What Is an NFT? Non-Fungible Tokens Explained
A non-fungible token (NFT) is a unique digital token recorded on a blockchain. Unlike fungible cryptocurrencies such as Bitcoin, where one unit is generally interchangeable with another unit of the same asset, NFTs are designed to represent individual items, identifiers, or ownership records that can be distinguished from one another.
If you do not understand the definition yet, there is no need to worry. In this guide, we will explain what an NFT is in simple terms, how NFTs work, the difference between fungible and non-fungible assets, their main applications, NFT standards, and some well-known examples.
NFTs can represent digital artwork, collectibles, game items, tickets, blockchain-based domain names, memberships, and other digital or real-world assets. However, an NFT does not automatically give the holder copyright or every legal right associated with the underlying asset. Those rights depend on the project, smart contract, license, and applicable law.
Fungible and Non-Fungible Assets
Before explaining what a non-fungible token is, it helps to understand the difference between fungible and non-fungible assets.
A fungible asset consists of units that are interchangeable and generally have the same value within the same system.
For example, Bitcoin, US dollars, and many other currencies are fungible assets. If you lend a $100 banknote to a friend, you normally expect to receive another $100 of the same value rather than the exact physical banknote.
Cryptocurrency tokens such as Bitcoin are also designed to be fungible. One bitcoin is not normally considered more valuable than another bitcoin simply because it has a different transaction history.
In contrast, a non-fungible asset is identifiable as a particular item and is not interchangeable on a one-for-one basis with another item.
For example, your laptop, smartphone, and car are individual physical objects. If you lend your car to a friend, you expect to receive the same car back rather than another car.
A specific ticket for a particular seat at a football match can also be non-fungible because its section, seat number, event, and other characteristics distinguish it from other tickets.
Leonardo da Vinci’s Mona Lisa is another simple example. The original painting is a particular physical work. It cannot be exchanged for another ordinary painting while treating both objects as exactly the same asset.
Fungibility depends on the characteristics and context of an asset. Some assets may contain both interchangeable and unique elements. What matters is whether individual units are treated as equivalent within the relevant system.
What Is a Non-Fungible Token?
A non-fungible token, or NFT, is a blockchain-based token that can uniquely identify a particular item, record, membership, or digital asset.
NFTs can be used for many purposes, including:
- Digital artwork and collectibles
- Video game items
- Event tickets and access passes
- Memberships and digital credentials
- Blockchain-based domain names
- Virtual-world assets
- Digital certificates and records
- Tokenized representations of certain real-world assets
The blockchain records information about the token and its transfers. Depending on the NFT design, the associated image, video, document, or other metadata may be stored separately from the blockchain.
This distinction is important. An NFT is not necessarily the image, video, or physical object itself. In many cases, the NFT is a blockchain token that points to or represents something else.
NFTs are held and transferred through blockchain addresses controlled by private keys or compatible wallets. The blockchain can provide a public record of token ownership and transfers, although the exact rights associated with an NFT depend on its smart contract and the terms of the project.
For example, buying an NFT representing digital artwork does not automatically mean that the buyer receives the copyright to reproduce and commercially exploit that artwork.
What Makes an NFT Different?
NFTs can have several characteristics that distinguish them from fungible tokens.
Uniqueness
An NFT can have a unique token identifier and associated metadata that distinguish it from other tokens.
For example, an NFT collection might contain thousands of tokens, with each token having a different token ID and different characteristics.
The ERC-721 standard is specifically designed for non-fungible tokens. In an ERC-721 contract, a particular contract address and token ID identify a specific token.
Rarity
Rarity is another important characteristic used by many NFT collections.
A project can create different traits and levels of scarcity. Some traits may appear in many tokens, while others may appear only once or a few times.
However, rarity does not automatically create monetary value. The market determines how much buyers are willing to pay for a particular NFT.
Different Supply Models
Not every NFT system works in exactly the same way.
ERC-721 is commonly used for individually identifiable NFTs. ERC-1155, on the other hand, is a multi-token standard that can represent fungible, non-fungible, and other token configurations within the same contract.
For this reason, it is better not to describe every NFT as inherently indivisible.
ERC-721 and ERC-1155 NFT Standards
Two important standards in the Ethereum ecosystem are ERC-721 and ERC-1155.
ERC-721
ERC-721 is a standard interface for creating and managing non-fungible tokens.
Each token can have its own identifier and associated metadata. This makes ERC-721 useful for applications such as collectibles, artwork, tickets, and other individually identifiable assets.
ERC-1155
ERC-1155 is a multi-token standard. A single contract can manage different types of tokens, including fungible and non-fungible tokens.
This makes ERC-1155 useful for applications such as games where a project may need to manage many different items, currencies, and collectibles efficiently.
Main Advantages and Characteristics of NFTs
NFTs are not simply a new type of digital image. The technology provides a way to create blockchain-based records that can identify and transfer particular digital assets or rights.
Blockchain-Based Ownership Records
One of the main benefits of NFTs is the ability to record token ownership and transfers on a blockchain.
Instead of relying entirely on a centralized database operated by one company, the ownership history of the token can be verified through the relevant blockchain.
However, the word “ownership” should be understood carefully. Owning the NFT normally means controlling the token recorded by the blockchain. It does not automatically mean owning the copyright, trademark, physical object, or every legal right associated with the underlying asset.
Transferability
NFTs can generally be transferred between compatible blockchain addresses.
For example, an NFT representing a collectible can be transferred from one wallet to another according to the rules of its smart contract and blockchain.
NFT marketplaces can also provide interfaces through which users list, buy, sell, and transfer NFTs.
Transparency
Public blockchains can make NFT transactions and token ownership easier to verify.
Users can inspect blockchain transactions and, depending on the network and application, review information such as the token contract, token ID, transfer history, and wallet addresses.
Applications of NFTs
Digital Art
Digital art became one of the most visible applications of NFTs.
Digital files can be copied easily, which historically made it difficult to create a scarce collectible around a digital work. NFTs introduced a way to associate a unique blockchain token with a particular artwork or collection.
An artist can sell an NFT representing a work, while the buyer can hold and transfer the token through a compatible wallet.
However, the NFT itself does not automatically transfer copyright. The rights granted to the buyer depend on the project’s license or agreement.
Digital Collectibles
Collecting is another major NFT use case.
Just as people collect physical stamps, trading cards, and other memorabilia, blockchain-based collectibles can be issued with unique identifiers, traits, and scarcity.
The market value of a collectible can change significantly depending on demand, scarcity, community interest, utility, and other factors.
Gaming
NFTs can represent items used in blockchain-based games, including characters, weapons, clothing, cards, land, and other game assets.
Unlike traditional game items that are generally controlled entirely by the game operator, blockchain-based items can potentially be transferred between compatible wallets or applications.
However, an NFT does not automatically work across different games. Interoperability depends on the technical design of the applications involved.
Virtual Assets
NFTs can represent assets in virtual worlds and metaverse platforms.
These assets may include virtual land, avatars, clothing, accessories, and collectibles.
Decentraland, for example, has used blockchain-based assets to represent virtual land and other items within its ecosystem.
The important point is that the usefulness of an NFT depends on the application and the rules surrounding the token.
Blockchain Domain Names
Blockchain-based naming systems are another important NFT-related application.
Ethereum Name Service (ENS), for example, provides blockchain-based names that can be associated with Ethereum addresses and other records.
ENS documentation explains that .eth names have blockchain-based ownership mechanisms, while wrapped names can also be represented through ERC-1155 NFTs.
This is different from traditional DNS domain ownership, which operates through centralized registries and registrars.
Real-World Assets
NFT technology can also be used to represent rights or claims connected to real-world assets.
Examples can include real estate records, tickets, certificates, memberships, luxury goods, and other assets.
However, tokenizing a physical asset does not automatically transfer legal ownership of that asset. The legal connection between a blockchain token and a physical asset depends on contracts, regulations, identity systems, and the jurisdiction involved.
This is why real-world asset tokenization involves both technical and legal challenges.
Identity and Credentials
NFT-like blockchain tokens can also be used for digital credentials, memberships, certificates, and identity-related applications.
However, sensitive information such as medical records should not simply be placed on a public blockchain. Privacy, access control, data protection, and legal requirements need to be considered carefully.
Famous NFT Projects and Examples
CryptoKitties
CryptoKitties became one of the earliest widely recognized NFT applications on Ethereum after launching in 2017.
The project allowed users to collect and trade virtual cats, with individual cats having different characteristics.
CryptoKitties helped demonstrate how blockchain-based digital collectibles could create unique tokens with different attributes.
The project became an important historical example in the development of the NFT ecosystem.
Decentraland
Decentraland is a blockchain-based virtual-world platform in which digital assets can be represented and traded through blockchain technology.
Virtual land, collectibles, clothing, and other assets can be associated with blockchain-based tokens.
The example demonstrates how NFTs can be used beyond static digital artwork and collectibles.
Digital Art
Digital art remains one of the best-known NFT applications.
Artists can use NFT marketplaces and blockchain networks to issue tokens associated with their artwork. Buyers can hold and transfer these tokens through compatible wallets.
The underlying digital artwork may still be viewable or copyable by other people. The NFT provides a blockchain-based record associated with the token rather than preventing every possible copy of the underlying file.
Blockchain Card Games
NFTs can also be used for digital card games.
In a blockchain-based card game, individual cards can be represented by tokens with different characteristics.
This creates a digital equivalent of collecting physical trading cards, where particular cards can have different levels of rarity and demand.
Gods Unchained is one example of a blockchain-based card game that has used NFTs to represent digital cards.
Internet and Blockchain Domain Names
Blockchain naming systems provide another example of how NFTs and blockchain ownership records can be used.
ENS is one of the best-known examples in the Ethereum ecosystem. Its documentation describes ownership and management mechanisms for .eth names, including NFT-based representations in some configurations.
Other blockchain naming services have also created decentralized naming systems.
The important distinction is that blockchain domains operate through blockchain-based protocols and smart contracts, rather than simply copying the traditional DNS system.
NFTs and the Future of Digital Ownership
NFT technology expanded the idea that digital objects can have unique identities and transferable blockchain records.
The technology can potentially be used for much more than digital artwork. Tickets, memberships, gaming items, credentials, collectibles, blockchain domains, and tokenized real-world assets can all use similar concepts.
At the same time, NFTs have limitations.
These include:
- Smart contract and wallet security risks
- Scams and fraudulent collections
- Market volatility
- Unclear or limited intellectual-property rights in some projects
- Dependence on marketplaces and applications
- Metadata and storage considerations
- Regulatory and legal uncertainty for some applications
Therefore, an NFT should not simply be viewed as a digital certificate that guarantees the value or legal ownership of an asset.
Instead, it is better understood as a blockchain-based token designed to identify and transfer a particular digital asset, item, or set of rights according to the rules of its smart contract and associated agreements.
What Is the Difference Between an NFT and Cryptocurrency?
The main difference is fungibility.
Bitcoin is designed so that one bitcoin is interchangeable with another bitcoin as a unit of the currency. NFTs are designed to identify individual tokens that can have different characteristics and values.
For example:
- Bitcoin: fungible cryptocurrency.
- ERC-20 token: generally fungible token.
- ERC-721 token: individually identifiable non-fungible token.
- ERC-1155: multi-token standard that can represent fungible and non-fungible assets.
This distinction makes NFTs useful when the application needs to distinguish one digital item from another.
How Do NFTs Work?
Although the exact implementation differs between projects, the process generally involves several steps.
- A developer creates an NFT smart contract or uses an existing NFT platform.
- The token is created or minted according to the contract’s rules.
- The token receives an identifier and associated metadata.
- The blockchain records the token and its ownership or transfer information.
- The owner can transfer the NFT to another compatible blockchain address.
- Marketplaces or applications can read the token information and display it to users.
For Ethereum-based NFTs, standards such as ERC-721 and ERC-1155 provide common interfaces that make it easier for wallets, marketplaces, and applications to interact with tokens.
What Should You Check Before Buying an NFT?
If you are considering buying an NFT, do not look only at the picture or the current market price.
Check:
- The blockchain and smart contract address
- The creator or project behind the collection
- The token ID and metadata
- The project’s stated utility and terms
- Whether the artwork or other asset is actually associated with the official collection
- The intellectual-property or licensing terms
- Marketplace and wallet security
- Transaction fees
- Whether the asset can actually be used for the purpose advertised
NFT markets can be highly speculative, and a high previous sale price does not guarantee future value.
Conclusion
A non-fungible token (NFT) is a blockchain-based token that can uniquely identify a digital item, collectible, membership, ticket, domain name, game asset, or other asset or record.
The key difference between NFTs and fungible cryptocurrencies is that NFTs are designed to distinguish individual tokens from one another.
NFTs have applications in digital art, gaming, collectibles, virtual worlds, blockchain domains, tickets, credentials, and tokenized real-world assets. Standards such as ERC-721 and ERC-1155 provide important technical foundations for NFT applications on Ethereum.
However, owning an NFT does not automatically mean owning the copyright or the underlying physical or digital asset. The actual rights depend on the smart contract, project terms, licenses, and applicable law.
As blockchain technology develops, NFTs may continue to evolve beyond their early association with digital collectibles and artwork into broader systems for representing digital ownership, access, identity, and real-world assets.
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