unauthorized copies of artworks.

Another important risk is market volatility. Although some NFTs have sold for enormous amounts, the price of NFTs can fluctuate drastically, and there is no guarantee of long-term value. As with any speculation, there is a risk of losing the invested amount.

Myth: NFTs and cryptocurrencies are the same

Although both NFTs and cryptocurrency tokens use blockchain technology, they serve entirely different purposes. Cryptocurrencies like Bitcoin are designed to function as currency - they are fungible, which means each Bitcoin can be exchanged for another Bitcoin without loss of value.

NFTs, on the other hand, are uniquely identifiable. Two NFTs cannot be directly exchanged for one another in the same way, because each has its own distinct characteristics. The value of an NFT lies in its uniqueness and rarity, while the value of a cryptocurrency lies in its acceptance as a means of payment or a store of value.

Conclusion

NFT fundamentally means ownership of digital assets with verifiable provenance and unique characteristics. They have opened entirely new avenues for artists, creators, and entrepreneurs to make money and for collectors to own digital works.

Although NFTs offer exciting opportunities, they are not without risks - from market volatility to security threats. The most important thing is to understand the technology behind them and how to trade responsibly. Over time, NFTs are likely to become even more integrated into everything from art to entertainment to daily transactions.