What is NFT (Non-Fungible Tokens)? All You Need to Know in 2023
Take a moment and think about how the world around you has changed. Retail became Amazon, libraries became Wikipedia, and instead of going to museums, you could soon be admiring digital NFTs.
In our article, we will show you why NFTs are more than just art and whether you will soon receive your university diploma as an NFT.
What are NFTs?
NFTs (Non-Fungible Tokens) are digital proofs of ownership of intangible goods. These assets are typically unique, non-substitutable digital assets (tokens). Blockchain technology allows ownership of these tokens to be proven and transferred.
Examples of this are digital works of art, computer game objects, digital tickets, or domain names. However, it can also be digital proof of ownership of physical objects such as paintings or other items.
The opposite of NFTs is fungible assets (fungible tokens). This interchangeability means that such a token can be replaced with an identical one at any time. Cryptocurrencies are exchangeable digital blockchain-based assets.
1 Bitcoin is always 1 Bitcoin, no matter when it was created and in which block it is currently located. A bitcoin can always be exchanged for another bitcoin without restrictions.
In the real world, €10 is always €10, whether in a bank account, a Paypal account, or a wallet as a crumpled bill. The interchangeability is there per se. You can also exchange a 10 euro note for two 5 euro notes or five 2 euro coins.
However, interchangeability can also be relative and subjective. A coin can one day become a rare and valuable collector's item due to its special properties.
A business class flight ticket is not interchangeable with an economy class ticket. And within Economy Class, a window seat is not the same as an aisle seat.
These small differences pose new challenges for NFTs on a blockchain. There can certainly be several identical NFTs, yet they are rare and relatively unique if only 10 exist worldwide.
What is the difference between non-fungible and fungible?
To understand what a "Non-Fungible Token" is and what makes NFTs so special, it is important to know the difference between "fungible" and "non-fungible." If something is fungible, then it is interchangeable. Good everyday examples are cash and securities. A ten euro note always works identically and is worth the same as any other ten euro note. If you buy a share of Apple, you get the same share of the company as any other shareholder.
Non-fungible things are not easily interchangeable - even if they may look the same at first glance. Classic examples are works of art. Replacing the Mona Lisa in the Louvre in Paris with another painting by Leonardo da Vinci quickly caused a stir. Another example of everyday life is cinema tickets. A cinema issues hundreds of tickets daily, which all look the same at first glance. However, the tickets are valid for very different films, starting times, and seats - so they cannot be easily exchanged and are therefore not fungible.
Blockchain Technology and NFTs
Before there were blockchains, numerous non-interchangeable digital objects already existed. Whether individual elements in computer games, digital tickets, domain names, or entries in social networks, the computer world was practically full of NFTs.
However, ownership could not be proven, nor was there any possibility of officially transferring ownership of these objects to someone else. There was simply no compatibility and, therefore, no standardized way to trade these digital things with sufficient liquidity.
And this is exactly where blockchain technology comes in. The entries and transactions in a blockchain are immutable, making ownership of an NFT secure and verifiable. The origin and the complete ownership history are forever stored in the blockchain.
NFTs on a blockchain thus enable unique ownership of copyable files. The fast and inexpensive shipping allows a safe exchange and trade.
What makes NFTs so valuable?
What is driving the demand for NFTs? It's not just digital scarcity or uniqueness. Rather, it is the individual benefit and emotions derived from the origin of the NFT.
The benefit is most obvious. When an NFT ticket grants access to a significant event, there is a clear reason to purchase that NFT. The same applies to objects in a computer game that gives the game characters special abilities.
But why should you buy an NFT artwork for a lot of money? That is certainly the question many are asking. And some doubt whether art can even be digital. But then it would be just as questionable why people buy expensive paintings or expensive collector's stamps.
It is the emotions that trigger the origin of the collector's item. The story behind it creates real value.
An autograph card is also just a piece of paper with some ink. But if the signature comes from a very prominent person and the reason for the signature is very special, then the value increases accordingly.
In the age of digitization, works of art and signatures of celebrities can now also be dematerialized and displayed on the Internet.
You can find out how to buy an NFT and everything you need to know about it in our guide.
The most well-known NFTs
Although NFTs can already look back on a few years of history, two NFTs, in particular, aroused widespread media interest in 2021.
Twitter founder Jack Dorsey's first tweet as NFT
Twitter founder Jack Dorsey NFTed his very first tweet from 2006 for approximately $2.9 million.
There could be numerous objections: The tweet is in Jack Dorsey's Twitter account and, therefore, still in his possession! What happens if Jack Dorsey just deletes the tweet? But that's not what it's all about; it's all about the story behind it and the emotions that are triggered.
When the founder of the Twitter platform sells his first tweet as a digital file, there is a unique story behind it. The new owner of the tweet can forever prove ownership of that NFT thanks to a blockchain.
He can prove that the bid came from Jack Dorsey personally and that he was awarded the highest bid. Who can say that about himself? Probably just as few can claim ownership of Henry Ford's first car.
Jack Dorsey's tweet was sold at an auction on the Valuables by Cent platform. Tron's Justin Sun was also one of the bidders, but someone else won the bid.
Artist Beeple and his $69 million NFT
The biggest NFT media attention to date has come from artist Beeple, whose digital artwork fetched a whopping $69 million at a Christie's auction on March 11, 2021.
The American Mike Winkelmann is behind the stage name Beeple. NFT artwork has the name "Every day: THE FIRST 5000 DAYS" and is a digital collage of a total of 5000 individual artworks that were created in as many days.
The total work of art is, therefore, more than 10 years of work; the actual effort is to create a 319-megabyte JPEG file with a resolution of 21,069 x 21,069 pixels.
But the whole story behind it is unique: the most expensive NFT work by a modern artist to date, the first NFT auction of its kind at Christie's, and thus the worldwide breakthrough in the art market. Will this work of art continue to increase in value in the future? Probably yes.
Anyone who has previously been unable to understand why people spend so much money on stamps or works of art will probably also find it difficult to understand the trade in NFTs. But it is quite conceivable that digital NFT artworks will also hang on the wall in the future.
And those who are self-reliant like to show their NFT collection on their social media profile with the help of social media management tools. With an NFT, you quickly become a fan of a certain artist or sports club. NFTs allow you to show off and impress in contemporary digital form.
Origin and development
NFTs have become significantly more present in the media in recent months. Headlines like Jack Dorsey's $2.9 million NFT tweet or the $69 million sale of the Beeple NFT bring NFTs to a much wider audience.
This often gives the impression that NFTs are a completely new phenomenon. But the history of blockchain-based NFTs can already show several years. The first NFT experiments were already running in 2012 with colored coins on the Bitcoin blockchain.
NFT Premiere on Ethereum: CryptoPunks
It was only with the Ethereum blockchain that NFTs took off. The first Ethereum NFTs appeared as CryptoPunks in the summer of 2017.
Crypto Punks are 10,000 unique digital characters brought to life by Larvalabs. Your digital proof of ownership is stored on the Ethereum blockchain as unique tokens. Individual optical properties characterize each CryptoPunk, so no two are alike.
CryptoPunks inspired the digital art market and were the precursor to later standards. Due to the limited supply and cult status among early adopters, they are already considered digital antiques. They are still tradable and interoperable with most NFT applications on Ethereum.
2017: Birth of the CryptoKitties
Even though Crypto Punks were officially the first NFTs on the Ethereum Blockchain, most people still remember the CryptoKitties. In late 2017, they became the first mainstream application of NFTs.
2017 was already a year with a lot of hype around cryptocurrencies, fueled by the ICO (ICO=Initial Coin Offering) bubble on the Ethereum platform.
In a short time, countless new ICO projects started, each with new and supposedly scarce tokens on offer. This triggered a veritable gold rush atmosphere. In another article, we will show you how to recognize such NFT drops.
More and more new cryptocurrencies on the Ethereum Blockchain saw the light of day in the digital world. It didn't take long for network congestion to increase, with significantly increased transaction fees. But one of the reasons for the high utilization was, among other things, creating and trading with CryptoKitties.
CryptoKitties are digital images of cartoon cats created by Dapper Labs for a blockchain computer game. Each cat is unique and, therefore, only exists once on the blockchain.
The special thing about them is that new unique CryptoKitties can be bred in the on-chain computer game by uniting different cats. These new cats could then be auctioned off or sold on the open market.
The CryptoKitties bubble
Breeding has attracted many speculators. The idea was simple: buy some rare CryptoKitties, use them for breeding some new, even rarer cats, sell them at high prices, and then start all over again. At its peak in 2017, the trading volume was around 5000 ETH, and sales of CryptoKitties achieved prices over $100,000.
It was almost absurd to pay such high prices for digital cats. But the incredible story behind it, combined with the big hype surrounding cryptocurrencies, brought many new buyers to the market quickly.
The network capacity of Ethereum at the time could not cope with this onslaught, so trading and breeding CryptoKitties incurred exorbitant fees and hours of waiting.
This mixture of hype, speculation, and the viral story finally resulted in a bubble that also attracted the attention of the press. But as expected, the bubble burst soon after.
In mid-December 2017, the demand for CryptoKitties suddenly dropped, and prices plummeted. The entire crypto bubble started to burst shortly after, and a multi-year bear market was heralded.
2018 – 2020: Developments during the ongoing bear market
After this hype, interest, and media coverage of NFTs leveled off. But that didn't mean that exciting NFT concepts weren't developed afterward. On the contrary, CryptoKitties laid the foundation for new ideas.
From 2018 to 2020, many new courses were set for blockchain-based NFTs, without which a new onslaught would probably not have been possible in 2021. Numerous blockchain projects have used the crypto winter to launch interesting NFT applications.
NFTs as digital art
This is how the art market discovered NFTs for itself. The property of clear proof of ownership and the possibility to display this transparently are almost ideal for digital art. Some artists started experimenting with NFTs.
Platforms for trading in digital art, such as OpenSea, SuperRare, MakersPlace, or Known Origin, were founded and continuously expanded.
So-called minting platforms such as Digital Art Chain, Mintbase, and Mintable integrated solutions to make creating NFTs easy and fast for anyone without any programming knowledge.
If the entry hurdle is low, this also whets scammers' appetite. In another article, we show you how to spot NFT scams early.
Gaming and virtual worlds
The gaming industry around blockchain-based virtual reality also recognized the great potential of NFTs early on. Above all, the Decentraland and CryptoVoxels projects should be mentioned here, which enable the purchase and ownership of virtual land in the form of NFTs.
New digital ecosystems with virtual cities and landscapes are emerging in these virtual game worlds.
Another pioneer in the field of blockchain-based virtual reality is Enjin. This project allows gaming paraphernalia from NFTs to be easily transferred from one game to another.
Domain names
In addition to art and gaming, the domain name market adopted NFTs early on to provide domains similar to ".com" with decentralized blockchain technology. The best-known service provider Ethereum Name Service was founded in May 2017 and connected to the most common NFT marketplaces in 2019.
The number of registered ".eth" domains has grown steadily.
Another well-known service provider is Unstoppable Domains, which has released the ".crypto" domain, among other things.
Between 2018 and 2020, many important foundations were laid for future NFT mass applications. NFTs have since penetrated numerous other sectors of the economy. These include sports, film, music, leisure, finance, and collectibles. These new NFT ecosystems will be discussed later.
Soulbound tokens
The latest modification of an NFT is the so-called SBT. Here, with Vitalik Buterin, the Ethereum founder, work was done on a system that introduces the new Soulbound tokens.
These SBTs cannot be traded and can be assigned to a user. Imagine you receive your school certificate or job reference, which is sent to you digitally as an SBT. This gives you a digital certificate, which is traceable in the blockchain and belongs only to you.
Using such SBTs, each user would receive a digital certificate of authenticity. As in paper form, a forgery would be much more difficult to create here.
This development can still be very exciting, and we will keep you updated.
NFTs on the Ethereum blockchain
Ethereum is currently the largest smart contract blockchain. Even with NFTs, Ethereum has been ahead since 2017. Whether Crypto Punks or CryptoKitties, the first Jack Dorsey tweet, or the Beeple collage, they all, as well as most marketplaces, are part of the vast NFT world on Ethereum.
Token Standards
All tokens on Ethereum, whether cryptocurrencies or NFTs, can be assigned to clear standards. Standards are an important building block for how tokens work. Essential properties such as ownership, access, and portability can only be guaranteed with suitable standards.
Standards are also essential for software development. This way, the basic functionalities, and behavior are clear to all involved.
The three most common Ethereum token standards are ERC20 for fungible tokens (exchangeable tokens such as cryptocurrencies) and ERC721 and ERC1155 for non-fungible tokens (non-exchangeable tokens=NFTs).
The NFT project Azuki has established a modification of the ERC721 standard with ERC721A. New NFT projects often use this. The advantage here is the significantly lower network fees.
The ERC20 standard assigns amounts to addresses. The number of cryptocurrencies held can always be seen for each Ethereum address.
With the birth of the CryptoKitties, the important NFT standard ERC721 was created, on which most NFTs are still based today. ERC1155 is another NFT standard developed by Enjin.
ERC1155 is a hybrid of exchangeable and non-exchangeable tokens. ERC721 maps owners to unique IDs, while ERC1155 has a nested mapping from IDs to owners to sets.
Disadvantages of Ethereum for NFTs
Even though Ethereum is the largest NFT platform, it is not always the first choice for every type of NFT. Ethereum is still struggling with the challenge of increasing capacity limits. Therefore, extremely high fees are sometimes incurred for creating and trading NFTs.
For a valuable NFT like the Beeple artwork, $100 in fees might be insignificant. But for many smaller artists who want to sell their work for $100 to $200, such high amounts are a clear obstacle.
Against this background, several alternative blockchains have come forward to close this market gap. Depending on the NFT use case, there is also a suitable NFT blockchain that promises faster and cheaper trading of NFTs. In the next section, we take a look at alternative NFT blockchains.
Alternative blockchains for NFTs
Even though Ethereum is currently still the top dog for NFTs and most NFT marketplaces are linked to Ethereum, there are also numerous other blockchains on which NFTs can be generated and traded. Most of these are so-called proof-of-stake blockchains, which are much better suited for NFTs.
Better because they enable more transaction volume with lower costs. When creating an NFT (minting), a new entry is written to a blockchain. This can eat up a large chunk of transaction fees.
Ethereum is currently based on Proof-of-Work, which requires a lot of work. This high effort severely limits the capacities, which results in higher fees.
On the other hand, proof-of-stake blockchains require significantly less energy and allow for faster transactions at lower costs, which is beneficial for generating NFTs and subsequent trading.
An alternative proof-of-stake blockchain that has made a name for itself when it comes to NFTs is Flow.
Flow
The same developers created the flow behind CryptoKitties. The flow blockchain is designed to prevent an overload like the one experienced by CryptoKitties in 2017 on Ethereum. There is also a native token called FLOW that can be traded on numerous exchanges.
NBA Top Shot, a very popular NFT marketplace in the US where basketball fans can buy NBA highlights as NFTs, is powered by the Flow blockchain.
With NBA Top Shot, the most spectacular game scenes of an NBA basketball game are edited into videos. These video highlights will be available for sale on the NBA Top Shot website.
In principle, the video clips are similar to traditional physical trading cards, whose proof of ownership is now determined by a blockchain entry.
If basketball is not your preferred sport, we have put together an article about the football manager Sorare for you.
NFT blockchain coins
Since 2020, many NFTs have experienced tremendous increases in value. One of the main reasons is that the cryptocurrency Ether (ETH), on which most NFTs are traded, has seen its price multiply.
If, in addition to in-depth market knowledge, you have a bit of luck or a sixth sense for which NFTs could be in high demand, you might be able to build a fortune with NFTs.
However, if this speculation is not for you, you can invest in selected NFT coins instead. This is roughly the same as investing in ETH because these NFT coins are required for fees on the respective blockchain on which NFTs are created and traded.
The more NFTs are in demand, the more fees are incurred, which drives demand for these coins and automatically affects the price.
Chiliz
CHZ is a utility token on the Ethereum blockchain used as the official cryptocurrency on the Socios.com platform. The main field of application is the sports and entertainment industry. Chiliz wants to revolutionize the connection between clubs and fans in the sports world. The goal is to offer millions of sports and e-sports fans cryptocurrency to buy direct voting rights in the form of fan tokens for their favorite clubs. These fan tokens are NFTs and also fall under digital collectibles. Owners of these NFTs receive numerous exclusive benefits and individual recognition.
Chiliz has already partnered with major football clubs such as FC Barcelona, Juventus Turin, and AS Roma. The venture is expected to attract even more attention from the sports world in the future and further boost the NFT market.
NFT Ecosystem
In the meantime, a large cross-blockchain ecosystem has emerged around NFTs, which will probably continue to grow in the coming years. Behind it are many start-ups that have specialized in different areas. The ecosystem includes infrastructure, digital collectibles, domains, the gaming industry, virtual reality, and marketplaces.
Marketplaces
What the exchanges are for cryptocurrencies, the marketplaces are for NFTs. NFTs can be created there and then traded.
The best-known and largest marketplace is OpenSea, the "e-bay" among the NFT marketplaces. We tested OpenSea for you and found the platform suitable for beginners and advanced users. Other interesting marketplaces include Rarible, SuperRare, and Mintable. All four marketplaces mentioned are compatible with Ethereum.
But the number of marketplaces for NFTs that are also compatible with other blockchains is constantly increasing. For example, a digital art marketplace linked to the Tezos blockchain is Kalamint.
How do you create an NFT?
In principle, creating an NFT and offering it for sale is not difficult. However, you need a few specific "tools" and some patience.
To put it simply, using the example of a digital work of art, you need a file that can be identified by copyright, a wallet, and sufficient cryptocurrency, e.g., ETH.
With the wallet, you can easily connect to an NFT marketplace, for example, the Metamask wallet on the Opensea platform. You can upload the digital file in the prescribed file format as soon as you are logged in there with the wallet. The NFT is created and added to the blockchain as an entry. This so-called minting is not free but requires fees.
We have tested the best NFT wallets for you.
After the NFT is created, the digital artwork will be visible in the marketplace's gallery and available for sale. The sales proceeds in cryptocurrency are then credited to the corresponding wallet address.
Technical limits
Although the first mainstream NFTs date back to 2017, the NFT phenomenon is still in its infancy. Many questions are open. In particular, the guarantees for authorship and ownership are not yet legally guaranteed. For example, multiple NFTs can be created on different blockchains for the same file.
Then there would be several different NFTs of the same original, which would be a meltdown in the art and collector world.
Furthermore, one must be aware that it is not the original NFT file that is stored on the blockchain but only the proof of ownership for an NFT "minted" on a corresponding platform. Even if this blockchain entry should exist forever, one is still dependent on other applications such as websites and platforms such as marketplaces or mobile apps.
This breaks the most important value proposition of blockchain technology: trustlessness. While Bitcoin does not require any trust in a third party, with NFTs, you are still dependent on trusting the authorities involved.
Future potential
Many experts agree on two things. First, NFTs have been quite the hype since 2020 and may be in a bubble fueled by a crypto bull market. And secondly: NFTs have the potential to change the sports, art, and music industries in the long term.
Generally, tokenizing all physical assets and items through NFTs could turn many industries upside down.
Some even go so far as to predict a future in which nearly all activity and economic activity will be shifted to the Internet. We are talking about the so-called metaverse, in which NFTs could play a central role. The beginning has already been made in gaming and virtual worlds. The expansion of GameFi is already in full swing.
For example, in a future financial economy, NFTs could serve as collateral to lend against. This is already possible in DeFi, as the examples NFTfi and ETNA Network show.
Of course, there is no guarantee for such future scenarios. Too many questions are still unanswered. But NFTs will probably not disappear completely. In the 1990s, only a few believed that the Internet would become what it is today.
How to make money from NFTs?
If you want to make money with NFTs, you have two options. The most obvious option is speculation – i.e., buying NFTs cheap and selling them higher. Anyone who invested early in a rare CryptoPunk or a special monkey from the Bored Ape Yacht Club could achieve profits in the millions with a bit of luck. But even on a smaller scale, there has always been and still is the opportunity for investors to benefit from significant price increases for collectibles.
What should you consider before buying NFTs?
The following factors should be analyzed before purchasing an NFT (collectible in this case) and can help to make a better investment decision. It should always be borne in mind that most NFT projects will probably have no (or very little) value in the long term.
Hype: How much is the NFT project talked about?Roadmap: What is the team planning for features and benefits for NFT owners?Brands: Who is promoting this project? (Influencers, Community, Awareness)Team: Who are the initiators behind the NFT project?Numbers: Average value of the collection, volume, floor pricesCommunity: How big is the community on Discord and Twitter?Another way for artists and creatives to make money from NFTs is to create and sell their own NFTs. Anyone can generate non-fungible tokens on NFT platforms such as OpenSea or Rarible. First of all, the work doesn't matter. Images, avatars, and other art in JPG, PNG, or GIF format are popular, but an NFT can also be an MP4 video or audio file in MP3 format. There are hardly any limits to the imagination.
In contrast to the distribution of classical art, DVDs, or CDs, distribution as an NFT offers a major advantage: recurring revenue. Not only can NFT creators set a fixed selling price or start an auction for auction, but also royalties- and thus earn money with every further purchase. The technical implementation as a unique, unmistakable non-fungible token in the blockchain makes it possible.
