A non-fungible token (NFT) is a unique digital file in the world that has a single owner and cannot be duplicated or divided. In order to track and guarantee its exclusivity, a blockchain network is used.
Before continuing with the concept of NFT, you should be aware that it is an abstract concept that is a bit difficult to internalize. In this article we are going to explain it in the simplest way possible. For this we will use examples that will help you understand it perfectly.
An NFT is a file like any other you may have on your computer or mobile phone. What sets it apart is that it is a unique file in the world with one owner. In addition to this, it is possible to know who has been the owner of the asset in the past, at what price it has been purchased and other relevant information that you want to store.
What are NTFs used for?
NFTs are mainly used to represent investments, offer different services or partially or totally represent a property.
Let’s see what NFTs are for with an example. Imagine that you are a graphic designer and you create a unique design that you want to sell to a person. The buyer wants to have the guarantee that this design will belong only to him and no one else will have it, and for that exclusivity he pays a premium.
If you, as a graphic designer, export the design as an image and send it to them by email, this file is easily replicable (like any other file on your computer) and will lose its exclusivity value. To understand it better, imagine a painting by Picasso. If, when photocopied, it had the same characteristics as the original work, it would lose all its value. However, it is a unique piece with a single owner.
To solve this problem of property rights in the digital world, NFTs have been created. NFTs make it possible to guarantee the exclusivity of an item and trace its owners and the price that has been paid for them. In short, a digital fingerprint of the file is generated, making it impossible to replicate.
This is possible thanks to blockchain technology. The blockchain is a digital database that contains information regarding the transactions that have been made on something specific, such as bank transfers. Information stored in this database cannot be deleted.
Characteristics of an NFT
The common characteristics that NFTs have are the following:
- It is a digital file.
- Each NFT is a unique item in the world.
- It is a non-expendable asset. This means that it is a non-substitutable good for another. For example, a fungible good is money, you can exchange a €1 coin for another €1.
- The owner has exclusive ownership rights to the NFT.
- Copyright and reproduction rights can be held by the creator of the file, even if it is sold.
- They can be sold, usually in exchange for cryptocurrencies.
- The value they have is established only by the market, through the perception of people. Thus, something that is valued at $1 today may be worth $1,000 tomorrow, simply because buyers value it.
- They are usually associated with digital art pieces.
Uses of NFTs
Non-fungible tokens can have numerous uses, here we explain some of the most common:
- Video game: Many of the NFTs that are marketed are appearance designs of certain video game characters, also known as “skins”. Players like their character to sport a unique look that sets them apart from the rest.
- Digital Artworks: The collection of exclusive digital files valued by the market and made by someone famous is an increasingly common practice.
- Investments: It can become a digital asset, so NFTs are used as an investment. If the investor considers that this file may appreciate in value over time, he will buy now to sell it in the future for a higher price and obtain a return on the asset.
- Real estate: The NFT allows to know the history of a property, to know who its owner has been, the price at which it has been previously sold, debts, seizure orders, etc.
Examples of NFTs
Below, we provide you with some examples of NFTs and the price at which they have been sold.
- CryptoPunk: They are different NFTs that show a pixelated face with different characteristics. Below, you can see one of them sold for $7.56 million.
- World Wide Web source code: The creator of the World Wide Web sold an NFT with the original source code of the same for 5.43 million dollars.
Finally, if you want to know more about non-fungible tokens, we recommend that you read our guide: The NFT revolution: the definitive guide to understand them.