A non-fungible token (NFT) is a unique token recorded on a blockchain. Fungible assets such as bitcoin or dollars are interchangeable: one unit is as good as any other. An NFT is not. Each one has its own identifier and its own owner, and the blockchain keeps a public record of both. The ethereum.org introduction to NFTs gives a general overview.
How NFTs Work
An NFT is an entry in a smart contract. The contract keeps a list that maps each token ID to the wallet address that owns it. When an NFT is sold or transferred, the contract updates that entry. Anyone can read the full ownership history on a block explorer.
On Ethereum, most NFTs follow the ERC-721 standard, which was proposed in January 2018. It defines the basic functions every NFT contract exposes: who owns a token, how to transfer it and how to approve someone else to transfer it. A second standard, ERC-1155, lets one contract manage many token types at once. That suits games, where some items exist in large quantities and others are unique.
Other chains have their own standards. On Solana, most NFTs follow standards built by Metaplex. Standards matter because wallets and marketplaces can support any collection that follows them without custom work.
What You Own and What You Do Not
This is the most misunderstood part of NFTs.
- You own the token: the blockchain entry is yours, and only your wallet can transfer it.
- The image is usually stored elsewhere: the token typically holds a link to a metadata file, which in turn links to the image. That file may sit on a decentralized network such as IPFS or on an ordinary web server. If the server goes offline, the token can end up pointing at nothing.
- Copyright is separate: buying an NFT does not transfer copyright unless the project's license says so. Rights vary widely between collections.
- Anyone can copy the file: the image can be saved or even minted again by someone else as a different token. What cannot be copied is the specific token from the original contract.
Ownership is also not permanent in any guaranteed sense. If your wallet is compromised or you sign a malicious transaction, the NFT can be transferred away, and there is nobody to reverse it.
A Short History
CryptoPunks, a set of 10,000 pixel characters, launched on Ethereum in June 2017. CryptoKitties followed late that year and became popular enough to congest the network. The ERC-721 standard came out of that period.
The market peaked in 2021. In March of that year, a digital artwork by the artist Beeple sold at Christie's for about $69 million. Profile picture collections such as Bored Ape Yacht Club traded for large sums. Trading volume and prices then fell sharply during 2022, and most collections now trade far below their peak or have no active buyers at all.
Where NFTs Are Used
- Art and collectibles: the original use, where artists sell directly to collectors.
- Gaming: in-game items that players hold in their own wallets and can trade outside the game.
- Membership and access: tokens that grant entry to a community, event or service.
- Ticketing: tickets issued as tokens, which makes authenticity checkable and lets the issuer set resale rules.
- DeFi positions: some protocols represent a user's position as an NFT, such as liquidity positions on Uniswap V3.
Tokenizing physical assets such as property is often mentioned. In that case the token is only as good as the legal agreement that connects it to the real asset.
Marketplaces and Royalties
NFTs are bought and sold on marketplaces such as OpenSea, Blur and Magic Eden. A marketplace is an interface plus contracts that handle listings and sales. The NFT itself stays in your wallet until it sells.
Creator royalties were an early selling point. A collection could specify a percentage of each resale to go to the creator. In practice, royalties were enforced by marketplaces and not by the token standard itself. As marketplaces competed on fees during 2022 and 2023, several made royalties optional, and creator income from resales fell. Royalties should not be assumed to be automatic.
How NFTs Are Valued
An NFT produces no cash flow in most cases. Its price is whatever a buyer will pay, which depends on the creator's reputation, scarcity within the collection, the community around it and the mood of the wider crypto market.
The "floor price" is the lowest asking price in a collection. It is a listing, not a guaranteed sale price. NFTs are illiquid: each one needs its own buyer, and in a weak market there may be none.
Risks and Common Mistakes
- Illiquidity: you may not be able to sell at any price.
- Wash trading: a seller can trade with their own wallets to fake volume and price history.
- Counterfeits: copies of well-known collections are listed under similar names. Check the contract address against the project's official site.
- Phishing: fake mint pages and surprise NFTs sent to your wallet are used to get malicious approvals signed.
- Abandoned projects: many teams stopped work after the mint sold out.
- Broad approvals: granting a marketplace or unknown contract permission over a whole collection puts every item at risk.
- Tax: in many countries, selling an NFT, or buying one with crypto, is a taxable event.
Nothing in this article is financial advice.
Key NFT Facts
- Meaning: non-fungible token, a unique token on a blockchain
- Main Ethereum standards: ERC-721 and ERC-1155
- ERC-721 proposed: January 2018
- Early collections: CryptoPunks and CryptoKitties, both 2017
- Market peak: 2021
Track on CoinMarketGuy
Most NFTs are priced in the native coin of their chain, so the Ethereum price page and the Solana price page show what a listing is worth in dollars at any moment. The converter handles the arithmetic for any amount.