When it comes to NFTs, the acronym that best distills their unique value proposition is “non-fungible.” In essence, this means that each token is one of a kind. This is a major distinction from cryptocurrencies and fiat currencies like dollars, where each coin or dollar is interchangeable with any other. In NFTs, however, a token that is minted represents a specific piece of digital art or utility. This makes it impossible for any two NFTs to be the same and allows collectors to distinguish their holdings from others.
This is the big selling point for many people who are into NFTs: They’re hoping that bringing this concept of scarcity to digital files will allow them to build new business models and monetize them. NFTs may not make trading digital assets easy or cheap (they don’t), but they believe that allowing owners to claim ownership of digital files will be the next step in the evolution of the internet.
NFTs are backed by blockchain technology, which creates immutable records that track the ownership of a file over time. This is how they’re able to transfer between parties without the need for intermediaries, making it a great way for artists to sell their work and for companies to offer products that can be owned by customers and fans alike.
Tokens are minted when content creators publish their digital files to the Ethereum blockchain, where they’re given a unique identification that is linked to a crypto wallet address. The identifier is public, so anyone can see who owns the NFT and where it is currently located in the Metaverse. When an NFT is sold, the sale is recorded in the blockchain, and the new owner’s address is updated. NFTs are traded through online marketplaces like OpenSea and Nifty Gateway, as well as in custom-built applications like NBA Top Shot.
NFTs can also be rewarded to users of an application or platform, or given as prizes in games and other social platforms. This can be an effective way to reward users or attract more users to a product, and is especially helpful for companies looking to build brand loyalty and encourage repeat engagement. The Bored Ape Yacht Club, for example, rewards its NFT holders with a members-only Discord server, exclusive merchandise, voting rights in future projects, and tickets to virtual meetups.
While there are some advantages to NFTs, the market is still young and highly susceptible to scams that can take advantage of unsuspecting buyers. A number of NFT projects have fallen apart because the project creators are unable or unwilling to follow through on their commitments. These are known as rug pulls, and they’re a major reason why some NFTs are worthless.
Even in cases where NFTs are a legitimate, thriving part of the ecosystem, their success depends on a strong community of collectors to drive ongoing interest. Without a robust community, the value of an NFT can quickly depreciate as other collectors lose interest and stop buying or trading them.