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What are Non-Fungible Tokens? (NFT)

The Beginner’s Guide


As we’ve covered in our guides, a blockchain is a network of computers that enforces common rules governing how data is shared within that network. 

We generally call this data cryptocurrency, because its essential properties – scarcity, durability, portability, divisibility and fungibility – enable it to be used as a money. But not all crypto assets need to have all of these properties. 

NFT showing Jesse Powell, CEO of Kraken
NFT showing Jesse Powell, CEO of Kraken

In fact, there are crypto assets that behave differently and offer different opportunities for traders and investors called non-fungible tokens (NFTs). NFTs are unique cryptographic tokens, which, like cryptocurrencies, can be bought, sold and exchanged over the internet without middlemen.

Like other crypto assets, they are immutable, resistant to theft, impossible to forge and easily trackable. However, they differ in that they cannot be replaced by something identical.

While one bitcoin can be traded for any other bitcoin without the user noticing a difference, NFTs are unique and, instead, function like trading cards or collectables. They can be purchased, stored, exchanged and sold, too, but each NFT accrues value independently.

NFTs could potentially represent anything from digital trading cards to in-game items to real estate, and they offer another way for investors to allocate and build wealth in the crypto world. 

Below we break down how they work and why they might be a compelling addition to your crypto asset portfolio. 

 


Why Use NFTs?

NFTs offer the promise of expanding the range of available crypto assets. 

Whether you are a collector looking to tokenize your existing assets (such as cards or stamps), or a gamer wishing for the possibility of transferring your items (weapons, skins, etc.) from game to game, you may find an interest in this emerging market. 

Digital artists may find the medium interesting as NFTs offer a way to protect digital ownership on the internet. Having art pieces recognized on a blockchain may help artists showcase their work in a virtual space and entice buyers to purchase an original work without fear of fraud.

Likewise, even more ambitious use cases could be ahead. 

In fact, some supporters of the concept speculate NFTs could even come to replace important paper documents detailing the ownership of everything from real estate to official records. 

How do NFTs work?


First, it’s important to note that not every blockchain can support NFTs. 

NFTs differ from traditional cryptocurrencies in that they are indivisible, rare or unique, which means that a blockchain needs to enable its users to create unique tokens to offer them.
Further, most blockchains that support NFTs are also powered by a cryptocurrency, which is designed to serve as the medium of exchange for the purchase of NFTs within that ecosystem. 

NFTs on Ethereum 

The first and most popular interface for creating NFTs is the ERC-721 standard, which allows for the issuance and trading of tokens on the Ethereum blockchain

Ethereum allows developers to program smart contracts for their NFTs, which can be made to contain details about the new assets they create. When a user exchanges an NFT, they are interacting with this contract, which tracks it on Ethereum. 

This means that the creator of the NFT can make a number of decisions that could influence the value of his, her or their creation, such as specifying how rare an item will be. 

In this way, an NFT representing a trading card can be made to have many of the special and unique characteristics that you get with a physical card, helping set the market price for it. 

NFTs on Other Blockchains

Ethereum isn’t the only option developers have for creating and launching NFTs.

Chief among its competitors may be Flow, a newer blockchain designed specifically for NFTs, and whose goal is to popularize the application of these tokens.

Other blockchains that enable the creation of NFTs include Cosmos, Polkadot and Tezos

What are non-fungible tokens nft nfts

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Useful Resources

Looking to learn what makes Ethereum the top option for NFTs? Head on over to the “What is Ethereum?” page located in Kraken’s Learn Center for a deeper dive.