Non-fungible tokens, or NFTs, are digital representations of anything that is unique and can represent various digital assets or physical items, like cars or art.
Cryptocurrencies were originally built to recreate the functionality of currency in the digital world. A crucial characteristic of currencies is fungibility. In other words, each individual unit must be valued the same as—and interchangeable for—another unit. For instance, if you give your friend a $1 bill from your pocket, and they give you a $1 bill from theirs, no meaningful change in value has occurred. The same is true for 1 bitcoin or 1 ether.
NFTs, however, are blockchain-based assets (or, tokens) that are one-of-a-kind (i.e. non-fungible). This functionality imbues them with qualities that make them useful in many settings. Perhaps the most well-known is the collectibles market. Just as a Babe Ruth rookie card or original Picasso painting can fetch high prices because of their rarity, so can popular collectible NFTs. However, NFTs can also represent in-game avatars or items in video games, tickets to events (in the real or virtual world), titles or deeds to physical property, and more.
Originally, NFTs were most often implemented on the Ethereum blockchain but have since gained popularity on chains like Solana and Algorand.
How do NFTs work?
NFTs exist on various blockchains, each with their own standards for creation.
Similar to how fungible tokens on Ethereum use the ERC-20 standard on Ethereum, NFTs on Ethereum use the ERC-721 standard. Thanks to the use of smart contracts, this standard is used to define how NFTs are created ("minted"), managed, owned, and traded. ERC-721 ensures that each NFT has a unique ID that defines its individuality and non-fungibility.
This process of NFT minting is key to distributing NFT collections. When a creator launches a new collection, they "mint" a set number of unique NFTs, each with its own distinct characteristics and metadata. This metadata can include anything from the artwork itself to special attributes, rarity levels, and unlockable content. Minting essentially brings the NFTs to the blockchain for them to be bought, sold, and traded.
While Ethereum pioneered NFT standards, other blockchains like Solana have emerged as popular platforms for NFTs, each with its own set of standards (in the case of Solana, Metaplex) and benefits.
Top NFT use cases: From art to gaming and more
NFTs are versatile tools in crypto because they are one-of-a-kind. First and foremost, that makes the scarce, which can drive value for collectables like digital art. It also means that if someone wants to prove they own something, whether it is in the virtual world or real world, they can do so by holding a unique NFT.
It is impossible to list every use for NFTs, because uses are still being imagined and developed. With that said, some of the most common ones are:
- Real-world ownership: As a way to provably demonstrate ownership of a unique asset, NFTs can reach outside of web3 and into the physical world. There is no reason that the title to a car has to be a piece of paper. As an NFT, it would live immutably on the blockchain. In February 2022, a house in Florida became the first physical real estate to be sold as an NFT on the blockchain—and the listing even included a work of art minted as an NFT.
- Digital art: The most expensive NFT ever sold was Beeple’s “Everydays: The First 5000 Days.” It sold at the famous Christie’s auction house for 38,525 ETH (worth more than $69 million at the time). Online open marketplaces for digital art (and other NFTs) have also been developed, including OpenSea and Magic Eden. PFP collections like CryptoPunks and Bored Ape Yacht Club also fall into this category.
- Metaverse assets: In metaverses like The Sandbox or Decentraland, virtual real estate is represented as NFTs on the blockchain. Other assets like avatars, wearables, and in-game experiences can be tokenized as NFTs, as well. This creates the opportunity for ownership of digital world assets, and it also establishes a rich economy for those assets to be traded among users.
- Blockchain-based games: Just as metaverse land and avatars on Ethereum are often represented as NFTs, so are characters within decentralized games. Further, in-game items like tools, weapons, and digital playing cards can provide unique functionality as NFTs.
- Music: By selling an NFT of a song to an individual, it gives that user ownership of the song’s file, which goes beyond the right to listen to the song. This could be used to grant the owner access to special experiences with the artist, or even legal rights and royalties to the song, depending on the NFT’s specifications. It also theoretically gives artists more control over their music when compared with the traditional music business.
- Community: Because NFTs are both identifiable and one-of-a-kind, they can bestow membership to online communities to their holders. For instance, owners of an Ape in the BAYC collection are granted exclusive opportunities to interact with each other—or even to attend events in the real world. For this same reason, NFTs can also be used as tickets for concerts or sports games.
- Ticketing: NFTs can be used for event tickets (like concerts, sports games) to combat counterfeiting and provide unique experiences.
- Supply Chain: NFTs are being used to track products and verify authenticity in supply chains.
- Loyalty Programs: Brands are using NFTs for customer loyalty programs and rewards.
Why are NFTs valuable?
The security and trustless nature of NFTs creates attractive reasons to own them. If we think of NFTs as collectible items, then it’s easy to see why these non-fungible tokens would be valuable to own. Additionally, NFTs are based on blockchain technology which means that you do not need to rely on trusted third parties for storage or validation.
Every NFT is a representation of a unique item and is, therefore, one of a kind. This creates digital scarcity. ERC-721 allows developers to create representations of digital items that are both unique and irreplaceable. This means that you are the only one in the world who owns that item. And you can prove your ownership with the blockchain.
If you want to buy your very own NFT, you can do so with cryptocurrencies like SOL or ETH. Bitstamp is one of the few exchanges in the world that allows you to trade traditional money for cryptocurrencies, with which you can then acquire NFTs.
NFT examples
While there are hundreds of NFT collections across multiple blockchains, some of the most popular ones include:
- CryptoPunks: One of the earliest NFT collections on Ethereum, CryptoPunks are 10,000 tokens that each represents a unique, 24x24-pixel character.
- Bored Ape Yacht Club: Ethereum NFT collection of 10,000 generative art NFTs depicting stylized apes. The BAYC was a highly coveted NFT collection at the height of the 2021 bull market.
- DeGods: Like CryptoPunks and BAYC, DeGods is a Solana-based profile picture (PFP) type NFT collection featuring unique combinations of attributes created using an algorithm.
- Fidenza: A generative art collection of 999 different artworks hosted on the Ethereum blockchain.
How to buy NFTs
To get started with NFTs, you’ll need a wallet compatible with the blockchain the NFTs live on. For example, you can use a Phantom wallet for Ethereum and Solana NFTs, or Metamask for Ethereum and other Ethereum L2s (like Optimism and Arbitrum) NFTs.
To understand how to use these wallets, you can check out the following Bitstamp guides:
Then, can you purchase, sell, or trade NFTs on popular NFT marketplaces like Magic Eden (for Solana, Ethereum, and Base collections) or OpenSea (for Ethereum and other Ethereum L2 collections).
To understand how to use these platforms, you can check out the following Bitstamp guides:
NFT Essentials
- NFTs are one-of-a-kind digital tokens representing ownership of unique items, from digital art and collectibles to virtual real estate and event tickets.
- NFTs use blockchain technology to verify authenticity and ownership, eliminating the need for intermediaries and providing increased security.
- NFTs have applications across various industries, including gaming, art, music, supply chain management, and loyalty programs, with new use cases constantly emerging.