Understanding NFTs – the new digital assets

NFTs are taking over and selling for millions—here’s how to make and sell one

From a $69 million piece of artwork to a $379,000 song created using the genetic sequence of COVID-19, NFTs are the Internet’s latest obsession. And they have the potential to make real money, too— the CEO of crypto exchange Coinbase said last month that the NFT market could quickly surpass the company’s cryptocurrency trading business. So how can someone get in on the action? Here’s what you should know. An NFT essentially allows its buyer to say they own the original copy of a digital file, in the same way you might own the original copy of a piece of physical art.

By Andy Rosen and Felicia Hou

If you thought navigating the thousands of available cryptocurrencies was confusing, prepare to have your mind blown by NFTs. These one-of-a-kind digital assets number in the millions, offering their buyers ownership of digital content such as images, videos and music.

What even is an NFT?

NFT stands for non-fungible token, which basically means that it’s a one-of-a-kind digital asset that belongs to you and you only. The most popular NFTs right now include artwork and music, but can also include videos and even tweets. 

NFTs have in some cases fetched staggering sums. One piece by the artist Beeple sold for $69 million in March 2021. Other creators have earned hundreds of thousands selling sports photos, online gaming items and even pixelated images of punk rockers.

Why would anyone spend hard-earned money on something that exists only online? As interest in NFTs grows, it helps to understand how these digital assets work, what gives them value and some risk factors to consider if you’re thinking of buying one.

How do NFTs work?

An NFT essentially allows its buyer to say that they own the original copy of a digital file, in the same way you might own the original copy of a piece of physical art or the master file of a music recording.

To grasp how NFTs function, you need to understand what it means for something to be “fungible.” If an asset is fungible, it can be swapped for another item within a category without changing its value. For instance, if you trade one dollar bill for another dollar bill, you still have a dollar.

Understanding NFTs also requires at least a baseline understanding of how blockchain technology works.

While blockchain networks support both NFTs and cryptocurrencies, the fundamental difference is that cryptocurrencies are fungible. One Bitcoin is essentially the same as another. Because NFTs are nonfungible, each one is different.

Content creators can make NFTs through a process known as “minting,” in which they generate a representation of their file on a blockchain network. These distributed networks can keep immutable records tracking every time an asset is bought and sold, and who currently owns it.

The dominant network used for NFTs is Ethereum, though others including Solana and Cardano are also commonly used.

Once an NFT is minted, it can be bought, sold or traded. And even if someone makes a copy of the underlying file, the record of ownership can’t be changed without the permission of its current owner. The technology is complex, but broadly speaking the records are secured by the same mechanism that gives cryptocurrencies value by ensuring that a single token can’t be duplicated and used in multiple transactions at the same time.

What is an example of an NFT?

Ownership can convey different rights depending on the specifics of an NFT. In some cases, an owner might be able to control how a file is used, and under what circumstances it can be reproduced. But the exclusivity conveyed by NFT ownership can often seem theoretical.

For instance, an NFT of a short music video by the artist Grimes sold on the online marketplace Nifty Gateway in February 2021, fetching about $389,000. You can still watch the video if you want. It’s right there, on the website where it sold.

But only one owner can possess the actual NFT of the video, known as “Death of the Old.” It’s analogous, in a way, to physical art. You might be able to look at a digital image of the “Mona Lisa,” or even a faithful real-world reproduction. But there’s one version that’s commonly accepted to be the true copy, and that’s at the Louvre in Paris.

The difference with NFTs is that even the original copy is digital. When people buy NFTs, the scarcity of original versions is a big part of what they’re paying for.

What are NFTs used for?

NFTs can theoretically be attached to pretty much any intellectual property, but activity so far has focused on a few sectors.

Art and music: The most highly publicized examples of NFTs have been in visual art, especially videos and still images that have sold for millions of dollars.

Some owners, for instance, use their NFTs as social media profile pictures, place them in online galleries or even use them as video conferencing backgrounds.

Collectibles: NFT technology has also proved a fit for digital versions of other collectibles, such as trading cards. Sports leagues including the NFL, MLB and NBA have all created digital collections memorializing things such as notable statistics and outstanding plays.

Gaming and virtual reality: NFTs can be attached to some unique video game items such as weapons, outfits or special characters — many of which have long been sold and traded in in-game marketplaces. NFTs could potentially make the sales of such items easier to execute, and less dependent on central authorities such as the makers of games.

Longer-term, NFTs could play a role in the creation of a realm of virtual spaces known colloquially as the metaverse. Some forecasters project that people in coming years will spend more time immersed in virtual reality spaces they’ve created. And in these spaces, exclusive NFTs could take on a new level of status.

What gives NFTs value?

For the most part, the value of NFTs is determined simply by what the market will bear. If you buy one as an investment, you’re essentially betting that someone will eventually be willing to buy it from you for more than what you paid.

There are other ways that an NFT can carry value, however. Beyond the innovation of digital scarcity, some believe NFTs have the potential to change the relationship between creators and consumers of content.

Because NFTs are built on digital “smart contracts,” which execute automatically when certain conditions are met, an artist could create a provision giving them a cut of the proceeds if their NFT were to change hands again. On the other hand, a buyer who supports a struggling creator with an NFT purchase could potentially secure a share of future earnings from other projects.