How Do NFTs Work? Learn the Basics

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How Do NFTs Work? Learn the Basics - NFT.com

Don Thibeau

Feb 7th, 2023

5 min read

Despite their mainstream status, NFTs defy explanation.

Surveys suggest only 1 in 4 Americans can describe how NFTs work.

Even crypto developers have trouble explaining the intricacies of NFT technology.

If you’re confused about how NFTs work and why some are worth millions, you’ve come to the right place.

Below, I’ll explain how NFTs work in plain English. By the end of this post, you’ll have a clear sense of why NFTs are special and how to start collecting them.

What are NFTs, and how do NFTs work?

To understand how NFTs work, let’s first back up and explain the basics of blockchain technology. Don’t worry; I’ll keep all the hi-tech jargon out of this description!

Think of a “blockchain” as a long list of transactions. Computers constantly monitor, broadcast, and record the latest transfers of each blockchain network’s digital currency (aka cryptocurrency). These computers can safely communicate crypto transactions without relying on an institution like a bank.

OK, so how do NFTs fit into this picture? Also, what does “NFT” stand for?

“NFT” is short for “non-fungible token,” and it’s a particular category of cryptocurrencies. Although NFTs live on blockchains like Ethereum, each has a different “ID tag.” Since NFTs are unique tokens (i.e., “non-fungible”), people can’t exchange them 1-for-1 on an exchange like Coinbase. Instead, NFTs trade more like vintage trading cards, movie memorabilia, or physical artworks.

By contrast, coins like Bitcoin (BTC) are “fungible,” meaning every BTC has an equal market value. In other words, one BTC always equals one BTC.

This “uniqueness” factor explains why so many crypto collectors want NFTs. Sure, anyone can copy NFT artwork, but that doesn’t give them ownership over that digital art. Only the person with an NFT in their crypto wallet has rights over it.

The scarcity and ownership history of NFTs explain why they’re so distinct in the crypto ecosystem.

So, what do people do with NFTs?

Now that you know how NFTs work, you may be thinking, “what’s the point?” Why are “blockchain ID tags” so sensational in cyberspace?

Well, it’s not just the ownership rights and scarcity that’s driving demand in the NFT sector. As more artists and developers enter the NFT space, they discover tons of innovative use cases for these tokens.

Unlike fungible cryptocurrencies, NFTs represent any form of digital media. Individuals and businesses have extreme freedom when designing their NFT collections.

Although animated profile pics (PFPs) are the most popular NFT collections, there are countless applications for NFT technology.

Here are a few exciting NFT use cases:

Exclusive video game items like wearables or playable avatars.
Digital property in metaverse games like The Sandbox.
Legal documents for physical real estate.
Loyalty rewards programs at restaurants.
MP3 files with exclusive music.
URL domain names.
VIP passes to live events.
Historic pro sports clips.

It’s easy to program special features into these tokens. For instance, artists can add royalty fees to their NFTs to receive passive income with every transaction.

Plus, content creators can send automatic crypto rewards into an NFT holder’s wallet since NFTs are traceable on a blockchain.

The explosive creativity and endless utility of NFTs help explain the hype in this crypto segment.

How can I create NFTs?

Every NFT goes through a process called “minting” before it enters circulation. Basically, “minting” is synonymous with “publishing” an NFT on a blockchain. After someone mints an NFT, the token has a specific address on its native blockchain.

For instance, when NFT.com minted the 10,000 Genesis Key NFTs, we published distinct token contract details on the Ethereum blockchain.

But you don’t need to be a Web3 developer to start minting NFTs. Although this process may sound complicated, it’s very straightforward on platforms like NFT.com. In most cases, you only have to select a digital file, customize it to your liking, and select “Mint.” In a few moments, you’ll see your NFT appear on a blockchain.

How can I buy NFTs?

Since NFTs don’t have a 1-for-1 exchange rate, you won’t find a lot of them on crypto exchanges like Binance or Coinbase. Instead, NFT traders use specialized websites known as “NFT marketplaces.” These websites allow NFT creators to offer their tokens for an auction or at a fixed price. In some cases, buyers canmake a “best offer” for NFTs they like.

There are countless NFT markets nowadays, each with different features, focuses, and supported blockchains. However, all NFT markets fall into one of two categories:

Curated NFT markets: Only prescreened & professional artists mint NFTs on curated NFT sites. Examples of curated NFT markets include SuperRare and Nifty Gateway.
Non-curated NFT markets: A non-curated NFT market lets anyone mint, sell, and buy NFTs. A few examples include OpenSea and Rarible.

In either case, you’ll need to link a compatible crypto wallet to log in and pay for an NFT. Some NFT sites now accept debit and credit card payments, but most ask buyers to use cryptocurrencies like Ether (ETH) to purchase NFTs.

By the way, NFT.com integrates with dozens of major NFT markets like OpenSea and LooksRare. Whether you’re a buyer or a seller, NFT.com provides a simple way to access multiple NFT markets on one screen. Plus, since you can link crypto wallets to your NFT.com profile, it’s seamless to verify ownership and display your favorite digital collectibles.

To learn more about how to use NFT.com to buy NFTs, check out this link.

Final Thoughts

The best way to learn how NFTs work is to jump in and start exploring! Whether you want to create NFT art, develop metaverse property, or join a vibrant NFT community, NFT.com has the tools to help you safely navigate the NFT space. Create your NFT.com profile page today to start your NFT collecting journey.

FAQs

Can anyone mint NFTs?

Yes, anyone can mint NFTs on most non-curated NFT markets. By contrast, curated NFT sites are for professionals with a digital art portfolio.

Where do people keep their NFTs?

Technically, NFTs live on their respective blockchains. To access your tokens, you need to use an NFT-compatible crypto wallet. Crypto wallets can be “hot” or “cold,” depending on where they store a secret passcode called the “private key.” “Hot wallets” are Internet-based mobile or desktop applications, while “cold wallets” are USB devices that keep the private keys offline. For more details on the pros & cons of hot vs. cold wallets, please check out this previous NFT.com guide. There are dozens of NFT-friendly wallets to choose from, but a few of the most popular include:

MetaMask
Rainbow Wallet
Trust Wallet
Coinbase Wallet
Ledger hardware devices

Why are NFTs so expensive?

Collectors frequently buy high-profile NFTs like CryptoPunks for record-shattering sums. However, NFTs aren’t only for millionaires. As you explore the NFTs on NFT.com, you’ll notice a wide range of prices for different tokens. The price of an NFT largely depends on how much demand there is for a particular collection. While an NFT’s scarcity is significant, it’s not the determining factor. Enough buyers need to see value in an NFT to push its price higher.

What blockchains sell the most NFTs?

Ethereum is the dominant blockchain for NFT trading, but plenty of competing chains have bustling NFT markets. A few other blockchains that are big names in the NFT space include:

Solana
Flow
Polygon
WAX
Tezos
BNB Smart Chain
Cronos

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