What Is a Non-Fungible Token (NFT)?
Non-fungible tokens (NFTs) are assets that have been tokenized via a blockchain. They are assigned unique identification codes and metadata that distinguish them from other tokens.
NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs—it all depends on the value the market and owners have placed on them. For instance, you could use an exchange to create a token for an image of a banana. Some people might pay millions for the NFT, while others might think it worthless.
Cryptocurrencies are tokens as well; however, the key difference is that two cryptocurrencies from the same blockchain are interchangeable—they are fungible. Two NFTs from the same blockchain can look identical, but they are not interchangeable.
How NFTs Work
NFTs are created through a process called minting, in which the information of the NFT is recorded on a blockchain. At a high level, the minting process entails a new block being created, NFT information being validated by a validator, and the block being closed. This minting process often entails incorporating smart contracts that assign ownership and manage the transferability of the NFT.
As tokens are minted, they are assigned a unique identifier directly linked to one blockchain address. Each token has an owner, and the ownership information (i.e., the address in which the minted token resides) is publicly available. Even if 5,000 NFTs of the same exact item are minted (similar to general admission tickets to a movie), each token has a unique identifier and can be distinguished from the others
Blockchain and Fungibility
Like physical money, cryptocurrencies are usually from a financial perspective, meaning that they can be traded or exchanged, one for another. For example, one [bitcoin] is always equal in value to another bitcoin on a given exchange, similar to how every dollar bill of U.S. currency has an implicit exchange value of $1. This fungibility characteristic makes cryptocurrencies suitable as a secure medium of transaction in the digital economy.
For this reason, NFTs shift the crypto paradigm by making each token unique and irreplaceable, making it impossible for one non-fungible token to be “equal” to another. They are digital representations of assets and have been likened to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning you can combine one NFT with another to create a third, unique NFT.
How Can I Buy NFTs?
Many NFTs can only be purchased with ether (ETH), so owning some of this cryptocurrency—and storing it in a digital wallet—is usually the first step. You can purchase NFTs via any of the online NFT marketplaces, including OpenSea, Rarible, and SuperRare.
Are NFTs Safe?
Non-fungible tokens, which use blockchain technology like cryptocurrency, are generally impossible to hack. However, the weak link in all blockchains is the key to your NFT. The software that stores the keys can be hacked, and the devices you hold the keys on can be lost or destroyed—so the blockchain mantra “not your keys, not your coin” applies to NFTs as well as cryptocurrency. NFTs are safe as long as your keys are properly secured.
What Does Non-Fungible Mean?
Fungibility describes the interchangeability of goods. For example, say you had three notes with identical smiley faces drawn on them. When you tokenize one of them, that note becomes distinguishable from the others—it is non-fungible. The other two notes are indistinguishable, so they can each take the place of the other.