Learn / Beginner · DeFi and Apps

What are NFTs?

Beginner · DeFi and Apps · about 5 min read

An NFT, or non-fungible token, is a unique token on a blockchain that records who holds a particular digital item.

How it works

• “Fungible” means every unit is the same, like one dollar or one USDC. “Non-fungible” means each token is different and cannot simply be swapped for another.
• A smart contract creates each NFT and tracks its owner, its ID and details that describe what it stands for. On Ethereum, standards such as ERC-721 set the rules.
• Anyone can check on the blockchain which wallet holds a given NFT.
• NFTs are used for digital art, event tickets, in-game items, course certificates and web addresses.
• The best-known sale came on 11 March 2021, when the auction house Christie’s sold a digital artwork by the artist Beeple for about $69.4 million. Christie’s described it as a digital-only work with an NFT to certify it is genuine.

Keep in mind

• The token shows who holds the token. What rights come with it, such as who may copy or sell the picture, depends on the terms set by the creator or seller, so read them.
• A price is only what a buyer will pay. An NFT can be hard to sell and can lose most of its value.
• NFT holders are targets for phishing and fake sites, and smart contracts can have flaws, so wallet security matters.
• General information, not financial advice.

What the record shows, and what it does not

Ethereum's guide says an NFT's ownership is recorded on the public blockchain, where anyone can verify it. That is a record of who holds a specific token. It does not by itself say who may copy, print or resell the image. Many NFTs also store the picture or file somewhere else, and the token only points to it, so the item's availability depends on where it is kept. Read the terms a creator or seller sets before you buy.

Uses beyond art

• Event tickets, including ones with assigned seats.
• Proof of attendance, course completion or contribution to a project.
• Domain names, such as names managed through ENS, and online identity.
• Gated access to content or communities.
• In-game items.
• Representing real-world assets, or serving as security for a loan.

Rules built into the contract

Creators can set rules when they create an NFT, such as a cap on how many exist or a royalty that sends a share of each resale back to them. Those rules are written in the contract, so check them before you buy. A royalty may not be honoured on every marketplace.

Staying safe

Ethereum's guide names phishing as the most common NFT security problem. Smart contract flaws and mistakes, such as exposing a private key, also cause losses. For tickets, it suggests checking the contract address to confirm the ticket is genuine. In practice:

• Reach a marketplace or mint from a bookmark, not from a link in a message.
• Never give out your recovery phrase, even to "support".
• Read what a wallet approval asks for before you confirm.
• Be wary of free NFTs that arrive unasked and invite you to visit a website.
• Remember an NFT can be hard to sell, and a price shown is not a price you will get.

Common mistakes

• Believing owning the token means owning the copyright.
• Buying a copy of a real collection from a fake page.
• Approving a marketplace to move all your NFTs when one was enough.
• Treating the last sale price as what the item is worth.
• Buying at the peak of a trend and not planning how to sell.

Try it yourself

1. On a block explorer, look up a well-known NFT collection's contract. No wallet needed. Note the total supply and the number of holders.
2. Find the collection's official website and compare its contract address with the explorer's.
3. Read the terms for the collection and write down what you would be allowed to do with the image.

Key terms

NFT, fungible, token standard, metadata, royalty.

Sources and credits

What NFTs are, uses and risks: ethereum.org, Non-fungible tokens. Token standards: ethereum.org, Token standards. General information, not financial advice.

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