Non-fungible tokens are challenging the worlds of collectibles, entertainment, and more in the digital age. Read this comprehensive guide to learn about NFTs.
*Compared to major competitors. Terms and conditions apply. This is not investment advice or an investment recommendation. NFTs are shown for illustrative purposes and the types of NFTs available may vary. Cryptocurrencies, including NFTs are highly volatile, subject to significant price risk, and may not be suitable for you.
In January 2009, a pseudonymous cryptographer or group of cryptographers launched a protocol that would change the way society interacts with the internet forever. That protocol was Bitcoin, and it introduced a new way of transferring value around the world without using intermediaries like banks and payment processors.
During the decade since Bitcoin launched, a new generation of developers has been applying many of the principles that were used to design Bitcoin to a wide array of new related technologies, birthing entire industries that can similarly inspire people to rethink how they transact with each other in an increasingly digital and virtual world.
Non-fungible tokens (NFTs) are one such development. After exploding in popularity throughout the cryptocurrency scene in 2021, NFTs have been increasingly recognized as a tool that could create new tools for ownership in a virtual world. This category of blockchain-based assets has the potential to revolutionize the way people interact with everything from art to live events.
This guide takes a deep dive into the world of NFTs to explore how they work, what they're used for, and where this technology is headed.
The term 'non-fungible token' is a slightly confusing name for a relatively simple concept.
'Fungibility' refers to the interchangeability of a good or asset. For example, one U.S. dollar is interchangeable with every other U.S. dollar. People can swap a $5 bill for five $1 bills and the value stays the same. The same is true for units of bitcoin and almost every other cryptocurrency in circulation today: one bitcoin equals one bitcoin, regardless of which unique bitcoin an investor is holding.
Non-fungible assets, on the other hand, are not fungible and cannot be replaced by other units. A painting, for instance, is a non-fungible asset. An artist cannot swap one work of art for another and maintain the same value even if they both come from the same artist.
Blockchain-based non-fungible assets allow collectors, traders, and other users to own representations of scarcity and uniqueness in a digital environment. This is the essence of NFTs.
Non-fungible tokens are a distinct class of digital assets. Each tokenized asset represents a completely unique piece of digital property. Unlike fungible tokens and cryptocurrencies like bitcoin, ether, and the thousands of tokens created in the Ethereum ecosystem, NFTs derive their value from not being interchangeable with another NFT.
This distinction may seem slight, but it is quite significant. For the first time, people can now own and trade digital assets in a virtual environment in a very similar way to how people have owned and exchanged physical assets like art, real estate, or rare collectible items for centuries but often with better security and transparency.
As a new asset class, NFTs give owners a way to handle intellectual property in the digital space. NFTs enable creators and entertainers like artists, musicians, athletes, and others to monetize their work in an entirely new way, and opens up a whole world of possibilities for interaction between the physical and digital worlds.
Copying and pasting text is a simple task that demonstrates how easy it is to replicate data in a digital environment. File sharing programs like BitTorrent and Napster show that people can replicate and share just about any kind of data -- from music and movies to software and textbooks -- quickly and easily, with little more than a phone or computer and internet access.
So, how does someone create digital scarcity? This is the age-old problem that Bitcoin solved. It's also the key to understanding how NFTs work.
When someone sends funds on a blockchain protocol (e.g., Bitcoin), a global network of computers, or 'nodes', validates the transaction, and records in a 'block' with other transactions. This block is then added to the chain of all previous transactions, creating an immutable record of every transaction that has ever been made on the network. Since every computer on the network maintains a copy of the record, it's impossible for any one actor to fudge the numbers or validate fraudulent transactions.
This is how Bitcoin and other cryptocurrencies prevent someone from spending funds twice, a type of error or attack simply called a “double spend.” When spending Bitcoin, the transaction is verified by the network and then recorded on the blockchain to show one party giving ownership to another. This prevents users from spending that same bitcoin again because the entire network knows that it’s already been spent.
Non-fungible tokens apply this principle to create genuine scarcity in unique digital assets.
When purchasing an NFT, the network verifies the transaction and records it on the blockchain. This creates a unique record of the NFT that prevents anyone from counterfeiting or duplicating it. Since they can't be copied or faked, NFTs provide a way to verify the authenticity of whatever they represent. This makes NFTs ideal for handling digital assets like art, music, or other forms of intellectual property.
Through unique on-chain identifiers and metadata that are non-replicable, or non-fungible, NFTs can only be owned by one entity at a time. Users can mint NFTs through smart contracts that manage its ownership and transferability parameters. This information encoded in the smart contract is then secured on the blockchain in which the NFT was minted. Basically speaking, minting an NFT creates a set of data stored on a blockchain ledger where information is stored, validated, then recorded into the blockchain ledger.
When minting an NFT, the owner receives a private key which gives them access to the NFT’s metadata, which also serves as the NFT’s proof of ownership. The public key attached to the NFT is used to verify the authenticity of it.
These measures make NFTs ideal for verifying ownership of digital assets, but it may also be ideal for certifying ownership of physical assets too. For example, an NFT could be used to verify ownership of a piece of land, which could revolutionize how people think about titling for real estate and cars. With NFTs, people might soon be able to complete an entire real estate purchase without ever filling out paperwork or having to go through third parties like banks and escrow services. This is just one sliver of the multitude of possibilities that NFTs offer.
Here are some quick stats about NFTs in June of 2022:
With all of the technical terms covered here, creating an NFT might seem like a complicated process, however, FTX makes the process (called “minting”) simple.
First, however, it's very important to own the copyrights to content before turning it into an NFT. Minting an NFT from copyrighted content could expose the minter to significant legal action and penalties.
After finding an original piece of content to mint into an NFT, users can start exploring the world of creating and collecting NFTs with no fees by creating an account on FTX and completing the Know-Your-Customer (KYC) verification process.
Once users have created an FTX account, navigate to the FTX NFT marketplace and follow the steps below to mint an NFT and start receiving bids.
Note: All NFT submissions are subject to a non-refundable $3 submission fee. Please allow at least 72 hours for the FTX team to review and approve the NFT submission. FTX US reserves the right to moderate the NFTs that are minted on the platform and can reject any NFT that it deems to violate the Terms of Service.
NFTs exploded in popularity in 2021, but they've actually been around for quite some time. In 2012, early Bitcoin adopter Meni Rosenfield introduced the concept of 'colored coins' on the Bitcoin blockchain. These special bitcoins would be 'colored' with different properties, which could be used to represent fractional ownership of assets like real estate, bonds, and even works of art.
The Bitcoin protocol couldn't support this idea at the time, but developers and researchers began experimenting with the concept of blockchain-backed non-fungible assets soon after Rosenfield published his paper. They expanded the idea to new protocols, and in 2014, a digital artist named Kevin McCoy minted the first NFT on an updated blockchain called Namecoin.
McCoy's creation, a digital art piece aptly named 'Quantum', ushered in the era of blockchain-backed, non-fungible assets and provided a glimpse of the wide-ranging applications for blockchain technology.
In January 2018 William Entriken, Dieter Shirley, Jacob Evans, Nastassia Sachs proposed the ERC-721 (Ethereum Request for Comments 721) standard, which gave rise to the modern NFT. With this new standard, the Ethereum blockchain was better equipped to handle non-fungible assets than any protocol before it, and soon developers began minting all kinds of NFTs on the Ethereum network.
Ethereum's popularity as a development platform attracted major brands and organizations to the world of NFTs. In 2018, crypto startup CryptoKitties introduced the first mainstream application for NFTs. The app allowed users to breed, collect, and trade digital cats, and it quickly became an internet sensation.
Since then, the world of NFTs has grown exponentially. Today, there are NFTs for just about everything, from digital art and collectibles to in-game items and real-world assets. In June of 2022, the market capitalization of all non-fungible tokens surpassed $12 billion, and everyone from celebrities and athletes to major corporations and independent artists are getting involved in this rapidly developing space.
Non-fungible tokens can represent ownership of just about anything. The following sections explain just a few types of assets that can be represented today as NFTs.
The first-known NFT was a piece of digital art, so it’s not surprising that this is still one of the most popular applications for the technology today. NFTs allow artists to sell their work in a new way, and provide collectors with a unique and valuable way to invest in art.
What's the difference between a piece of online digital art and an NFT? When buying an NFT, the collector is actually purchasing the underlying blockchain data associated with the artwork. This data is stored on a decentralized ledger, which means that it can't be altered or deleted. They own the NFT forever.
It can be helpful to think of an art NFT as a certificate of authenticity for a digital piece of art. NFTs provide artists with a way to verify the ownership and authenticity of their work, and they also give collectors the peace of mind that comes with knowing they own a one-of-a-kind piece.
This framework for understanding ownership is especially useful when it comes to commercial usage rights. Buying an NFT grants the owner exclusive rights to use the artwork in any way they see fit. This includes things like using it in advertisements, on merchandise, or even in other digital artworks.
Some of the most popular NFT collections have sprouted entire communities like CryptoKitties, Rare Pepe Party, CryptoPunks and the Bored Ape Yacht Club. Many of these platforms have grown from novelty projects into multi-billion dollar entities, with the NFTs themselves becoming some of the most valuable assets in the world.
As an artist, selling work as an NFT is a great way to ensure that they get paid for the work and that it's used in the way they intended. As a collector, buying NFTs is a great way to invest in digital art and support the artists they love while reaping the same scarcity benefits of physical art collectors.
Photographers have also started experimenting with NFTs of their work. Like any other form of NFTs, buying a photograph NFT gives the owner exclusive rights to use the photograph however they like, such as for advertisements, merchandise, or even in other digital artwork.
Platforms like OpenSea and Rarible often feature photography NFTs, and a growing community of photographers who are actively experimenting with the technology. Artists like DrifterShoots, an urban photographer who specializes in cityscapes and street photography, have developed entire communities around their work and generated millions of dollars in revenue.
Musicians use NFTs as a new way to monetize and control their intellectual property. And as musicians search for new ways to monetize their work in the digital age, NFTs have proven to be an innovative tool to engage with fans in a new way.
Artists like Grimes, Snoop Dogg and Steve Aoki have launched some of the largest music NFT libraries, and generated millions of dollars in revenue in the process. Aside from selling individual tracks and limited-edition albums as NFTs, bands like Kings of Leon have sold exclusive experiences, like lifetime front row seats as NFTs as well.
Here’s a more in-depth look at some standout artists who are pioneering the NFT space for music:
Snoop Dogg: ‘Tha Doggfather’ dove headfirst into cryptocurrency before it hit the mainstream, advocating for Bitcoin as far back as 2015. Since then, he's become one of the foremost celebrities in the NFT space, releasing exclusive tracks, digital art, and live experiences as non-fungible tokens.
In the spring 2022, Snoop announced that he would use his recent acquisition of the legendary label Death Row Records to launch the world's first NFT-based record label. This appears to have already paid off, as his first drop generated over $44 million of revenue with his 'Stash Box' NFT collection. The rapper also announced plans to create his own virtual world within The Sandbox metaverse platform, where users can purchase NFTs to attend exclusive events and experiences in the digital space.
3LAU: DJ and producer Justin Blau generated a whopping $11.7 million in just three days by releasing 33 collector's editions of his Ultraviolet album as NFTs. 3LAU was a crypto early adopter, and he continues to be a vocal supporter of the burgeoning decentralized music industry.
His NFT collection was auctioned on the decentralized marketplace Dshop, and it featured some unique musical experiences in addition to ownership of the digital artwork and audio files. One lucky collector won the opportunity to record a song with the producer as part of the token sale, demonstrating the engaging new ways in which NFTs can enable artists to interact with their fans.
Shawn Mendes: Canadian singer and songwriter Shawn Mendes released a collection of digital collectibles in 2021 that also showed the wide variety of ways that musicians can leverage NFTs to engage with fans. Mendes partnered with avatar design company Genies to digitize a collection of accessories, from his guitar to an iconic vest to give fans the opportunity to own unique collectibles from throughout his career.
The gaming industry has always been on the cutting edge of technological innovation, and NFTs are no exception. In-game assets have been traded for years in games like World of Warcraft and Diablo, but these items existed solely within the game itself. With NFTs, gamers can own their favorite in-game assets as digital collectibles that they can use across different games. Although all gamers and developers are not supportive of the NFT industry’s growth, many are.
Here’s a short list of some standout and popular NFT games:
Axie Infinity: This popular digital pet game allows users to collect, care for, and fight with their pets. The game features over 500 different creatures, each with their own unique abilities and looks.
Axie Infinity has its own native currency, AXS, which can be used to purchase in-game items like land and breeding licenses. These assets can then be sold on the game's marketplace or traded with other players.
Decentraland: This virtual world offers users the experience of purchasing land, building homes and businesses, and hosting a variety of events in the metaverse. Decentraland has its own native currency, MANA, which can be used to buy in-game assets. These assets can be anything from land and buildings to clothing and furniture. Users can also purchase Decentraland's virtual currency, LAND, which is an NFT that represents a piece of property in the game.
CryptoKitties: CryptoKitties is one of the most iconic NFT games, and it was one of the first to launch on the Ethereum blockchain. The game allows users to collect, breed, and trade digital cats. Each kitty is unique and can be bred with other kitties to create new and exciting combinations. Kitties can also be traded with other players or sold on the game's marketplace.
Chainmonsters: This blockchain-based game is all about its players collecting, trading, and battling with digital monsters. Chainmonsters makes extensive use of in-game NFTs by tokenizing just about every asset a player will interact with, allowing users to trade and sell a wide array of inventory items as well as the monsters themselves.
The Sandbox: This popular voxel-based game lets its players create their own 3D worlds and games. The Sandbox features its own native currency, SAND, which can be used to purchase in-game assets, which can be anything from land and buildings to clothing and furniture. Sandbox users can also create their own NFTs in the game, which can be used to represent just about anything. These NFTs can then be traded with other players or sold on the game's marketplace.
DeFi Kingdoms: Part game and part decentralized exchange, this unique platform allows players, collectors, and traders to own a variety of in-game assets with the ultimate goal of earning yield on their tokens. DeFi Kingdoms is a unique play-to-earn platform that makes investing in DeFi fun and easy to understand.
An increasingly popular use case for NFTs is using them to access a variety of exclusive live events and other experiences, from concerts and festivals to sporting events and more. This type of NFTs can also often be used to purchase add-ons related to the event and even earn rewards. For example, Coachella, one of the most popular music festivals in the world, gave festival-goers who purchased NFTs access to exclusive events like meet-and-greets with performers.
The NFL also utilized NFTs for Super Bowl LVI. As part of a purchased ticket for the game, attendees received a free NFT that served as a digital commemorative, essentially showing their proof of attendance. This is just one other way in which sports leagues, artists, and entertainers from all different niches can use NFTs to enhance their fans’ experience.
The NFT industry is constantly evolving and innovating. Here’s a short list that overviews some interesting and recent developments.
A common question asked by prospective NFT investors and many NFT skeptics is: Why pay for a digital image when anyone could save the file to their hard drive and look at it whenever they want? Sure, anyone can screenshot an NFT, but the key distinction between copy-pasting an NFT and actually owning it is the proof of ownership, control, and related experiences and benefits granted to owners.
When buying any NFT, a collector is purchasing control, ownership authentication, and all other benefits related to owning an original digital asset. This lets the owner do whatever they want with that piece of content-- sell it, trade it, or monetize it through licensing commercial rights. It's their asset, and they have full control over it.
Take the Mona Lisa, for instance. Anyone can recreate or print a copy of the Mona Lisa, yet the only version that carries true value is the painting that’s attached to Leonardo da Vinci’s name. The owner behind the painting is what gives the art its value. NFTs simply leverage blockchain technology to apply this same principle of ownership to the digital landscape.
Collecting NFTs isn’t just the act of buying a digital token. It’s the process of acquiring a piece of digital property. NFTs are enabling the future of ownership in the digital age, and they offer a unique opportunity to invest in a new and growing asset class.
There are many marketplaces for browsing, collecting, and trading NFTs. This section offers a brief step-by-step overview for the process of collecting NFTs through FTX.
To add USD or USD stablecoins to a user’s account, navigate to ftx.us/wallet and find the deposit tab and choose from FTX’s various funding options:
With an account registered and funded, users can now start browsing NFTs. FTX offers a wide array of both Solana and Ethereum-based NFTs and the marketplace is being updated constantly, so take the time to browse the selection and find the right asset.
From the main screen, scroll down to browse the latest and most popular NFT collections or click the browse button to sort by collection or individual NFTs. Please note that some assets on the platform are listed for a flat price, while others are sold in an auction format.
If purchasing from a collection, be sure to review the following data before purchasing:
FTX lets users buy, sell, and trade NFTs without paying any gas fees. But the process for buying NFTs will vary by platform. Some marketplaces may require users to connect an external wallet like MetaMask, while others may provide an NFT wallet for users.
Once a desired NFT is found, submit a bid for the asset or select 'buy now' if it's listed for a flat fee. If the bid is accepted, the NFT will automatically be added to the user’s digital wallet. If purchasing an NFT from FTX, users can view all of their current holdings by going to ftx.us/wallet and selecting the NFT tab from the dropdown menu.
Users can also display their collection by scrolling down, enabling the gallery view and generating a unique URL for the NFT collection.
Listing NFTs that a collector already owns on FTX is quick and easy. Navigate to 'create' on the NFT portal and click 'apply for listing'. Fill out the questionnaire about which blockchain the NFT is based on, its token standard, and whether the user is the original creator or has written permission to sell copyrighted content.
FTX reviews all listings to ensure that content complies with its terms and services. Users should hear back within 48 hours, and if the listing is accepted, enter details for the asset listing and the NFT will go live on the site.
Like any new technology, especially in the growing economies of cryptocurrency markets, NFT collecting and trading carries some inherent risks.
Fraud is one of the most pertinent risks. Ownership of an NFT is recorded irreversibly on a public blockchain’s ledger, but NFT issuers can mint digital representations of content they do not own. For new and experienced collectors alike, it's important to only buy NFTs from reputable sources and to be aware of the potential for fraud when making any investment.
Since NFTs are based on blockchain technology, they are subject to the same risks as any other cryptocurrency. For example, an NFT might be lost or stolen if the wallet it's stored in is hacked. Phishing links or other forms of cyber attacks can often target NFT collectors and seek to gain access to their wallets to steal the collectibles inside. Additionally, the value of an NFT could drop if the underlying blockchain platform experiences technical issues. New collectors should carefully evaluate all relevant technical risks before investing in an NFT.
Every collector hopes their NFTs will one day be valued at millions of dollars. But it’s important to carefully evaluate the status and growth potential of a collection before investing.
This process can be difficult, so traders and collectors should try to answer the following questions before investing:
Doing ample research and due diligence is a crucial prerequisite before trading or collecting in any market, especially NFTs.
Like any other digital asset or cryptocurrency, NFTs are subject to some of the same market risks For example, NFT prices can be volatile, and many of the marketplaces for accessing NFT collections are still relatively new and sometimes unreliable especially during times of high use and market activity.
Secondary markets for NFT are also often quite small and illiquid, which means it may be difficult to find buyers for certain NFTs or that collectors and traders looking to sell an NFT may have to sell at a lower price than what they originally paid.
NFTs have a wide range of potential use cases that are only just beginning to be explored beyond gaming, art, entertainment, and more. Here are some of the most promising areas for NFT adoption in the future.
Blockchain technology is already revolutionizing supply chain management, and NFTs may hold the key to taking that revolution to the next level. NFTs could be used to track the provenance of goods and ensure that they are not counterfeit. Companies like Everledger are already using NFTs to track physical assets from accessories to diamonds.
NFTs and blockchain technology more generally may greatly reduce slippage and provide more transparency across the entire supply chain, unlocking a more transparent and efficient way to manage the global economy.
NFTs could also be used to track and manage digital rights. For example, an artist could sell an NFT that grants the buyer the right to use a digital image in a certain way. Or a musician could sell an NFT that grants the buyer the right to use a piece in a creative project like a film or video. In the future, people can expect to see more companies using NFTs to sell digital content and manage rights.
NFTs could also be used to manage identity. For example, an NFT could be used to verify that a user is who they say they are when accessing a service or website. Or an NFT could be used to store and manage personal information like medical records. More and more companies may begin using NFTs for identity management in the future.
At this point in the guide, the NFT information discussed should have helped novice and experienced collectors build a strong foundation of the NFT industry and its future. At their core, NFTs are about one thing: ownership verification.
NFTs provide a way to verify that a user is the rightful owner of an asset. This is done by storing information about the asset on a blockchain, which is then used to verify the ownership of the asset. NFTs have the potential to revolutionize a wide range of industries by providing a more efficient and secure way to verify ownership and authenticity.