What Is an NFT? Your Guide to Non-Fungible Tokens in 2022

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Learn how NFTs work, what they’re worth, and why it matters.

[Featured Image] A colorful abstract depiction of data represents the intersection of digital content and blockchain technology.

NFTs are digital assets that are stored on a blockchain. They represent various forms of digital content and may even be tethered to physical assets. Ownership of these assets is recorded in the blockchain, creating an immutable record that enables the selling and trading of NFTs. If you are not yet familiar with blockchain technology, you can learn the basics in the article What Is a Blockchain Developer (and How Do I Become One?) and browse the glossary of terms at the bottom of this page. 

What does NFT stand for?

NFT stands for non-fungible token. Although non-fungible tokens are widely regarded as a new technology, the first NFT was minted in 2014 by digital artist Kevin McCoy and tech entrepreneur Anil Dash. You can trace the origins of NFTs even further back to 2012 when Meni Rosenfeld published the "Colored Coins" whitepaper. “Colored Coins” describes the methodology for representing and managing the ownership of real-world assets on a blockchain

What does non-fungible mean?

The term “non-fungible” is not limited to the NFT space. It is also used to describe assets in law, finance, or commerce that are difficult to exchange with similar goods. In other words, non-fungible assets are unique. You cannot replace them with similar items. Diamonds are a great non-digital example of a non-fungible good. Many different cuts, grades, and styles of diamonds exist. These qualities make them unique and non-interchangeable with other diamonds. 

Non-fungible vs. fungible

In contrast, bills in US currency are an example of a fungible good. You can exchange one $50 bill for five $10 bills or two $20 bills and two $5 bills. Anything that is mutually interchangeable can be described as fungible. Fungible goods are easily replaced with items of identical or practically identical value. 

What is a non-fungible token?

A non-fungible token is a digital identifier recorded in the blockchain. It cannot be copied, substituted, or changed. Non-fungible tokens validate the authenticity and ownership of a digital asset. Essentially, a non-fungible token is proof of ownership. This type of certificate is digital and cannot be altered due to the nature of blockchains. 

What is an NFT?

NFTs are proof of an asset’s purchase. They are not the asset itself. These circumstances mean that you can create an NFT out of virtually anything. In addition to digital objects, you can use a digital object to represent a tangible item. Here are a few examples of things that can (and have been) turned into NFTs:

  • Digital content like video clips and social media posts

  • Media files such as GIFs

  • Video game items like avatars and skins

  • Digitized fashion such as NFT sneakers

The difference between cryptocurrency and NFTs

Despite their similarities, cryptocurrency and NFTs are not the same thing. Cryptocurrency is, however, a digital currency used for trading NFTs. The primary difference between cryptocurrency and NFTs lies in their value. The value of cryptocurrency depends on its utility, similar to the US dollar. If every merchant in the US decided to stop accepting US dollars, their value would plummet because they are purely economical. NFTs have both economic and non-economic value. Since an NFT can represent anything from artwork to a video game, its value depends on factors like investors, collectors, and rarity. 

Examples of NFTs

The list below contains a few of the most widely recognized NFTs and NFT collections.

  • Cryptopunks. As one of the earliest NFT collections, Cryptopunks are well-known in the NFT space. Cryptopunk #8857 went viral in September of 2021 after selling for $6.63 million or 2000 Ether (ETH), the Ethereum network’s cryptocurrency. One reason behind its staggering price tag is rarity—Cryptopunk #8857 is one of 88 Zombie Cryptopunks in existence. 

  • Bored Ape Yacht Club. The Bored Ape Yacht Club is an iconic NFT collection thanks to its popularity among celebrities and high-profile athletes. Much of its notoriety derives from the usage of Bored Apes as profile pictures on social media. Notably, Bored Ape #3739 sold for $2.9 million in September 2021. 

  • Lazy Lions. Avatars from the Lazy Lions NFT collection are trendy among those in the NFT community. Upon their debut, between 3,000 and 4,000 of the 10,000 Lazy Lion NFTs released sold in just five hours. As of July 2022, the most expensive NFT available from this collection is Lazy Lion #6632, currently listed for 2,000 ETH or $2,120,500.

Why do NFTs look like that?

You may have noticed that mainstream NFTs look strikingly similar to one another. This phenomenon is due to the usage of layering and generative coding. Layering is the process of generating a set of images from a list of visual elements. For example, you might add “hat” and “shirt” to your list and produce variations like a cowboy hat, a polo shirt, a Hawaiian shirt, and a top hat. Then, you’d use a computer program or generative coding to stack each of these layers on top of each other in a randomized order. Creators can also input rules such as “if the avatar is wearing a top hat, it cannot also be wearing a Hawaiian shirt.” 

These rules and variations make it possible to create thousands of unique avatars from a little over a hundred elements. Programmatically generated NFTs are similar to randomizing a character when playing a role-playing video game (RPG). RPGs often include hundreds of options for clothing, facial features, and accessories. Choosing to randomize your character rather than customize it will prompt the game to generate a random combination of each element for you.

Why are NFTs so expensive?

The value of an NFT depends on many different characteristics.  A few contributing factors include:

  • The source's credibility

  • The artist's relevancy

  • The current market for NFTs

  • The utility of the NFT 

Kevin McCoy, co-creator of the first-ever NFT, told Ocula Magazine that NFT pricing could be broken down into a set of questions:

“Do you believe that assets will be digital? Do you believe that scarce digital assets will be more valuable than non-scarce assets? If yes to both, then the scarcest digital assets will be the most valuable. This is currently how the crypto-collectors view things [1].”

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Why do people buy NFTs?

The reasoning behind an NFT purchase is likely to vary significantly from one person to another. Since NFTs can be made from collectible items, personal preferences or brand loyalty can drive investments. Some NFT collections strive to create an exclusive community of owners, driving sales among those who want to join. Ultimately, buying an NFT is a personal choice. 

Pros of NFTs

  • Decentralization. Like Cryptocurrency, NFT selling and trading are not controlled by a central authority. Instead, each member of the blockchain network receives a copy of identical, immutable data (in the form of a distributed ledger). This removes the need for a mediating party because it enables people to execute transactions without trusting one another. You can learn more about decentralized finance by taking an online course like Decentralized Finance (DeFi): The Future of Finance Specialization offered by Duke University.

  • Networking. Depending on the creator of the NFT, real-world perks could be tethered to purchases from their collection. Examples of these perks include access to exclusive events and membership in groups or associations.

  • Artist advocacy. Anil Dash, co-creator of the first NFT, was working as a consultant to auction houses and media companies at the time of the idea's conception. Dash wrote for the Atlantic that this role had him "obsessively thinking about the provenance, ownership, distribution, and control of artworks." NFTs were meant to use blockchain technology to protect artists from exploitation. Instead of working with third-party companies who often siphon earnings, NFTs aimed to help artists protect their creations by connecting them with sellers and investors directly.

Cons of NFTs

  • Environmental impact.NFTs are traded with major cryptocurrencies like Bitcoin and Ether (ETH). These cryptocurrencies use a protocol called Proof of Work to validate transactions. In short, Proof of Work is like a mathematical puzzle that proves a certain amount of computational power has been expended, thus confirming the validity of a blockchain transaction. This process is often called mining. As the networks grow, the puzzles become more challenging and require more computational power for miners to solve. According to some environmental advocates and financial regulators, the energy it takes to uphold this digital economy is not sustainable [2]. In 2020 alone, mining consumed more energy than the entirety of Switzerland [3].

  • Community impact. Energy is expensive, leading miners to relocate their operations to areas with cheaper energy costs. These mining operations can drive up energy costs for locals and cause cities to exceed their hydropower quota. Depending on the extensiveness of the hardware, mining operations can also generate a constant, tangible vibration in the area [4].

  • Legal rights. When an NFT is purchased, the owner obtains the rights to the digital asset that lives on the blockchain. They do not receive legal rights to the underlying content. If another party trademarks the artwork or item that an NFT represents, that party retains control over the legal rights of the intellectual property (IP) regardless of who owns the NFT.

  • Value fluctuation. Since NFT value is not purely economic, it can fluctuate based on the current social climate. For example, Jack Dorsey, co-founder of Twitter, sold his first-ever tweet as an NFT last year for over $2.9 million. Today, Dorsey's NFT tweet is owned by crypto entrepreneur Sina Estavi. He listed the NFT for sale at $48 million and closed the auction with just seven total bids ranging between $5-$277.

Key takeaways

  • NFTs are digital assets that are stored on a blockchain. They act as certificates of ownership and authenticity over an object, tangible or intangible. 

  • NFTs and cryptocurrency are not the same. NFTs are traded using cryptocurrency. 

  • The value of an NFT hinges on several factors, including social relevancy and scarcity.

  • Purchasing an NFT does not inherently provide you with the rights to the artwork or asset that the NFT represents.

Glossary of terms

TermDefinition
Anil DashTech entrepreneur and co-creator of the first NFT
BlockchainPeer-to-peer network that works by recording and distributing unchangeable data
CryptocurrencyDigital currency. Cryptocurrency transactions are validated through cryptography rather than a central authority.
Ether (ETH)The cryptocurrency used on the blockchain network Ethereum
EthereumA blockchain network commonly used for NFT trading
FungibleMutually interchangeable, easily replaced with goods of similar value
Kevin McCoy Digital artist and co-creator of the first NFT
Meni RosenfeldAuthor of the “Colored Coins” whitepaper, the conceptual foundation for NFTs
NFTNon-fungible token
Non-fungibleUnique, difficult to exchange with similar goods
Proof of WorkCryptographic proof of computational power expended; used to verify and authenticate blockchain transactions

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Article sources

1. Ocula Magazine. “Why Kevin McCoy is Auctioning Off the First NFT Ever Minted, https://ocula.com/magazine/art-news/why-kevin-mccoy-is-auctioning-the-first-nft/.” Accessed July 14, 2022. 

2. Business Insider. “Proof-of-work crypto mining should be banned in the EU, says European markets regulator, https://markets.businessinsider.com/news/currencies/eu-regulator-proof-of-work-crypto-mining-ban-bitcoin-blockchain-2022-1.” Accessed July 14, 2022. 

3. University of Cambridge. “Cambridge Bitcoin Electricity Consumption Index, https://ccaf.io/cbeci/index.” Accessed July 14, 2022. 

4. MIT Technology Review. “How Bitcoin Mining Devastated this NY Town, https://www.technologyreview.com/2022/04/18/1049331/bitcoin-cryptocurrency-cryptomining-new-york/.” Accessed July 14, 2022. 

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