NFTs, explained: These hot digital collectibles shaking up art and gaming – but what are NFTs exactly?

Just what are NFTs? It's the question everyone is asking as digital art explodes in value. While NFTs have been around for a few years it took Beeple, CryptoPunks and Bored Ape Yacht Club to put this new technology on the map. Since then Adidas, Nike, Disney, McDonalds and many celebrities has jumped into NFTs.

Answering the question, 'what are NFTs?' is the easy part: non-fungible tokens are a way of registering a one-of-a-kind image, video, or any form of digital, or indeed, physical item on a blockchain. It's decentralised and open to scrutiny. 

NFTs can still be tricky to understand, however, and the more they make headlines the harder it is – after all, if a photo of an NFT bin sells for 252k then anything is possible. You can now even create NFTs on the go, as we detail in the best NFT apps for iPhone.

What is an NFT?

An NFT is a kind of digital asset that is unique – that is, non-fungible. An NFT can represent a number of digital properties, including artwork, collectibles, video snippets, an item from a video game or even a music album, among others. Music group Kings of  Leon issued its recent album via an NFT that entitles users to download the album and related artwork.

“It can’t be traded with another one, like a dollar can be traded for another dollar,” says Dr. Richard Smith, CEO of The Foundation for the Study of Cycles, explaining non-fungibility.

NFTs are built on the same kind of infrastructure – blockchain – that cryptocurrencies are. Because they use blockchain, the transfer of an interest in NFTs is recorded on the blockchain, putting ownership on a permanent record, making it impossible (or at least very hard) to falsify.

“Each time an exchange on the blockchain occurs, whether that’s buying and selling an NFT or transacting in Bitcoin, the transaction is made public on the blockchain and marked with a unique digital signature,” says Aubrey Strobel, head of communications at Lolli, a Bitcoin rewards app. “This distinct signature verifies the transfer of ownership of an NFT.”

 

Unlike a unit of bitcoin, however, each NFT is completely unique, so it can't be exchanged like-for-like. The file stores extra information that elevates it above pure currency and brings it into the realm of, well, anything, really. As a result, NFTs have become collectable digital assets that hold value, just like how physical art holds value.

Some businesses, such as those in the music industry, envision the NFT as a future way to track the interest in a specific asset and then quickly pay the artists responsible for it. Similarly, when owners sell the asset to someone else, the original producer may even be able to take a cut of the sales price. Blockchain tech enables the hard-to-falsify record of ownership.

Essentially, you can make NFTs from almost anything unique that can be stored digitally and holds value. They're like any other collector's item, like a painting or a vintage action figure, but instead of buying a physical item, you're instead paying for a file and proof that you own the original copy. 

How do NFTs work?

The unique identity and ownership of an NFT is verifiable via the blockchain ledger. They were first launched on the Ethereum blockchain, but other blockchains including FLOW and Bitcoin Cash now also support them. Whether the original file is a JPG, MP3, GIF or anything else, the NFT that identifies its ownership can be bought and sold just like any other type of art – and, like with physical art, the price is largely set by market demand.

If you wandered into a gift shop of an art gallery, you'd find a number of replicated prints of famous masterpieces, well there are some NFTs that act the same way. There are parts of the blockchain that are totally valid, but they wouldn't hold the same value as the original. 

NFTs will most likely come with a license to the digital asset it points to, but this doesn't automatically confer copyright ownership. The copyright owner may reproduce work and the NFT owner gains no royalties. Artist Chris Petrocchi explains secondary sales and royalties in his video tutorial on how to create NFT art.

NFTs are exploding in popularity

While NFTs have seemed to suddenly explode on the scene, interest in them has been building for a while, says Alex Salnikov, co-founder of Rarible, an NFT marketplace.

But several factors working together may be leading to the recent explosion in interest.

“High-profile investors like Mark Cuban have been talking about them, the NBA is using them in their new Top Shot site, several major artists are jumping on board, and let’s not forget the nosebleed-level surges in cryptocurrency prices such as Bitcoin and Ethereum,” says Anthony Citrano, founder of Acquicent, an NFT marketplace. “It feels like a perfect storm here.”

 

Because NFTs are denominated in cryptocurrencies, their prices have surged as crypto prices have skyrocketed, explains Citrano.

Meanwhile, Salnikov points to the increasing interest in cryptocurrencies such as Bitcoin and Ethereum and the ease of getting started with them.

“It’s a whole new non-financial use case for people, not only geeks,” he says.

The explosion in interest is also another step in the “analog” world becoming more “digital.”

“The pandemic has increased the amount of time that people are spending online, making digitally native products like NFTs more attractive, as we’re living digitally now more than ever before,” says Strobel.
Where can I buy NFTs?

If you do want to look into buying NFTs, they can be bought on a variety of platforms depending on what you want to buy (for example, if you want to buy baseball cards you're best heading to a site like digitaltradingcards, while other marketplaces sell more general pieces). 

Where can I buy NFTs?

You'll need a wallet specific to the platform you're buying on and you'll need to fill that wallet with cryptocurrency. As the record sale of Beeple's Everydays – The first 5,000 days at Christie's (pictured above) proved, NFTs are hitting more mainstream auction houses, too, so these also are worth watching out for. In case you missed it, that Beeple piece went for $69.3 million.

Because of the high demand for many types of NFT, they are often released as 'drops', much like with events, when batches of tickets are often released at different times). We go into more detail in our guide to NFT drops. This means a frenzied rush of eager buyers when the drop starts, so you'll need to be registered and have your wallet topped up and ready to spend.

“If you’re buying an NFT because you really like it and want to own it, there is very little risk because it will be yours forever, or for as long as you wish to own it,” says Citrano. “If you’re buying NFTs to speculate, that’s another story.”

In other ways, however, NFTs are relatively secure, even if they don’t make a good investment.

“NFTs actually have an advantage over physical art,” says Strobel. “Whereas a painting can be stolen from a museum in a heist, stealing an NFT would usually involve hacking an individual user’s private key – no easy feat if they’ve secured it offline like most people do or should.”

And NFTs have the other advantages of blockchain technology, says Salnikov: They’re instantly and verifiably transferable, and your ownership is borderless and independent of the platform.

Who uses NFTs?

NFTs are having a moment among artists, gamers and brands across all kinds of sectors. In fact, it seems every day brings a new player to the NFT marketplace. For artists, stepping into the NFT space adds another possibility for selling art, and provides fans with a way to support it. NFT art ranges from small, quick-to-make GIFs (Rainbow Cat, above, was sold by NyanCat for $690,000) to more ambitious works. Celebrities are also getting involve, either as investing as collectors, or creating their own NFTs (or having them created for them by artists).

It would be expected that work by well-known artists would fetch big bucks as NFTs, something an anonymous group of 'art enthusiasts' relied upon when they burned an original Banksy in order to increase the value of an NFT. However, some sales are still eye-popping for the prices they reach. When Pak's NFT Artwork 'The Merge' sold for $91.8 million in December (he actually sold shares in the artwork), it was the third-highest price ever fetched by the work of a living artist.

NFTs are becoming an attractive revenue stream for brands, and we've seen all kinds of companies jumping on the bandwagon. Taco Bell's 25 taco-themed GIFs and images (you can see one of them above) sold out in just 30 minutes. Each NFT contained a $500 gift card, which may explain their initial popularity, but the TacoCards are now selling on the secondary market for up to $3,500 (and to clarify that no longer includes the gift card!

Why are NFTs controversial?

There's a lot of money being made in the NFT market, but you'll have heard there's also great controversy, not least due to the impact on climate. The creation of blockchain assets, NFTs included, uses a horrendous amount of computing power – and so a huge amount of energy. Some are worried about the very real impact the craze could have on the environment. 

CryptoArt.wtf, a site set up to calculate the carbon footprint of NFTs (which is now offline), calculated that a piece of NFT art named 'Coronavirus' consumed an incredible 192 kWh in its creation. That's equivalent to one European Union resident's entire energy consumption for two weeks. Was it a particularly big piece? It's estimated that a 'simple' NFT GIF can create the same consumption.

Polygon's sustainability pledge comes ahead of Ethereum's transition to a Proof-of-Stake consensus mechanism, which will reduce the network's energy consumption by almost 99 percent. After Ethereum's transition to PoS and the completion of CCRI analysis, Polygon will move beyond carbon neutrality to attain the carbon negative status.

Conclusion 

As with all collectibles, buy them because you love them, not to make money. Buy art because you like to look at it or it brings you joy. Buy handbags because you derive pleasure from them. Do not expect to make money on these speculative assets, because the odds are not great.

Still, if you would like to get involved, you may not have to pony up huge amounts to get started.

“Some NFTs are relatively inexpensive, making it possible for people to get a part of the action at less extravagant prices,” says Strobel.

However, you’ll want to be content if you’re never able to sell the NFT again. And that means being comfortable with losing your entire investment.