NFTs cheat sheet: Everything you need to know about non-fungible tokens

NFTs are the hottest new thing in the world of the blockchain. But what are non-fungible tokens, how are NFTs different from cryptocurrency, and what are their practical uses for businesses?

NFTs: A short-term trend or here to stay?

You've probably heard about the latest new digital craze: non-fungible tokens or NFTs. These unique digital codes rely on the same blockchain technology as cryptocurrencies like Ethereum, but with a big difference: NFTs are completely unique and establish ownership of digital assets.

I wrote an article in 2018 about an online game called CryptoKitties, which involved collecting and breeding one-of-a-kind digital cats that lived on the Ethereum blockchain. These cats could be bought, bred and sold for Ethereum cryptocurrency, and ownership of the cats used NFT technology way before it was cool.

Fast forward three years and we're living in an age where Twitter founder Jack Dorsey can auction off an NFT for his first-ever tweet for $2.9 million, and digital artwork sells for hundreds of thousands of dollars, which rightly leaves people in the art world and beyond scratching their heads and wondering just what a non-fungible token is, why it matters and if there's anything behind the hype.

SEE: Hiring kit: Blockchain Engineer (TechRepublic Premium)

What are NFTs?

Non-fungible tokens are, in a way, a lot like cryptocurrency. The record of their existence lives on blockchains, they can be bought and sold using cryptocurrency, and there isn't necessarily a physical asset that ties them to the real world. 

NFTs differ from cryptocurrency in that they're non-fungible, meaning they can't be exchanged for an identical item. Cash, for example, is a fungible asset: Each dollar may be unique, but the particular dollar you have doesn't matter. If you swap a $10 bill for two five-dollar ones, you still have $10. Trade your $10 for an autographed baseball card, however, and you then have a non-fungible item: it's unique, and while it may have a monetary value, it isn't itself a trade commodity. 

SEE: There's more to cryptocurrency than Bitcoin: 5 other digital coins to consider (free PDF) (TechRepublic)

Other examples of non-fungible goods include artwork, houses, website domain names, your pet cat and parcels of land. 

Here's where NFTs come in: they're digital tokens on a blockchain that represent a unique item, like Jack Dorsey's tweet, a crypto kitty, a piece of digital art or even a physical asset with ownership tied to an NFT. 

What rights does ownership of an NFT confer?

If the idea of claiming ownership to a tweet, a GIF, a piece of property in an online game or a virtual cat seems odd, you're not alone in thinking so. NFTs have been controversial, and it's just as easy to find support for them online as it is to find people who think they don't make any sense

Daniel Van Boom, editor at TechRepublic sister site CNET, said people who don't understand NFTs are in good company. He wrote: "It's incomprehensible that clips, memes and gifs are selling for six, seven and even eight figures."     

Even more confusing is what owning an NFT means: If you purchase the NFT of a unique piece of art, you have sole ownership over it and can do with that art what you want, right? Not exactly. 

Take, for example, Nyan Cat, an animated GIF of a cat with a body made out of a toaster pastry, flying through space with a rainbow in its wake. An NFT of Nyan Cat recently sold for $590,000, but as CNET points out, the owner of the Nyan Cat NFT is only that: the owner of the Nyan Cat NFT. The intellectual and creative rights to the work are still owned by the artist who created it. 

SEE: NFTs: A passing trend or here to stay? Americans and UK residents have very different opinions (TechRepublic)

From CNET reporter Oscar Gonzalez: "What the owner of the token has is a record and a hash code showing ownership of the unique token associated with the particular digital asset. People might download Nyan Cat and use it on social media if they want, but they won't own the token. This also means they can't sell the token as the owner can." 

Ownership of NFT assets can vary based on the transaction, but the Nyan Cat example is a typical case in which the creator still owns the work, but the NFT purchaser owns the original copy. Nothing about an NFT inherently confers copyright, which is why a $69 million NFT of a piece of digital art by Beeple (whose name is Michael Joseph Winkelmann) can be copied and re-copied without anyone breaking the law. 

Think of owning an NFT like owning an original van Gogh: Sure, you have the artwork the man himself painted, but there are countless prints of it in other people's homes. The big difference is that it's basically impossible to claim ownership of a virtual item that can be copied without error unlimited times, while a physically original van Gogh painting is (with the exception of a skilled forgery) unmistakably the original painting. 

When you think of it like that, it's almost as if an NFT is only worth the bragging rights that come with it. 

How are NFTs created, and how are NFTs sold?

In an article for OneZero, Allen Gannett walked through the process of creating his own NFTs and what was involved. Hint: You'd better have some spare cash if you want to try getting rich off your own art.

"There are three steps: the actual creation of the art, the "minting" of them (transforming the file to a one-of-one NFT) and selling them," Gannett said. Buying NFTs, on the other hand, is just like bidding on any type of online auction. 

SEE: Dole partnership creates an NFT series as a first step to fight global hunger (TechRepublic)

With a digital asset in hand, anyone wishing to mint an NFT needs to choose an NFT market, like Nifty Gateway, SuperRare or Rarible, where the digital asset can be uploaded and minted into an NFT on whichever blockchain the market operates on--most NFTs are part of the Ethereum blockchain. 

Here's where we arrive at sticking point number one: Some of the larger exchanges require NFT minters to apply to publish works. "I had imagined that I could walk in, throw down my best art and soon be showing my work to the masses. Instead, I was met by forms asking me to explain who I was and my background," Gannett said.

Creators who make it past that point are now faced with the second obstacle to minting an NFT: money. Like everything to do with the blockchain, you need to put up some serious money to get your transaction added. In Gannett's case, "doing this would cost .67 ETH (Ethereum) or, as we would say in normal-speak: $997. These fees vary based on how 'congested' the Ethereum network is," he said. Naming one particular piece of NFT artwork in order to sell it cost Gannett an additional $86, and publishing four NFT images for sale ended up costing a total of $1,300. 

"The next morning I received a bid of .05 ETH (about $76) for each of my four NFTs. The Ethereum gas fees for accepting the bids? $88…each," Gannet said. "But I sold one, because even if I lost $12 on it, I'm now, technically… a professional NFT artist." Gas fees are the price that must be paid into the Ethereum blockchain for verifying a transaction, such as the sale of an NFT, acceptance of a smart contract or the purchase/sale of Ethereum cryptocurrency.

SEE: Quick glossary: Blockchain (TechRepublic Premium)

How could NFTs impact businesses?

There are various ways in which NFTs could affect businesses: They have the potential to transform ownership rights, and they can be used as tools for selling digital and physical merchandise.

The NBA, for example, has created a new line of NFT collectibles called Top Shots, which are essentially short, collectible highlights from games that act as a sort of digital trading card. They've been successful enough that one LeBron James Top Shot sold for more than $200,000.

Celebrities, like rapper Post Malone, have also gotten into the NFT game. Malone recently partnered with crypto firm Fyooz to create NFTs that would allow owners to trade them for a game of beer pong. Other celebrities have sold art, songs and other digital products on NFT marketplaces. 

"Blockchain-backed worlds are ripe for opportunity. Now is the time to build the structures to support NFTs and find your brand's next audience on the decentralized web," futurist Cathy Hackl said in Forbes.

SEE: How blockchain will disrupt business: A special report (free PDF) (TechRepublic)

When tied to digital or physical assets, NFTs provide a new means of establishing ownership as well. "The file itself—whether a photo, a video, an ebook or anything else—must 'live' somewhere else. You can create a permanent, secured record of the asset on a blockchain, and that record can be 'tied' cryptographically to the asset wherever it lives off-chain, but they do not reside together," intellectual property lawyers Lance Koonce and Sean Sullivan said

"[NFTs] can be used to represent other, unique assets that are either online or in the physical world," Koonce and Sullivan said. 

Here's where businesses have the potential to do something with the technology behind NFTs. The tokenization of ownership, as CoinTelegraph points out, could help assert ownership of physical objects by "keeping them secure, ultimately revolutionizing the compensation, storage, legality and the security of property." 

NFTs, like the cryptocurrency and blockchain industries as a whole, are still a Wild West of risk and little regulation, but given time, NFTs could become a valuable investment for businesses looking to secure their property or products with a digital ownership chain. It's a far cry from the NFT art markets of 2021, but like cryptocurrency, the underlying technology may be the thing that lasts rather than its initial speculative application.

Is the NFT market already in a bubble?

Popular cultural awareness of NFTs is still relatively new, but as CNN pointed out, the bubble may already be bursting. "The average price for an NFT on April 5 was about $1,256—down from more than $4,000 in late February," wrote CNN Business digital correspondent Paul La Monica. 

Even Beeple, possibly the biggest winner in the current NFT craze, said he thinks NFTs are in a bubble, much like the dot com bust of the early 2000s. "But it didn't wipe out the internet. And so the technology itself is strong enough where I think it's going to outlive that," Beeple said. 

Another problem with NFTs, like that of cryptocurrency, is that many people who think they understand what they're investing in aren't as aware as they should be, said Koonce and Sullivan. "There may be misconceptions among purchasers that by buying an NFT associated with underlying digital assets, they are purchasing the asset itself rather than just the token." 

SEE: Move over athletes and gamers—digital influencers want in on the NFT trend (TechRepublic)

As mentioned above, NFT ownership ultimately only amounts to bragging rights. Those bragging rights may be worth millions of dollars, but only if someone else thinks they're that valuable and is willing to purchase them. 

"What NFTs really do is create scarcity. It's artificial scarcity, but that's nothing unusual: Nike and Kanye West created artificial scarcity when they decided to only produce 200 Yeezy Red October sneakers, which is why that particular pair of sneakers runs over $10,000," said CNET's Boom

The difference between sneakers and, say, a token representing a picture of sneakers, is that buying the sneakers means you own a pair. Buying the NFT only means you own a unique token that says you own the picture of the sneakers, which can still be copied, shared, printed and hung on the wall by anyone who wants to do so. 

In addition, NFTs and their fungible-token cousins on the blockchain have an environmental problem: they consume tons of energy. Bitcoin mining alone consumes the same amount of energy per year as the entire country of Sweden, and that doesn't take into account other currencies that eat up tons of energy as well; Ethereum, where most NFTs live, uses roughly the same amount of energy per year as an entire company.

French artist Joanie Lemercier recently sold a set of six NFTs on Nifty Gateway for several thousand dollars in a matter of seconds. The energy required to complete the sale was a massive 8.7 megawatt-hours. The average U.S. home consumes 10.7 MWh per year, for comparison, meaning that single sale ate almost a year's worth of electricity for the average home. The art was later resold, requiring a similar amount of energy.

"Does acquiring bragging rights to a digital image that anyone with an internet connection can enjoy constitute an unavoidable part of one's carbon footprint?" Peter Howson asked on The Conversation.

There's an excellent technology underlying NFTs that, like blockchains in general, have the potential to transform supply chains, ownership and business, but the tech is still in its infancy. Whether NFTs will prove to be practical tools or just another short-lived digital bubble remains to be seen. 

Also see

NFT concept

Image: elenabs/Getty Images