What is an NFT? Complete guide 2023 to understand NFTs

What is an NFT? A question that many people ask themselves. NFTs are new. A previously unknown concept. Many wonder is this a new hype about nothing, or a serious new technology? The answer is: NFTs are part of a fundamental change, comparable to the Internet 20 years ago.

NFTs (or Non-Fungible Tokens) are becoming increasingly well known and popular, but what exactly are they? NFTs or “non fungible token” sounds complicated at first, but is surprisingly simple once you understand the basics. Whether you’re just starting to get into cryptocurrencies or you’re already familiar with blockchain technology, this in-depth look at NFTs covers everything that’s relevant to understanding the topic.

From digital collectibles, to access rights to assets such as music, artwork or books, to all kinds of assets and services, NFTs are having an impact on virtually every sector imaginable. They will change the digital world the way the Internet did 20 years ago. Find out what makes these tokens so special!

What are NFTs ? – A simple explanation

NFTs are distinctive and immutable digital objects. They represent a kind of “title deed” for digital assets. With digital values, such as digital art or digital pieces of music, the problem up to now has been that these files could be copied and duplicated as often as desired.

Every file on the computer can be duplicated and sent, so that many people can be “owners” of a picture or piece of music. For pictures and pieces of music, there were still solutions to deal with this, but for tickets, shares, or real estate, the digital possibilities were very limited, as there was always the problem of proving and transferring digital things in an unchangeable and trustworthy way.

NFTs solve this problem. An NFT guarantees ownership and access to a digital object. Whether that is a picture, a piece of music, a stock, a piece of real estate, an insurance policy, a piece of art, or an admission ticket. The digital object is not reproducible and no one other than the owner has access to the digital object associated with the NFT.

Technically, an NFT involves creating a token on a blockchain that is linked to a digital object. The digital object can have a “physical twin” in the non-digital world, but it does not have to. For example, a property and its securitized ownership can exist in real terms, but can also be created immutably as an NFT in the digital world. Meanwhile, a piece of music will often only exist in the digital world.

What makes NFTs so special is their ability to prove specific ownership of digital assets that are otherwise ubiquitous online and reproducible at will. Because of the security advantages they offer compared to traditional types of ownership verification, these tokens will play an enormously important role in the digital world in the future.

How does an NFT (non fungible token) differ from an FT (fungible token)?

Non fungible tokens

Non-fungible tokens (NFTs) are a relatively new form of digital object that are an alternative to the more traditional forms of digital object in the form of a token such as Bitcoin and Ethereum. “Non fungible token” therefore means that this token and the object associated with it is unique, it has very specific properties. For example, a concert ticket for a Madonna concert, on January 24 in block 7, row 12, seat 8 in the Olympiahalle in Munich has very special and unique characteristics. These characteristics are stored digitally and unchangeable via an NFT.

Fungible tokens

In contrast, there are “fungible tokens” in which one object corresponds to another. In terms of its properties, a Bitcoin is identical to another Bitcoin. Thus, while each Bitcoin is unique and immutable on the blockchain, it has exactly the same properties as every other Bitcoin. With fungible tokens, one digital asset is one hundred percent the same as another digital asset

NFTs are unique, meaning that each NFT is represented by a unique object on a blockchain; this ensures that NFTs cannot be replicated.

NFTs have become popular due to their utility and the increasing demand for digital assets, with NFTs being used for items such as collectibles, artwork, clothing, music, and more. In addition, NFTs offer users greater control over their assets than traditional cryptocurrencies; this includes the ability to set permissions to transfer assets between users and determine where assets can be used or stored. As the NFT space with its NFT ecosystem continues to gain popularity in the cryptocurrency world, they will become an even bigger part of our lives in the coming years.

What are the different types of NFTs?

Basically, there can be all forms of NFTs, since theoretically any possible object or service can be created as a digital token. There are no limits here. So far, however, development is still in its infancy. The following types can currently be divided according to their properties:

• Utility NFTs allow users to access specific products or services;

• Security NFTs representing ownership of specific projects, properties, or businesses;

• Collectible NFTs serve as digital collectibles, similar to physical trading cards

• Phygital NFTs are assets that combine both physical and digital components in a single token. This allows owners to have a tangible proof of ownership for valuable items while having access to the benefits of the digital capabilities behind them, for example via a digital twin.

Each type of NFT has its own advantages and disadvantages depending on the use case, which makes them an interesting addition to the world of digital property.

Applications for NFTs

The useage of NFTs is conceivable in almost every area of application. Wherever digital objects and the associated products, rights and services are relevant, NFTs will play a huge role in the future. Some now established use cases are listed below.

Collectibles (Digital Art)

This is the area where the topic of NFTs got its start, NFT artwork created by NFT creators (digital artists) were the first from of digital collectibles in NFT space. NFT collections are all kinds of digital collectibles. These can be works of digital art, pictures, avatars, profile pictures, graphics or soccer trading cards. These collectibles can be clearly assigned to an owner with the NFT; by owning the NFT, he has a certificate of authenticity and the right to use this collectible.

Well-known examples of such NFT collectibles include the 2017 CryptoPunks, a digital art collection of 10,000 punks randomly generated by a specific algorithm to ensure that each punk has unique features and a unique look.

A single digital artwork from a digital artist achieved great awareness in February 2021. The digital artwork “Everydays the first 5000 days” by US digital artist “Beeple” was sold for almost 70 million US dollars at Christies. NFT art in the form of collectibles sold on the emerging digital art market.

Another example of the success of digital collectibles in NFT space are the Bored Apes, comic book images of monkeys, of which there are 10,000, each image equipped with certain unique features. These were created (minted) for about $250 US each in the spring of 2021 and some have been sold for million dollar amounts.

The company Yuga Labs offers all members of the Bored Ape Yacht Club access to certain communities and networks and distributes other NFTs to the owners of the Bored Apes. In addition to the digital collectible, each Bored Apes NFT owner thus has exclusive access to certain events, people and rights.

These are some of the most famous NFT collectibles. But this is not limited to pictures.

NFTs are also playing an increasingly important role in the music and video sectors. This is because music NFTs can also be used to map digital property rights and the associated benefits. A music or video NFT is a digital certificate that uniquely identifies the owner.

These NFTs grant owners the right to a specific piece of music, album art, video or other exclusive access to specific content. They offer artists new ways to market their music, cutting out the middlemen, and owners entirely new ways to connect with artists and share in their success. NFT example Kings of Leon. More information about music NFTs can be found in the following article.

In the field of domain names, NFTs are also becoming more and more common. On the blockchain, the information about the owner of the domain is stored, as well as all the content of the website and the domain. Domain NFTs work like regular NFTs, the owner can buy, hold or resell them.

NFTs as certificates of authenticity

NFTs can serve as “certificates of authenticity” for all certifiable things. These can be, for example, identities and the data associated with them. Every person has an individual appearance, educational qualifications, a medical history or a certain shopping behavior. All this data is usually stored in databases of large companies and used by them. With the help of NFTs, it is possible to tokenize the identity and assign the relevant data to that identity. Thus, the owner of the identity would get his data back and could decide to whom he makes it available.

Every title or degree could be issued as an NFT in the future. For example, a master’s degree can be created as a personalized NFT, which is then assigned to a very specific holder. Wherever certificates or diplomas are created, NFTs can be used to document titles with the help of blockchain technology.

Gaming NFTs

Another implementation of NFTs is NFTs in gaming. Gamers sometimes spend a lot of money on certain equipment in games, but they can only use it within that game world. In the well-known game Fornite, gamers invest in new skins and weapons to have a competitive advantage over fellow gamers. Such digital objects can be mapped as NFTs and thus transferred and sold to others without being tied to the specific game world.

New games based on the blockchain are emerging all the time. The gaming genre “play-to-earn” refers to the possibility of earning money through gaming. This video game industry is mostly games that are based on blockchain. The games offer the opportunity to earn real money, for example by collecting and exchanging digital game cards or by buying and selling certain items.

The NFTs guarantee the uniqueness of the game items and thus offer completely new possibilities. One of the most famous examples of a “play-to-earn” game is the game Axie Infinity. Tens of thousands of people have played this game as a full-time job, earning a living. But other projects like the well-known project The Sandbox is another example of blockchain-based video games using NFTs.

Game developer Rockstar Games has announced that it will also include NFTs in the game in the next installment of the Grand Theft Auto series.

The metaverse will play a key role in the future for the use of NFTs in conjunction with games.

NFTs for Loyalty programs

Rewards and reward programs are another very interesting NFT usage. All forms of rewards can be mapped as NFTs and are thus digital objects that can be used by the holders. These rewards can now be resold or redeemed. This gives companies the opportunity to enter into a completely new customer relationship with their customers and to grant loyal customers certain rights.

For example, a customer could receive certain discounts on the purchase of products through a loyalty program. He can prove this entitlement via an NFT. If necessary, he can sell the NFT and the rights associated with it. In return, the issuer of the NFT can obtain certain data about his customer in a unique and unchangeable way and make him very specific offers.

The US company Starbucks has announced that it will integrate NFTs into its loyalty program. With this program, Starbucks aims to offer its customers a wide range of rewards while promoting community.

NFTs for digital assets

NFTs can tokenize almost any asset, making it available as an immutable digital object. The great advantage of this is that this asset can be transferred much more easily without the need for a trust-building authority.

Nowadays, the transfer of a property requires the use of a notary, a land registry and certain documents and records. This is necessary because the property has not yet been digitized in a secure and unalterable way. NFTs can solve this problem. Thus, a property can be divided into any number of shares, and for each share a special NFT is issued that guarantees an ownership share in the property.

The benefits are new investors, increased liquidity, cost reduction and increased transparency.

The advantages demonstrated here using the example of real estate can be transferred to almost all types of assets, whether these are company shareholdings, securities, diamonds, land or precious metals. The possibilities are unlimited and will completely change the world of asset management and transfer in the coming years.

The company Finexity offers a good example of different types of digitized assets through its marketplace.

NFTs for services

NFTs open up completely new possibilities for the digitization of services. Especially in the area of clearly defined services such as airline tickets, hotel accommodations or concert tickets, their use is obvious. Until now, services were relatively difficult to digitize and transfer. NFTs make a lot of things easier.

For example, for the flight from Zurich to Miami on March 17 at 5:50 p.m., it would be conceivable to digitize every single seat on the plane via an NFT. The holder of the NFT can then use the proof of the NFT at the check-in counter to take advantage of this service and board the corresponding flight.

However, he or she can also resell the NFT if he or she is unable to take the flight and another person can take the flight. The current time-consuming transfer of flight tickets or a refund would thus be enormously simplified. Both the airline and the customer would benefit enormously and save time and money.

This would be just as applicable to hotel accommodations, rail travel, rental cars, or any other type of clearly definable service.

Ticket service provider “Ticketmaster” has started linking its tickets to NFTs. Via the Flow blockchain, all Ticketmaster organizers can now link NFTs to each attendee’s ticket.

NFTs in logistics

In the area of logistics chains, all products and their components can be digitally recorded via NFTs. Each individual product becomes a digital object and can thus be recorded and tracked. This ensures that transparency is increased for all products, proof of authenticity can be integrated and transferability is greatly simplified.

In almost all areas of the economy, the unambiguous digitization of products or services would greatly simplify many processes, save costs and increase customer satisfaction.

Summary NFT applications

The NFT use cases presented here are just a very small sample of the possibilities that NFTs offer. Whether for assets, products or services, NFTs can be used everywhere to simplify processes, increase transparency, save costs and provide additional application possibilities. Development is still in its early stages, but it is clear that for many use cases, the use of NFTs will be a “gamechanger” and will completely change the interactions between companies and people. The question “What is an NFT?” can be answered most simply with the statement: An NFT is a unique, digital asset.

How and where to buy NFTs?

Those who want to buy and sell NFTs can currently do so through an NFT marketplace. NFT marketplaces make it possible to buy and sell NFTs and trade NFTs with other interested investors. NFT marketplaces act as NFT exchanges. There are now a large number of such NFT exchanges.

Trading NFTs is possible either via the common currencies, such as EURO, US Dollar via credit card or via cryptocurrencies such as Bitcoin, Ethereum or Stablecoins. The marketplaces differ in terms of the operator and the associated options, securities and offers.

NFT marketplaces on crypto exchanges

Large crypto exchanges like Binance, Crypto.com or Coinbase offer a wide range of NFTs through their exchanges. You can buy many types of “Non fungible Tokens” here.

On the online marketplaces of crypto exchanges you can find almost all known and popular NFTs that are traded on the NFT market. The navigation varies from platform to platform. There are many NFT offers for purchase and custody.

The NFT marketplaces of crypto exchanges offer the same advantages and disadvantages as for the purchase and custody of cryptocurrencies. The advantage of easy handling and usability and many functions is offset by the dependence on a single company as a major disadvantage.

NFT market from other companies

Besides the major crypto exchanges, other companies also offer NFT platforms and marketplaces. The currently best known and polular platform with the largest NFT marketplaces is opensea.io Every day thousands of NFT transactions take place here.

On opensea.io you can find almost all NFTs and buy them. However, you must have your own wallet. The own wallet must be linked with opensea.io. You can then buy NFTs by depositing cryptocurrencies or you can buy cryptocurrencies directly via opensea.io using the payment provider Moonpay.

The big advantage of this platform is that, on the one hand, there is a very large offer of NFTs and that the NFTs are stored on your own wallet. For more information on setting up your own crypto wallet, see this blog post.

An NFT marketplace for luxury goods such as clothes or watches is the platform of UNXD.

Another well-known pmarketplace that offers similar features to Opensea is Rarible.

Decentralized NFT marketplaces

Decentralized NFT marketplaces are not operated by companies, but by communities. They also offer the same advantages as company-run marketplaces, but the administration and management is done by a community. Having your own digital wallet with cryptocurrencies is a mandatory requirement to buy and trade on these platforms.

A few weeks ago, the NFT platform Blur was launched. Blur is an aggregator of several other platforms and looks at which platforms have which NFTs available. Blur offers its users the ability to trade NFTs through a single platform that aggregates various marketplaces, including its own marketplace. For traders, this means that they receive better conditions for the same transactions on Blur.

Buying NFTs – Summary

Ultimately, it depends on the user’s preferences and experience on which platforms they want to buy their NFTs. The NFT platforms of the crypto exchanges offer users a very simple and quick way to start buying NFTs. In order to gain initial experience, it makes sense to open an account at Binance or another large crypto exchange with an NFT marketplace and gain initial experience with the topic of buying NFTs.

Advanced users cannot avoid using decentralized offerings such as Blur or opensea for several reasons. The variety of NFTs and the secure own storage are big advantages of these platforms. Many details on buying NFTs and an in-depth comparison of different NFT marketplaces can be found in the article “How to buy NFTs – The Complete Guide 2023“.

What are the benefits and risks of investing in NFTs?

NFTs (non-fungible tokens) have opened up new investment opportunities for people looking to diversify their portfolios. NFTs offer investors exposure to art, digital collectibles, music and other digital assets that are inherently scarce.

These digital assets offer the opportunity to earn very good returns due to the high demand for NFTs among crypto users. Of particular interest with NFTs is the fact that their value is measured in cryptocurrencies such as Ethereum based on the Ethereum blockchain. For many NFTs, Ethereum is the reference currency. A price increase of the cryptocurrency Ethereum would thus automatically increase the value of the NFT.

Along with the price increase of the underlying cryptocurrencies, the price of the NFT naturally changes as well. Demanded and interesting projects and the associated NFTs have seen huge price increases of many hundreds of percent in the last 24 months. Other projects, which have not been accepted, have experienced no or negative price development. With an investment in NFTs, there is therefore the possibility to profit “twice”, on the one hand from the increase in cryptocurrencies and on the other hand from the price increase of the respective NFT.

Like other investments, NFTs are not without risk; their value can fall or rise suddenly depending on speculative buying or selling, and their long-term value is difficult to predict. Therefore, it is important for potential NFT investors to carefully research NFT projects and understand what the project is about, how popular it is, and other important criteria.

Overall, NFTs offer very high return opportunities, but the risks are also correspondingly high. But with some experience and familiarization, you can find interesting NFT projects relatively quickly and profit from a price increase. Because it is clear that in the next few years still very many people will buy NFTs because of their great advantages. This will result in high price increases for many projects.

Summary

It is guaranteed that NFTs will cause widespread upheaval because of their innovation and potential. The ability to make all available products and services globally available, tradable and transferable as digital assets will bring about huge changes.

The change will have a similar dimension to the introduction of the Internet and the social media economy. This transformation of the then existing economy, known as WEB 2.0, has given rise to new giants such as Amazon, Google, Facebook and Co. which have fundamentally changed the way people interact with each other.

NFTs, cryptocurrencies and the underlying blockchain will do the same. But probably to an even greater extent. Because if WEB 2.0 was about new forms of how information was transmitted through e-mails or social media, it is now about value. The term WEB3 is increasingly being used in connection with this new paradigm.

Until now, the transfer of values has always required trustworthy authorities such as banks, land registers or notaries. These will become less important in the future because blockchain technology makes this technically very easy. Just as an e-mail containing information and files can be sent in seconds from a German user to a Japanese user, for example, values of all kinds will be able to be transferred in the future.

Adaptation and growth is proceeding at a rapid pace.

Thus, the increase in users and applications with the advent of the Internet was already rapid and almost unmanageable. With WEB3, it seems to go even faster, so that no one can say what will happen and how the world will change. And one thing is certain: NFTs will play a key role in this development!

So if you are interested in participating in this brave new world of digital assets, it’s time to take a hard look at the topic of NFTs and the opportunities and changes they bring! NFTs are certainly not hype, but a gamechanger.

Frequently asked questions

What are NFTs easily explained?

NFTs are distinctive and immutable digital objects behind which value is stored in the form of a digital product or service on a blockchain.

What is an NFT (Non fungible token)?

“Non-fungible tokens” means “non-exchangeable tokens. A euro is exchangeable for another euro, making it fungible. A fingerprint is unique, so it cannot be exchanged for another fingerprint, i.e. it is non-fungible.

How does an NFT work?

An NFT is stored on a blockchain as a kind of file and can no longer be changed. The characteristics and properties assigned to it remain the same.

What is a blockchain?

A blockchain is a database in which transactions are stored unchangeably. The best-known examples are the Bitcoin blockchain and the Ethereum blockchain.

On which blockchain are the most NFTs?

Most NFTs are currently on the Ethereum blockchain. It remains to be seen whether Ethereum will continue to dominate in the future. Other solutions such as Solana, Avalanche, and BNB have been gaining market share recently.

What is a Phygital NFT?

Phygital NFT is a term used to describe the combination of physical and digital elements in an NFT.

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