What are NFTs and how do they work?

Published: Jan 05th, 2022

Updated: Jan 25th, 2023

Collins Dictionary announced that NFT is the 2021 Word of the Year in November, leading to a lot of people scratching their heads trying to figure out what an NFT is.

You’re in the right place to find that very answer.

What is an NFT?

NFT or non-fungible token is a digital asset that represents real-world objects such as art, music, and sports. ‘Non-fungible’ roughly means that it’s fully unique and can’t be replaced with something else. Bitcoin is ‘fungible’ because you can trade one bitcoin for another, and you’ll have the same thing.

NFTs are bought and sold online, often alongside cryptocurrency and usually encoded with the same underlying software as many cryptocurrencies.

Surprisingly, NFTs have been around since 2014 and have gained notoriety to it becoming increasingly more popular to use them to buy and sell artwork. £123M has been spent on NFTs since 2017.

How do NFTs work?

NFTs are usually one-of-a-kind and have unique identifying codes. They exist on a blockchain, a distributed database that is shared among the nodes of a computer network.

Blockchains is also the process that makes cryptocurrencies possible.

An NFT is created from digital objects – both tangible and intangible such as:

  • Artwork
  • GIFs
  • Collectables
  • Video
  • Music

Another way to look at it is, NFTs are like physical collector’s items, only they are in a digital form. Once you own an NFT, you have exclusive rights as it can only ever have one owner at a time.

The music and art worlds are already billion-dollar industries and NFTs are in the midst of shaking them up.

Why do NFTs have value?

As with all assets, supply and demand are key market drivers for price and due to the limited number of NFTs and their high demand, people are currently prepared to pay a large sum of money for them.

With this in mind, it’s worth remembering that an NFTs value is based entirely on what somebody is willing to pay for it.

It’s possible that some NFTs have the potential to make their owners a significant amount of money, but they are risky to purchase as their future is uncertain. Due to their age, there isn’t enough history to determine what their performance will be.

Whether or not NFTs are in it for the long haul, we can’t know for sure, however, it is clear that they are creating come welcome disruptions to the arts and media industries and creating new opportunities for digital art.

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