> A Non-Fungible Token, or NFT for short, is a digital asset on a blockchain that represents a unique item. The Title to a plot of land on the land registry is a real world example of an NFT where the unique item is the land and the blockchain is the land registry (although the land registry is centralized). The term ‘non-fungible’, meaning unique and irreplaceable, is key to understanding NFTs because that’s where they differ from cryptocurrencies, which are fungible and can easily be exchanged for one other. NFTs can represent art, literature, music, collectibles, or even real world assets like real estate.

How do NFTs work_

> Just because NFTs are digital, it doesn't mean that a simple screenshot or download amounts to ownership just as owning a print of a famous painting isn’t the same as owning the original painting. Details, such as ownership, authenticity, uniqueness, and the asset’s transaction and ownership history are tied to the NFT and stored on the blockchain. These details are publicly available on the blockchain, and serve as a permanent record that cannot be forged or tampered with.

>> Any person can create or ‘mint’ an NFT by tokenising an asset on a blockchain network. There are several NFT marketplaces today, many of which are beginner-friendly. The only thing a creator needs is crypto in a digital wallet compatible with the marketplace of choice in order to pay the necessary fees for creating an NFT. A handful of marketplaces even allow for trading NFTs using fiat currencies like the US Dollar, so it is not essential to own crypto in order to enter the NFT space.

>>> An NFT is stored on a block in the blockchain with details of its provenance, i.e., the history of ownership, and the value it has been traded/purchased for Smart contracts are used to mint NFTs by verifying and assigning ownership to a specific user, and thereafter used for transferring NFTs. Ethereum is the most commonly used blockchain for NFTs although Bitcoin is catching up with its relatively new Ordinals protocol. Once an NFT has been minted, it can be held as an investment or collectible, sold at a fixed price or by auction, traded or exchanged for another NFT, or even gifted, donated or burned.

Why do NFTs have value_

> Not all NFTs have value. Infact, most NFTs are worthless as they don’t represent anything of value. An NFTs value is derived from the asset that it represents. Therefore an NFT representing a piece of digital art from Damien Hurst, should be worth more than an up and coming digital artist. It is also important to note that Damien Hurst is creating value through his digital art, the NFT is just the mechanism to record the ownership and provenance. A consequence though, is that NFTs are easily tradable and therefore their value is determined by a market. Therefore, NFTs are a highly efficient method for creators/brands/companies to transfer value to their audience. Intrinsic in this value is the efficiencies that NFTs offer - transferability and traceability.

Examples of real-world uses of NFTs

[1] Art_ NFTs allow artists to digitize their work and transfer value directly to their collectors. Further, artists do not profit from subsequent sales of their art after the initial sale but with NFTs, they can benefit from royalties by programming the smart contract to transfer them a fixed percentage of any future sales

[2] Charity_ Many well known brands have created and sold NFTs as part of fundraising efforts for charities

[3] Real estate_ Property is tokenized and minted as NFTs to simplify real estate transactions, fractionalize property ownership and transparency

[4] Music_ Tokenized music allows artists to sell their music directly to fans. Such NFTs are usually sold along with incentives like access to exclusive additional content, appearances in music videos, share of streaming royalties etc

[5] Gaming_ NFTs are anticipated to be big in the gaming industry where gamers can buy or compete for exclusive in-game items that might give them an advantage in playing (e.g. weapons, superpowers) or make their characters more unique (e.g. skins). These in-game assets can then be taken out of the game and traded with other players on an NFT marketplace. Through interoperability, these assets can be taken into another game, significantly changing the gaming experience

[6] Digital Collectibles_ Collectibles and memorabilia from sports, movies, popular culture etc. are minted as NFTs

[7] Proof of Digital Properties_ NFTs are used to establish and prove ownership of digital properties such as domain names and assets in virtual worlds

[8] Proof of Identity or Compliance_ NFTs are also used to prove that a person is who they say they are or that they have complied with certain requirements, such as attending an event or completing an online course

Challenges surrounding NFTs_

[+] NFTs are speculative assets, and their value can be unpredictable and prone to fluctuation. For example, Justin Bieber’s Bored Ape NFT dropped from USD 1.3 million in January 2022 to USD 60,000 in July 2023.

[+] Copyright infringement has been a huge problem on NFT marketplaces, with one popular site estimating that more than 80% of NFTs created with its free listing tool were either plagiarized, fake, or just spam. 

[+] The hype surrounding NFTs has led to NFTs being created just for the sake of it, rather than creating assets with value. 

[+] Since NFTs exist on a blockchain, there is potential to permanently lose an NFT if a user loses their private key.

[+] While blockchain is by itself largely secure, related software like wallets and key storage facilities can be hacked. Making NFT theft common.

> NFTs represent a new dimension within the digital economy that is significantly more creator friendly than traditional markets. Since they only exist on blockchains, NFTs enjoy advantages like security and permanent, immutable records. It enables the creation of large, decentralised communities built around shared interests, where creators can connect directly with consumers and consumers can support artists, creators, brands etc. NFTs have opened up an exciting new method for creators and consumers to connect, and for people to start collecting/investing in digital assets.