Deep Dive: NFTs
Learn about what NFTs are, how they work, and how they're used.
Non-fungible tokens, known as NFTs, are unique digital assets. NFTs are a type of crypto asset that represents a unique token. Crypto assets are digital assets that utilize technologies such as peer-to-peer networks and cryptography. They rely on a public ledger to execute transactions. A few types of crypto assets are cryptocurrencies, platform tokens, or NFTs.
NFTs can take the form of any digital asset. The most popular NFTs right now are digital works of art, videos, in-game digital items, audio files, and even pieces of writing.
The term non-fungible refers to the unique and individualized nature of each NFT. Think of NFTs similar to concert tickets. Each concert ticket is unique since it has a unique section, row, and seat number, for a unique concert date and performing artist.
This is a stark contrast to fungible assets, such as a US dollar bill. Any US dollar bill can be exchanged for another dollar bill and it is worth the exact same and has the same characteristics. NFTs cannot be exchanged for one another since no two NFTs are the same. Each has its own value and characteristics. Some of these characteristics are visual or digital assets, such as digital art or a virtual item in a video game. Each NFT secures the information associated with it, such as ownership, asset history, cryptocurrency resale value, by encoding and cryptographically securing it.
NFTs are created through a process known as ‘minting’. Minting is done on a variety of platforms, but the most popular are marketplaces like Mintable and OpenSea. These marketplaces use web-based user interfaces to make the minting process simple and seamless for end-users. NFTs can also be minted with a variety of tools or pieces of code, such as Flow or Alchemy. You can check out Filebase’s guides on how to mint NFTs using either of these methods here.
NFT tokens are written on blockchain networks, the most frequently used being the Ethereum and Solana blockchains. The blockchain network provides a secure and globally distributed ledger for the NFTs, allowing for full accountability of each transaction and the ability to trace transactions by unique blockchain addresses instead of through usernames or identities.
Minting NFT is the process of converting a digital file into a crypto collectible or digital asset on a blockchain network. The digital item or file is recorded on each peer in a network on the blockchain forever, and it is impossible to remove, modify, or edit it. Non-fungible tokens are minted in a similar concept to how metal coins are made and put into circulation.
The minting process is fairly easy and does not require a heavy time commitment, but it does cost money to mint an NFT on most blockchain networks. This price to mint an NFT is referred to as a ‘gas’ fee. The Ethereum network is an example of a blockchain that charges gas fees for minting NFTs. Polygon, on the other hand, does not charge gas fees to mint NFTs on the network.
After an NFT is minted, the creator of the NFT can earn a profit on the sale of the NFT when it is bought on an NFT marketplace such as OpenSea. NFTs can also be sold through an NFT creator’s personal website, which is a popular option for dedicated NFT developers.
Ethereum is an open-source, decentralized blockchain network that has smart contract functionality and features its own native cryptocurrency, Ether. Ethereum is the most widely used blockchain network for NFT marketplaces and NFT transactions.
Solana is a public blockchain network that also has smart contract functionality and a native cryptocurrency, SOL. The market value of SOL is drastically less valuable than Ether so the gas prices for minting NFTs are cheaper than minting NFTs on Ethereum. This makes Solana popular for NFT transactions that are of lesser dollar value than NFTs bought and traded on Ethereum.
Polygon is a blockchain network that does not charge gas prices to mint NFTs. Polygon is popular on the marketplace OpenSea, where users can quickly and seamlessly mint NFTs for free using OpenSea’s user interface and the Polygon blockchain network.
Smart contracts are programs stored on a blockchain that are written and used to automate the execution of transactions when predetermined conditions are present. It contains the NFT's metadata, such as the name of the NFT, a URL to the NFT data file, a description of the NFT, and any other data the creator has included. If the NFT is part of a collection, sometimes there will be metadata stating its position in the collection and its rarity compared to other NFTs in the collection.
Smart contracts are created and used during the NFT minting process. If you mint an NFT through OpeanSea or Mintable, the backend of the marketplace takes care of the smart contract process for you. If you want to mint an NFT through your own code, you will need to write a piece of code that creates a smart contract for you for each transaction.
You can purchase an NFT through a variety of marketplaces, or through an NFT collection’s website. Some popular NFT collections are CryptoPunks made by Larva Labs or the Bored Ape Yacht Club. Collections often have their own dedicated website, along with community resources such as Discord communities.
Once you’ve bought an existing NFT or created your own, you can sell it for a profit on a marketplace or create your own website for sales if you’ve created an NFT collection. The backend process of buying and selling NFTs will remain the same regardless of the platform you choose to use for these transactions.
The most common NFTs are associated with digital art. NFTs can be associated with an image file and many popular NFT collections are composed of tens of thousands of images that share common characteristics or styles. For example, many NFT collections have a theme and showcase a variety of characters or avatars, each with its own unique look.
NFTs being associated with art helps artists pursue other revenue streams. Many artists rely on commission pieces over the sale of their own personal collections, so NFTs give them a potential profit for those personal collections or unique pieces.
Since NFTs have unique tokens associated with them, online gaming has begun to use NFTs to redeem in-game items. These in-game items can then be traded amongst players and have an associated value within the virtual world of the game. Some games also offer physical items in conjunction with virtual items, so if a player has an NFT for a certain item, they can redeem that NFT for a physical game-related item.
As streaming services like Spotify came to dominate the music industry, payments for new music fell by over two-thirds between 2010 and 2015. NFTs can also be associated with pieces of music, providing a new way for artists to gain royalties on their music. Many music artists and bands are beginning to offer their album’s digital files as NFTs, and associate other perks with owning an NFT version of their album. Think about when physical albums were popular and they would include an exclusive poster or album booklet inside the plastic CD case. NFTs can be used to replicate that idea but in a digital format. They can also be used for things like concert tickets, so if you buy a certain NFT of an album, you could also be getting front-row concert tickets on the artist’s next tour.
NFTs can also be used for writing, which can be used to determine the original authors of writing and help protect against plagiarism. NFTs can also be used for digital books, primarily Kindle books that are only available as digital files and not physical publications. This provides another source of income for authors, similar to musicians and artists. NFTs associated with pieces of writing are far less common than digital art or gaming NFTs.
While many NFTs are associated with other rewards such as in-game rewards or digital music files, some NFTs are purely for collectability and novelty. One example of this is the original Nyan Cat meme, which sold for 300 Ethereum. There are a variety of other memes and viral videos that have been sold as NFTs, with no other benefit than being able to say you own the original copy of a popular meme.