What are NFTs? A Complete Guide to Non-Fungible Tokens

NFT stands for Non-Fungible Token. This sounds complicated, but the concept is actually simple: an NFT is a digital item that is completely unique and whose ownership is recorded on a blockchain.

NFTs made headlines when people started paying millions of dollars for digital art. While the hype has cooled significantly, the technology behind NFTs is real and has applications beyond just art. This guide explains what NFTs are, how they work, and the serious risks you need to understand.

What Does "Non-Fungible" Mean?

To understand NFTs, you first need to understand the word "fungible." Something is fungible when one unit is exactly the same as another unit. They are interchangeable.

Fungible examples: A one dollar bill is fungible. If you trade your dollar bill for someone else's dollar bill, you still have exactly one dollar. They are identical in value. Bitcoin is also fungible. One Bitcoin is worth the same as any other Bitcoin.

Non-fungible examples: The Mona Lisa painting is non-fungible. There is only one original. You cannot swap it for a different painting and expect the same value. A concert ticket is non-fungible too. Your ticket for seat A1 is different from a ticket for seat G25.

An NFT applies this concept to the digital world. It is a digital file (like an image, video, or piece of music) with a unique certificate of ownership recorded on a blockchain.

How Do NFTs Work?

When someone creates (or "mints") an NFT, they are writing a record on a blockchain that says: "This specific digital item exists, and this wallet address is the owner." This record cannot be faked or altered because it is stored on a decentralized blockchain that thousands of computers verify.

Here is the important distinction: the NFT itself is typically not the digital file. The NFT is the ownership record on the blockchain. The actual image, video, or music file is usually stored somewhere else (on a server or a decentralized storage network like IPFS). The NFT simply points to where the file is stored and records who owns it.

When you buy an NFT, you are buying the ownership record. The previous owner's wallet is updated to remove them as the owner, and your wallet is recorded as the new owner. This entire transaction is visible on the blockchain for anyone to verify.

What Can Be an NFT?

Almost anything digital can be turned into an NFT. The most common types include:

Digital Art

This is the most well-known use case. Artists create digital paintings, illustrations, or generative art and sell them as NFTs. Buyers own the "original" digital piece, even though anyone can view or download a copy of the image.

Profile Picture (PFP) Collections

These are large collections of thousands of unique characters, like CryptoPunks or Bored Ape Yacht Club. Each character has different traits (hats, backgrounds, accessories) that make some rarer than others. Owners use them as their social media profile pictures to signal membership in a community.

Music and Video

Musicians and filmmakers can sell their work directly to fans as NFTs, cutting out middlemen like record labels and streaming services. Buyers can own a piece of an album or a limited-edition video.

Gaming Items

Video game items like swords, armor, land, or characters can be NFTs. This means players truly own their in-game items and can sell or trade them outside the game. This is a key concept in "Web3 gaming."

Domain Names

Blockchain domain names (like .eth addresses from Ethereum Name Service) are NFTs. They serve as your wallet address, website name, and digital identity all in one.

Real-World Asset Certificates

Some projects use NFTs to represent ownership of real-world items like real estate, luxury goods, or event tickets. This ties into the broader Real World Assets (RWA) trend.

Where Do You Buy and Sell NFTs?

NFTs are bought and sold on specialized marketplaces. The most popular include:

• OpenSea: The largest NFT marketplace. Supports NFTs on Ethereum, Polygon, and several other chains.
• Blur: Popular with traders. Focuses on Ethereum NFTs with advanced trading features.
• Magic Eden: Started on Solana and has expanded to other chains. Good for gaming NFTs.
• Rarible: A multi-chain marketplace that also lets anyone create and sell NFTs easily.

To buy an NFT, you need a crypto wallet (like MetaMask) loaded with the right cryptocurrency for the blockchain the NFT lives on (usually ETH for Ethereum NFTs or SOL for Solana NFTs).

Common Misconceptions About NFTs

"Buying an NFT means I own the copyright"

Usually, no. When you buy an NFT, you own that specific token on the blockchain. The creator usually keeps the copyright to the artwork. You cannot legally reproduce it, sell prints, or use it commercially unless the creator explicitly grants those rights.

"NFTs cannot be copied"

Anyone can right-click and save the image associated with an NFT. The blockchain records who owns the original NFT, but it cannot prevent people from copying the underlying digital file. Think of it like owning an original painting: anyone can take a photo of it, but only you own the original.

"NFTs are always valuable"

This is the most dangerous misconception. The vast majority of NFTs lose most or all of their value over time. An NFT is only worth what someone else is willing to pay for it. If no one wants to buy your NFT, it is effectively worthless regardless of what you paid for it.

The Risks of NFTs

1. Extreme Price Volatility

NFT prices can swing wildly. A collection that is popular today could be forgotten tomorrow. Many NFTs that sold for thousands of dollars during the 2021-2022 boom are now worth close to nothing.

2. Scams and Fraud

The NFT space is full of scams. Common ones include fake collections that mimic popular projects, rug pulls where creators disappear with buyer money, and phishing attacks that trick you into signing malicious transactions.

3. Liquidity Risk

Unlike fungible tokens that you can usually sell instantly on an exchange, NFTs require a buyer. If no one wants your specific NFT, you cannot sell it at any price. Many NFT owners have found themselves holding items that have zero trading activity.

4. Storage Risk

If the server or service hosting the actual image or file goes offline, your NFT might still exist on the blockchain, but it would point to nothing. Some projects use decentralized storage (like IPFS or Arweave) to reduce this risk, but not all do.

5. Smart Contract Risk

NFT marketplaces and collections run on smart contracts. Bugs in these contracts have been exploited in the past, resulting in stolen NFTs and lost funds.

Frequently Asked Questions

Are NFTs dead?

The speculative bubble of 2021-2022 has deflated significantly, but NFT technology is still actively used and developed. The use cases have shifted from speculative art trading toward gaming, digital identity, and real-world asset tokenization. The technology itself is not dead, but treating NFTs as get-rich-quick investments is no longer viable.

Should beginners buy NFTs?

For most beginners, we do not recommend buying NFTs as your first crypto experience. Focus on learning the basics first: understanding wallets, security, and how blockchains work. If you later decide to explore NFTs, treat them as collectibles, not investments.

Do I need to pay taxes on NFT sales?

In most countries, yes. Selling an NFT for more than you paid is a taxable event. See our crypto tax guide for more details on how crypto transactions are taxed.

What blockchain are most NFTs on?

Ethereum is the most popular blockchain for NFTs, followed by Solana and Bitcoin (through Ordinals). Different blockchains have different communities, fees, and marketplaces.