What are NFTs?

Everything you need to know about non-fungible tokens, and some use cases that go beyond digital artwork.

Over the course of 2021, a fireball phenomenon in digital artwork swept across the entire web3 space, as the NFT industry increased in total value from $82.5 million to $17 billion. It turned heads from all creative industries, with many successfully cashing in on a fervent wave of NFT enthusiasm.

But it also left many people wondering: What ARE NFTs, anyway?

It’s a great question. There are so many misconceptions surrounding NFTs that most people don’t realize their potential beyond selling artwork. So let’s go back to basics, take a look at what NFTs actually are, what information they store, and highlight some innovative use cases for them across various industries.

What does non-fungible mean?

If something is “fungible,” it just means every unit is the same and can be exchanged for any other unit. Think of it like a dollar. If I give you a dollar, and you give me a dollar, nothing has changed: we both have the same amount of money we started with. This means dollars, like most cryptocurrencies, are fungible.

If something is “non-fungible,” it means that each unit is unique, and units cannot be interchanged freely. Think of this like trading cards. If I have a valuable trading card, and you have a less valuable one, if we exchange cards, you now have gained monetary value, and I have lost some. This means these trading cards are “non-fungible.”

What is a non-fungible token?

You may have heard that “NFT” stands for “non-fungible token.” So let’s talk about what this means.

A token is a digital asset on a blockchain network. This includes cryptocurrencies (fungible tokens), NFTs, semi-fungible tokens, and others. Each type of token has its own properties that make it useful for different purposes. For more on each type of token, check out our full article on the different kinds of tokens.

So how can a token be non-fungible? The answer is simple: each NFT has its own unique token ID. This is just a number that identifies the token, and no two NFTs minted from the same smart contract can have the same token ID. Token IDs are what give NFTs their uniqueness and digital scarcity, and also make their authenticity easier to verify.

What is a smart contract?

A smart contract is just a program on the blockchain. It functions as both the “blueprint” and the “factory” for creating tokens. It establishes the properties of the tokens to be minted from it. An NFT smart contract establishes the rule that the tokens to be minted from it will each have their own unique token ID, and thus be non-fungible.

What is an NFT collection?

All of the NFTs minted from a particular smart contract are called a “collection.” Popular NFT collections include Bored Ape Yacht Club, Cryptopunks, and The Sandbox. Each collection is minted from one smart contract, and no two NFTs within each specific collection can share a token ID.

What information is stored in an NFT?

One of the biggest misconceptions about NFTs is that they actually store the metadata (images, audio, video, etc.) that they represent. With the exception of a few blockchains, NFTs generally store very little information. They are simply a representation of the metadata associated with them, a sort of digital receipt or certificate of ownership and authenticity.

The information typically contained in a given NFT is:

• Contract address: the address on the blockchain of the contract from which the NFTs were minted. This is also the indicator of which collection the NFT belongs to.
• Token ID: the unique identifying number of the NFT within the collection. Again, no NFTs minted from the same smart contract can share the same token ID.
• Metadata URL: the URL that points to the location of the metadata associated with the NFT. This metadata is usually a file on IPFS (a popular distributed file-storage network) that contains the attributes of the NFT, information about its creator, a description, and the location of the actual file associated with the NFT (image, audio, video, etc.)
• Provenance data: Many NFTs can also record provenance data, or, a record of every transfer since the NFT was minted, along with optional data entered with each transfer (essentially “notes” about the transfers). This transaction history helps further verify that an NFT is authentic and is not a forgery.

Why are NFTs valuable?

Inherently, they’re not. You or I could create a hundred NFTs right now on any number of blockchains, and they would have no value whatsoever. The value of any given NFT is based on its perceived scarcity and uniqueness. Since an NFT is a digital certificate of ownership, it essentially confirms that the holder of the NFT is in fact the true owner of the metadata associated with it. However, anyone can easily view, listen to, or download this metadata. So the value is not in the exclusive access to the metadata but in the exclusive and verifiable ownership.

Are NFTs a scam?

Many use the fact that NFTs do not protect access to the metadata associated with them to argue that NFTs are a scam. However, the fact is, no digital asset is impervious to being copied, and NFTs provide the only practical way to implement true ownership of digital assets. So whatever opinion you have about the latest celebrity NFT selling for millions of dollars, the fundamental mechanism for creating verifiable authenticity and digital asset ownership is extremely useful for a wide variety of purposes. Let’s have a closer look at some of these.

Real-world NFT use cases

Beyond representing digital artwork and creating digital scarcity, NFTs can be used in a multitude of industries in ways that other digital assets cannot. Since they exist on decentralized networks, they are much less vulnerable to being hacked, stolen, or tampered with in any way. Even without any inherent value, their verifiable authenticity and immutability make them uniquely suited for some fascinating real-world use cases.

Physical asset tokenization

All kinds of real-world physical assets are subject to forgery. Knock-offs of brand-name clothing, sneakers, luxury handbags, watches, or even consumer electronics are passed off as authentic to unwitting buyers everywhere.

NFTs could be a key factor in combatting this black-market industry. If goods were sold with NFTs as receipts of authenticity, and each time the goods themselves changed hands, the NFTs were transferred to the new owners, the ownership history would be easily traceable and the authenticity of the goods would be easily verifiable. Buying goods without the accompanying NFT would be a risk, and it would significantly discourage the production of counterfeit goods. The NFTs themselves would not have value, per se, but they would be a solid mechanism for verifying the value of the goods they represented.

Supply-chain tracking

Building on this principle, supply chains for every industry rely on centralized ledgers to track the movements of goods. However, since these ledgers are generally under the control of a central authority, they are vulnerable to tampering and require a degree of trust by all parties involved.

If goods in a supply chain were tokenized using NFTs and tracked on blockchain networks, this degree of trust would be minimized. Each good would be represented by an NFT which would, in turn, have a traceable location history built into the token itself. No central authority would have control over the location histories, and they would be impervious to external tampering. In this way, the traceability of each item in the supply chain would be verifiable in an accurate and trustless way, completely impossible without the use of NFTs. Again, the NFTs themselves would not be valuable digital assets, but merely functional representations of real-world physical items in a distributed ledger.

Royalty payments

In the music industry, collecting royalties for artists for the sales of their compositions is a whole industry within itself. Many musicians are already selling NFTs as one-of-a-kind digital assets (and often commanding huge sums of money), but what if multiple NFTs of the same song were made and sold for a few dollars apiece? Each NFT would have its own, unique, token ID, and each time the NFT was transferred, a built-in royalty payment mechanism would pay the original creators a percentage of the sale. The whole royalty-collection process would be automated and guaranteed, enabling artists to collect a significantly larger percentage of the sales of their works.

Taking things a step further, if streaming services and radio stations used NFTs to register each time a specific NFT was played, and the NFTs themselves subsequently paid out royalties for the plays to the original creators, it would provide a more direct and certain mechanism for receiving a whole swath of income for artists.

In-game assets

It’s commonplace for gamers to pay for in-game items like skins, weapons, characters, or other modifications to their gaming experience. Most players have no problem shelling out their hard-earned cash on such assets, but most also don’t realize that the game’s manufacturers have full control over their properties, value, resellability, and even validity or existence.

If a game creator decides a certain sword, that players have paid good money for, is too powerful or should no longer be used in a game, they can simply get rid of it. Sure, they’d face some backlash, and maybe have to reimburse some players, but that would be the end of it. And if a manufacturer decides in-game items cannot be resold, then that’s the final word. Players cannot get money back for the assets they’ve purchased, whether or not they’re still using them.

If in-game assets were tokenized, all of this potential hassle would be eliminated. Players could buy, sell, or trade any in-game items as they wished, and the items would always be the same as what they had originally purchased. No one, not even the manufacturers themselves, could tamper with the items, and gamers would have more certainty that the money they’re investing into any game could be recouped to some degree in the future.

How to make your own NFT apps

We’ve taken it from the very basics of what NFTs are to some of the most cutting-edge edge use cases of the technology. We hope this gives you a better understanding of NFTs and what they can be used for, and maybe even inspires future NFT innovators to build even cooler applications.

If you’re a developer, and we’ve gotten your creative juices flowing, then you should know that implementing NFTs into your app is a breeze with Tatum. In fact, it’s so easy that any developer can do everything they need with our JavaScript SDK on multiple blockchains. And you can do everything with a free plan.

If you want to give it a try, check out our guide on how to create NFTs with Tatum, sign up for a free API key, download our JavaScript SDK, and get building!

If you have any questions or need any help, feel free to hop onto our Discord, and one of our devs will get back to you as soon as possible.

Happy coding!