Main terms

To avoid any misunderstanding first of all let’s clarify a few terms that are inextricably bound with NFTs.

  • Cryptocurrency is any form of currency that exists digitally (or virtually) and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units. Cryptocurrency is a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

  • A blockchain is a distributed database that is shared among the nodes of a computer network. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin or Ethereum, for maintaining a secure and decentralized record of transactions. Blockchain guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party. In other words, a blockchain is a digital record of information that is distributed across a network of computer systems. Because a system of recording information is completely decentralized, it is almost impossible to maliciously infiltrate or change.

We got the gist of the couple very important concepts so let’s describe what is NFT.

What is NFT?

Non-fungible tokens (NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Those unique units of data on a blockchain are linked to digital and physical objects to provide an immutable proof of ownership. In other words, NFTs are individual tokens with valuable information stored in them.

Actually, fungibility is an economics term that describes the interchangeability of certain goods. For example, a dollar bill is equal to any other dollar bill while a non-fungible token is something unique and inimitable. For example, if you have a dollar bill signed by a famous artist, it becomes unique.

NFTs differ from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can serve as a medium for commercial transactions (e.g., for buying goods).

Non-fungible tokens can digitally represent any asset, including online-only assets like digital artwork (music, pictures, videos) and real assets such as real estate. Other examples of the assets that NFTs can represent include in-game items like avatars, digital and non-digital collectibles, domain names, and event tickets.

Why NFTs are valuable?

NFTs are valuable because ownership of anything that people want is, by nature, valuable. And people want NFTs. They want to own pieces of art and items of cultural significance. They want to own things they think will appreciate in value.

How NFTs are stored?

NFTs are made possible through the blockchain technology that supports cryptocurrencies. Currently NFTs can be bought, sold and secured through many different blockchains, including Ethereum. Because NFTs hold a value primarily set by the market and demand, they can be bought and sold just like other physical types of art. The unique identifier associated with an NFT is stored across a secure and distributed network, making its ownership and history secure, verifiable, and part of the public record. This way through NFTs, businesses, artists, and investors can prove ownership, create scarcity, earn royalties, and sell their digital assets.

ERC-721 standard

Since the majority of NFTs reside on the Ethereum cryptocurrency's blockchain it makes sense to mention ERC-721 token standard for non-fungible tokens on Ethereum. ERC-721 is a free, open standard that describes how to build non-fungible or unique tokens on the Ethereum blockchain. The main characteristic of ERC-721 tokens is that each one is unique.

When an ERC-721 token is created, there is one and only one of those tokens in existence. These tokens, as NFTs, have spread the idea and application of unique assets on Ethereum.