NFTs: digital ownership

What Makes a Token Non-Fungible

NFT stands for non-fungible token. Fungibility means interchangeability. One dollar equals another dollar. One Bitcoin equals another Bitcoin. They are fungible because individual units are identical and can substitute for each other without loss of value. Non-fungible means unique. Each token is distinct from every other, with its own identity and potentially different value.

NFTs use blockchain technology to establish verifiable ownership of unique digital items. Before NFTs, digital files could be copied infinitely with no way to distinguish original from duplicate. Ownership meant controlling access to a file, easily circumvented. NFTs change this by recording ownership on a public ledger where anyone can verify who owns what, creating digital scarcity for the first time.

The token itself does not usually contain the digital asset. Instead, it contains metadata pointing to where the asset is stored, plus a record of ownership history. This distinction matters because the blockchain stores the ownership record permanently, but the asset itself might live on servers that could eventually go offline. Understanding what you actually own when purchasing an NFT requires examining these technical details.

Digital Art and Collectibles

Digital art was the first major NFT use case to capture public attention. Artists could sell work directly to collectors with verifiable scarcity, receiving payment immediately without gallery commissions or waiting for checks to clear. Collectors could prove ownership of original works and potentially resell them on secondary markets.

Generative art projects like Art Blocks create unique pieces algorithmically at the moment of purchase. The same code produces different outputs based on random inputs, making each piece one-of-a-kind while maintaining cohesion within collections. This approach has produced some of the most valued NFT art, blending human creativity with computational possibility.

Profile picture collections like CryptoPunks and Bored Apes became cultural phenomena, with owners using their NFTs as social media avatars and membership badges for communities. Some collections achieved extraordinary valuations, with individual pieces selling for millions of dollars. The social dynamics around these projects often matter as much as aesthetic qualities.

The art NFT market experienced extreme volatility. The 2021 boom saw record sales and celebrity participation. The subsequent bust destroyed most valuations, with many collections declining 90% or more from peaks. This cycle demonstrated both genuine interest in digital ownership and the speculative excesses that pervade crypto markets generally.

Music and Media

Musicians have explored NFTs as alternatives to streaming platforms that pay fractions of cents per play. Artists can sell limited editions directly to fans, potentially capturing more value from their most dedicated supporters. Some musicians have sold ownership stakes in royalties, giving fans financial interest in their success.

The model works best for artists with established fanbases willing to pay premium prices for special access or ownership claims. Emerging artists face the same discovery challenges as traditional music distribution, with NFTs adding complexity without solving fundamental audience-building problems. Success stories exist but represent exceptions rather than new industry standard.

Video content, writing, and other media have seen similar experiments with varying results. The technology enables new business models, but adoption depends on whether audiences value ownership claims enough to pay for them. Most media consumption remains free ad-supported or subscription-based, with NFTs serving niche collector markets.

Gaming and Virtual Worlds

Gaming represents perhaps the most natural NFT application. Players have always valued virtual items and traded them through gray markets. NFTs formalize this by putting ownership on-chain, enabling trading without publisher permission and potentially letting items move between games.

Play-to-earn games attempted to create economies where players could earn real income through gameplay. Early examples like Axie Infinity attracted millions of users, particularly in countries where even small earnings represented meaningful income. Most of these economies proved unsustainable as speculative interest waned and token prices collapsed.

More sustainable models focus on player ownership as enhancement rather than income source. Games where players truly own their items, can trade freely, and potentially maintain value across game updates or sequels address real player desires without promising unrealistic financial returns. This evolution continues as developers learn what works.

Virtual real estate in metaverse projects like Decentraland and The Sandbox attracted significant investment before proving actual utility. Ownership of virtual land makes sense if these platforms achieve mainstream adoption. The bet remains speculative, with most platforms struggling to attract consistent users beyond speculators.

Utility and Access

Beyond collectibles, NFTs can represent access rights, membership, and credentials. Token-gated content and communities require holding specific NFTs to enter. Event tickets issued as NFTs prevent counterfeiting and enable secondary market trading. Certification and credential NFTs could streamline verification processes.

These utility applications often make more practical sense than speculative collectibles. A concert ticket NFT that cannot be counterfeited and can be resold easily provides clear value. A membership NFT that grants access to exclusive content or communities serves obvious purposes. Utility-focused projects tend toward sustainability where speculation-focused projects often collapse.

The distinction between utility and speculation is not always clear. Many projects promise future utility that never materializes, using those promises to drive speculative purchasing. Evaluating whether utility claims are realistic requires skepticism and research rather than accepting roadmap promises at face value.

How NFTs Work Technically

Most NFTs exist on Ethereum using the ERC-721 standard, which defines how non-fungible tokens should behave. Creating an NFT, called minting, involves deploying a smart contract or using an existing platform contract to create a new token with unique identifier and metadata. The token is then associated with a wallet address representing ownership.

Metadata typically includes a link to the actual content, stored either on traditional servers, decentralized storage like IPFS, or on-chain in rare cases. Where content is stored affects permanence. Server-hosted content can disappear if the host stops paying for storage. IPFS and Arweave offer more persistence but still require someone to maintain the files. Truly on-chain storage is most permanent but expensive and limited to small files.

Secondary sales happen through NFT marketplaces like OpenSea, Blur, and Magic Eden. Smart contracts can encode royalties, automatically sending percentages of resale prices to original creators. However, marketplace enforcement of royalties has become inconsistent, with some platforms allowing buyers to bypass them. This erodes a key value proposition that attracted creators.

Transaction costs vary dramatically by blockchain. Ethereum NFT transactions can cost tens or hundreds of dollars during network congestion. Alternatives like Solana, Polygon, and Base offer cheaper transactions with various tradeoffs around decentralization and security. Choosing the right chain depends on your priorities and budget.

NFTs and Web3

NFTs represent a core building block of the Web3 vision, enabling digital ownership that users control rather than platforms. In theory, your NFTs are yours regardless of which platform you use to view or trade them. In practice, ecosystem dependencies and metadata hosting create ties to specific services.

The broader Web3 vision imagines NFTs as portable identity, reputation, and asset representations across applications. Your accomplishments in one game could convey status in another. Your professional credentials could be verified instantly anywhere. Your creative works could be displayed and traded across platforms. How much of this vision will materialize remains uncertain.

Evaluating NFT Projects

Most NFT projects will fail or fade into obscurity. The market has seen thousands of collections launch with grand promises, capture speculative attention briefly, then collapse. Separating viable projects from pump-and-dump schemes or well-intentioned failures requires careful evaluation.

Consider the team behind the project. Are they doxxed with verifiable track records? What have they delivered previously? Anonymous teams can disappear with funds more easily. Consider the utility being promised. Is it realistic and valuable if delivered? Vague roadmaps filled with buzzwords warrant skepticism.

Consider the community. Active, genuine communities suggest staying power. Artificial engagement and bot activity suggest manipulation. Consider the price relative to utility. Are you paying for actual value or speculation on future value that may never materialize?

NFTs mix genuine innovation with extreme speculation. The technology enables new forms of digital ownership and creator monetization. But most NFT purchases lose money, and the space attracts scams alongside legitimate projects. Approach with appropriate skepticism, invest only what you can afford to lose, and remember that nothing about blockchain technology guarantees returns. New to crypto? Start with the basics before exploring NFTs.