NFTs Explained: What is a non-fungible token and how does it work?

Representative Image. © Elenabsl | Megapixl.com

Cryptocurrencies are one of the hottest financial topics making headlines in 2021 – be it tweets of Elon Musk sparking wild Bitcoin and other cryptocurrencies’ price fluctuations, or the much talked about Coinbase IPO. As policymakers seem to be more open-minded about cryptocurrencies now, the markets have come up with new products on digital assets like crypto indices, inverse ETFs, etc.

As we talk about the cryptocurrencies, one term that usually pops up is non-fungible token (NFT). We at Kalkine Media bring to you all you need to know about the NFTs.

What are NFTs?

A non-fungible token, popularly known as NFT, is a unit of data stored in a digital ledger called a blockchain. A non-fungible token certifies an asset to be unique and is not interchangeable. The word non-fungible means that they are unique and can’t be replaced with something else. Cryptocurrencies, on the other hand, are fungible in nature. These can be used to represent various real-world items such as photos, artworks, real estate, and other types of digital files. Some of the NFTs present today include unique digital artworks, a unique sneaker in a limited-run fashion line, in-game items, essays, digital collectibles, and domain names among many others.

So, how do they work?

As is the case with Bitcoin, NFTs also contain ownership details for easier identification and transfer between holders of the token. The holders of the token are given an option to also add metadata or attributes pertaining to the asset in NFTs. Like, tokens representing coffee beans can be categorised as a fair trade. On the other hand, artists can sign their digital artwork with their signature using the metadata.  The token has evolved from ERC-721 standard.

Representative Image, Image Source: © Morganphoont | Megapixl.com

ERC-721 is a free, open standard that defines the minimum possible interface needed for exchange and distribution of gaming tokens. Take the example of cryptokitties – launched in November 2017, they are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitty is unique, along with a price in ether. Within a short span of the launch, cryptokitties were able to mop up such a huge fan base, that they spent US$20 million worth of ether on it cumulatively, with individual spending hitting a six-figure mark.

First Ever Tweet Sold As A Non Fungible Token, Image Source: © Sedovukr | Megapixl.com

Another example is that of the sale of first ever tweet by Twitter Inc (NYSE:TWTR) co-founder Jack Dorsey, that fetched US$2.9 million. To put it simply, NFTs are like a normal collector’s items – but they are only digital. So, rather than getting an actual oil painting hanging on the wall of their drawing rooms, the buyers get a digital file.

Seems interesting? So how do you buy them?

The NFTs are purchased through an NFT exchange – a third-party e-marketplace. Some of the NFT exchanges include OpenSea, Rarible, SuperRare, Foundation and AtomicMarket, among others. Among them OpenSea is the largest one -- featuring more than 700 different projects. The details of the transactions vary slightly on each exchange. The auction for the blockchain opens during the allotted time and once the token gets a winning bid, the site usually connects with the new holder by sending a verified link to their profile at the marketplace.