What Are NFTs?

2 min read
DeFi Guides

NFTs are a means of tokenizing and establishing secure and verifiable ownership over tangible and intangible assets, whether of a digital or physical nature. Unlike traditional digital items, which can be in infinite supply, NFTs attest to the uniqueness of the underlying item, thus creating scarcity. NFTs have various use cases, including as collectibles, for monetizing work, to ease and secure transactions, and more.

What Are NFTS, and Why Are They Unique?

NFTs are cryptographic assets containing unique metadata and identity codes that certify their individual characteristics, such as ownership rights, authenticity, person’s identity, and more. Due to their unique properties, NFTs can neither be replaced nor interchanged.

NFTs can serve various purposes, including:

  • To digitally represent physical assets (real estate, legal documents, etc.);
  • To represent digital assets and collectables (an article, a song, an in-game item, a video, a graphic work, a digital identity, etc.);
  • To remove intermediaries and simplify transactions;
  • For identity management and verification;
  • To mandate ownership or other rights;
  • For monetization of work through primary sales and royalties;
  • For trading, investments, and as collateral.

NFTs are often confused with cryptocurrencies. While they are built in a similar programming way, they are fundamentally different. Cryptocurrencies are interchangeable (fungible), meaning one NEXO can be traded for another NEXO since they have equal value.NFTs, on the other hand, are unique. This means no two NFTs have the same value. As a result, they can’t be traded at equivalency.

How Do NFTs Work?

NFTs originated from the ERC-721 standard on the Ethereum blockchain. The standard allows for the creation of unique and easily transferable tokens.

An NFT is generated through smart contracts in a process called “minting.” “Minting” is a procedure for converting data into a cryptographically-secured digital asset, recorded on the blockchain (usually Ethereum, but it can also be another). During that process, the unique characteristics of the particular item (data, a physical, or a digital asset) are “embedded” in the NFT to, later on, serve as a built-in digital signature. This signature assigns ownership and manages the transferability of the NFT.

As a result, the NFT can serve as proof of ownership for a particular tangible or intangible item. An NFT can only have a single owner. While anyone can independently verify who that is, no one can modify the ownership record or revoke the owner’s access to the NFT.

NFTs are unique. It is impossible to edit or copy/paste a new NFT into existence. Thanks to this, transaction terms are always clear, transparent, and immutable.

To mint an NFT, you will need a digital wallet connected to a marketplace. NFTs are stored on the blockchain (they can also be stored off-chain if the user prefers to) and are accessed through digital wallets.

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