What Are NFTs (Non-fungible Tokens)?

Non-fungible tokens (NFT) are cryptographic digital assets that each have uniquely identifiable metadata and codes. Their data is stored on the blockchain, ensuring they can’t be replicated or forged.

The tokens act as a representation, like an IOU, for either digital or tangible items. For instance, one could create NFTs that stand for digital artwork, virtual real estate in a game, collectible Pokemon cards, or even someone’s personal identification information.

Currently the majority of the NFT market is focused on collectibles like sports cards and digital art. But there are other highly priced NFTs on the market as well, such as a tokenized version of the first-ever tweet, created by Twitter CEO Jack Dorsey.

Let’s dive into the details about how NFTs work, what they’re important, and what makes them valuable.

What are NFTs Used For?

The concept of digital representations of material items is not new. But the addition of blockchain technology makes NFTs important. As part of a blockchain, NFTs are easily verifiable and unique, each one able to be traced back to the original issuer.

NFTs are revolutionizing gaming, art, and the collectibles market. They also have the potential to transform real estate, travel, and identity management. Millions of dollars have been spent on NFTs over the past few years, and their popularity is increasing amongst both collectors and crypto traders.

NFTs and Gaming

For the first time, immutable ownership and efficient sale of collectible and in-game items is possible. This opens up many opportunities for online gaming and world creation. For instance, within virtual worlds like Decentraland and The Sandbox, players can create pretty much any business one might create offline—design and sell hats, create avatars, or sell theme park tickets. Players can even create in-game currencies to sell to other users.

NFTs and Art

NFTs are revolutionizing the art world. Using an NFT exchange, artists can sell digital art directly to buyers, removing the need for a gallery or auction house. Typically, middle men can take a large percentage of sale profits, which means artists may be able to increase their profits using NFTs. It’s even possible for artists to earn royalties each time their artwork or music is sold. The most expensive digital art sold so far was a group of NFTs created by Beeple which sold for over $69 million.

NFTs and Identity Management

There are also use cases for NFTs in identity management. Currently people around the world travel with physical passports, which can easily be lost or stolen, and even replicated or forged. Storing identity information on the blockchain has the potential to eliminate these risks and may one day make travel processing more efficient.

NFTs and Real Estate

Another use case for NFTs is in real estate. Dividing up a property is difficult, but dividing digital real estate is easy. Multiple people can invest in and exchange property if it has been digitized. This principle can also be applied to other material assets.

NFTs and Supply Chain

NFTs can also help improve and validate supply chains. For instance, a coffee company could prove that their beans are fair trade. A wine company could create an NFT for each bottle of wine to keep track of every step of its production.

NFT Standards

Most NFT tokens are currently created using one of two Ethereum token protocols, ERC-721 or ERC-1155. These are essentially blueprints for tokens that were created by the Ethereum team. The blueprint creates a template for certain information that must be included for any new NFT, such as security and ownership information. By standardizing the way this information is created, NFTs are easily distributed and exchanged.

Starting with a blueprint, software developers can create NFTs that are compatible with large public exchanges and NFT wallets such as MyEtherWallet and MetaMask. This ensures that people can buy and sell the NFT and hold it in their own personal wallet.

Other blockchain networks such as Tron, Neo, and Eos are also building out NFT token standards. Each one has different token functionality, so software developers can choose which platform is best for the token they are creating.

What Makes NFTs Valuable?

As with any type of asset, supply and demand drives the price of NFTs. Since there are only so many of each collection of NFTs or individual NFTs, this can make the demand for them very high.

One might wonder what the value would be in owning a representation of a limited edition item as opposed to the real thing. NFTs are both easily verifiable and completely unique. This makes them easily tradable online. Their code is also useful because each NFT can be traced, including past transactions of that token. This provides security, transparency, and prevents fraudulent items from being sold.

Gamers, investors, and collectors have been flocking to the NFT market because they see the potential for market growth and significant profits.

Within certain online games, for example, real estate is a prized possession. If one owns a plot of land on a main road in a virtual world where they could open up a casino, that has the potential to make a lot of money. So that plot of land is very valuable.

Are NFTs Cryptocurrencies?

Cryptocurrencies, like physical money, are fungible assets, which can be exchanged and used for financial transactions because they are identical to one another. For example, one USD is always equal in value to another USD. Although NFTs are built on blockchain technology, they aren’t the same as cryptocurrencies, in that they can’t be exchanged with one another. Think of an NFT like a passport or a ticket to an event. Each one is unique.

An NFT that represents a baseball card can’t be directly exchanged for one that represents a piece of digital art. And even an NFT that represents one baseball card can’t be exchanged for one that represents a different baseball card. The reason for this is that each NFT is unique and contains specific identification information.

However, NFTs are similar to cryptocurrencies in that they have attributes and metadata that makes them easily transferable and identifiable.

Key Characteristics of NFTs

There are several characteristics of NFTs that make them different from other types of assets and that appeal to investors. They are:

•   Indivisible: Unlike Bitcoin or other forms of cryptocurrency, NFTs can only be bought and sold in their entirety. They can’t be divided into smaller portions.
•   Non-interoperable: Just as NFTs can’t be exchanged for one another, one type of NFT can’t be used in another NFT system or collection. NFTs used in online games, for instance, are like a playing card or game piece. Just as a Monopoly piece can’t be used in the game of Life, the owner of a CryptoKitties NFT can’t use that NFT in the Gods Unchained game.
•   Indestructible: Token information is securely stored on the blockchain using smart contracts. This means NFTs can’t be erased or copied.
•   Immutable: One important characteristic of NFTs is that the person who buys one actually has possession of it. They can sell it or hold it. It’s not held by a company the way iTunes holds music and licenses it out for users to listen to.
•   Verifiable: The creation, transaction, and identification information for NFTs can be traced and verified without a third party. This allows anyone interested in buying an NFT to make sure it’s legitimate and do their own vetting before purchase. It prevents the creation and sale of fraudulent tokens.
•   Extensible: Two NFTs can be combined to create a new, unique NFT.
•   Capable of storing metadata: NFT creators and owners can add metadata to NFTs. For instance, an artist could sign their digital artwork.

The Takeaway

The NFT market is still new and full of potential for creators and investors. However, before investing in cryptocurrencies, NFTs, or any other digital asset, it’s important to research and understand the market.

One way to get started investing in digital assets is with SoFi Invest®. Members can trade cryptocurrencies like Bitcoin, Ethereum, and Litecoin, right from the convenient mobile app.

This post originally appeared on SoFi and was republished with permission.