Skip to main content

What are NFTs? Non-fungible tokens explained like you’re 5

What are NFTs: NFTs explained
What are NFTs: NFTs explained (Image credit: Snappa)

“What are NFTs?” It’s a question that’s been flooding Google’s search engine as people try to make sense of the trending buzzword. NFT stands for non-fungible token, but what does that even mean? Well, before I can explain what “non-fungible” means, let’s dive into the definition of fungible.

“Fungible” describes a good that can be easily swapped for another good within the same asset class. For example, if I swap your $100 for my five $20 bills, you likely won’t say, “Hey, that’s not fair!” because they have the same value. As such, the US dollar is fungible. Cryptocurrencies like Dogecoin and Ethereum are fungible as well — you can easily exchange one Bitcoin for another without stepping on any toes.

What are NFTs?

What are NFTs? (Image credit: Snappa)

Non-fungible, on the other hand, describes a one-of-kind, unique good that can’t be readily exchanged for another good within the same asset class. Non-fungible tokens are also indivisible (i.e. they can’t be divided into smaller denominations in the same way that a dollar can be split up into four quarters). 

For example, your great-grandmother’s wedding ring is non-fungible. It can’t be readily swapped for any ol’ ring — it holds a deep sentimental value and it can’t be easily exchanged for another piece of jewelry. You’d likely throw a fit if someone tried to trade your precious family heirloom for some banged-up band. In the same way, NFTs are scarce digital assets with distinctive characteristics, making them difficult to swap for another similar good because it will likely not have the same value.

Now that you understand the definition of non-fungible, let’s get into the meat and potatoes of NFTs and why they’re making such a splash in the crypto-art market.

What are NFTs? 

NFTs are one-of-a-kind, digital goods stored on the Ethereum network that authenticates an asset as a genuine and original entity. I know, I know — this may sound like gibberish to you, but don’t worry, I’ll explain NFTs using two analogies.

What are NFTs: NFTs explained

What are NFTs? NFTs explained (Image credit: Snappa)

Let’s say you have a pair of badass, one-kind-a-kind sneakers that were specifically made for you by Nike. You also own an official certificate from Nike that says, “There is no other sneaker in the world like this one.” In the same way, NFTs are uniquely created digital assets (e.g. animations, graphic designs, GIFs, audio files, memes and even tweets). Like your Nike sneakers, NFTs are appealing to collectors because they come with a digital certificate of authenticity — if you will — due to Ethereum-based blockchain support (more on this later), proving that it’s genuine and original.

Imagine Leonardo da Vinci was alive today and he digitally painted the Mona Lisa via Adobe Illustrator (AI).

What are NFTs

What are NFTs? Mona Lisa NFT (Image credit: Snappa)

His social media followers would go nuts over his new portrait and it’d go viral. Recognizing its value, Da Vinci decides he wants to sell it. He can convert his digital masterpiece into an NFT. It will be backed by blockchain technology, proving that he is in possession of the original Mona Lisa. Da Vinci can then sell his Mona Lisa NFT to the highest bidder. Although there are many copies out there (e.g. screenshots of the Mona Lisa), DaVinci’s AI file is the true “Adam and Eve” of all the Mona Lisas floating around on the internet. A digital-art enthusiast purchases DaVinci’s Mona Lisa NFT and he’s happy to spend millions on it because the NFT affirms that he owns DaVinci's original, authentic AI file. 

London-based digital artist V Buckenham summed it up perfectly: “An NFT is just an entry in a fancy database somewhere asserting that you ‘own’ the artwork.”

How does the Ethereum blockchain authenticate NFTs? 

Most NFTs are powered by the Ethereum blockchain network. You may know what a blockchain is, but if not, don’t worry — I’ll break it down for you.  

What are NFTs? The Ethereum Blockchain

What are NFTs? The Ethereum Blockchain (Image credit: Snappa)

Cryptocurrencies like Ethereum and Bitcoin run on a blockchain, a peer-to-peer network that uses complex encryption algorithms to record online cryptocurrency transactions. The blockchain cuts out the need for centralized institutions like banks. Whenever someone sends or receives Bitcoin, for example, it is recorded on a public ledger that uses a jaw-dropping amount of computing power to ensure the transaction is legitimate.

If the concept of a blockchain seems too abstract, think of it this way: there is a network of interconnected computers that communicate with each other to accept cryptocurrency transactions. If malicious actors wanted to hack Ethereum and Bitcoin, it’d be difficult because it’s not just a few computers they’d need to tackle — there’s a whole peer-to-peer network one must take down. In order for new Ethereum and Bitcoin data to be accepted into the blockchain, a consensus among many peers in the network is required, so if there’s an anomaly, it will likely be flagged and denied.

Each NFT on the Ethereum blockchain has a unique ID with data about who created it, its price history and more. As cryptomedia analyst Jesse Walden puts it, “When an NFT is minted by a creator, this information is immutably registered on the blockchain and becomes a sort of digital passport for the work.” Minting an NFT on Ethereum is a way for artists and creators to secure their work (thanks to the support of the blockchain) to guarantee to buyers that they’re getting the real deal.

What are some real NFTs that have been sold at shockingly high prices?

Billionaire investor Mark Cuban sold a motivational-quote NFT for $1,700. It said, “No one ever changed the world by doing what everyone else was doing.” According to Business Insider, each time his NFT gets resold, Cuban acquires 15% in royalties.

An NFT of a flying cat with a Pop-Tart body sold for $580,000. No, I’m not kidding. Someone actually purchased a GIF of a toaster-pastry kitty zooming through the sky with an accompanying rainbow for almost $600,000, according to the New York Times. 

Nyan Cat

Nyan Cat (Image credit: Nyan Cat/Prguitarman)

If you thought that was insane, wait ‘til you hear this: Jack Dorsey, Twitter’s CEO, sold an NFT version of his first tweet for a whopping $2.9 million at an auction. The 2006 tweet says, “just setting up my twttr.” 

The musician (and mother of Elon Musk’s youngest son) Grimes sold her NFT collection of digital artworks for $6 million in less than 20 seconds.

Well-known artist Mike Winklemann, also known as Beeple, sold the most expensive NFT in digital-art history: a 21,069 x 21,069-pixel collage of his first 5,000 days of artwork for $69 million.

Beeple NFT

What are NFT's Beeple's $69 million NFT artwork (Image credit: Beeple/Christie's)

These digital assets, of course, can’t be touched or held physically, but they’re selling at insanely high prices because someone with money to blow is salivating over the thought of owning original, authentic virtual artwork via NFTs. 

A short history of NFTs 

A perfect segue into the history of NFTs is a recently sold video clip of Lebron James dunking. The clip lasts only a few seconds, but a fan paid more than $200,000 for it. This clip was hosted on NBA Top Shot — an online marketplace where basketball fans can swap show-shopping NBA video highlights like trading cards. 

NFTs NBA Top shot LeBron

What are NFTs? LeBron James dunking (Image credit: NBA)

NBA Top Shot came to be thanks to the NBA’s partnership with Dapper Labs, the blockchain company often credited as the pioneer behind the NFT phenomenon.

In December 2017, Dapper Labs debuted CryptoKitties — funky, digital cat collectibles à la Pokémon cards and Beanie Babies. Each CryptoKitty was associated with a unique string of code on the Ethereum blockchain, granting the CryptoKitty holder total ownership of the NFT image. Though there are older examples of NFTs, CryptoKitties is considered one of the first NFTs to launch the “holy crap, this is overpriced!” non-fungible token market.

Cryptokitties NFTs

What are NFTs? Cryptokitties (Image credit: Cryptokitties.co)

According to CNBC, the median price of a CryptoKitty is $25.04, but some high-end NFT cat images can sell for as much as $114,481.59. It’s a-paw-ling, I know, but NFTs are paw-some for creators seeking new revenue streams for their talents.

How do I make an NFT?

NFTs are becoming a major cash cow for digital artists with a following. With creators selling their NFTs at sky-high prices, people want to know how they, too, can cash in on the crypto craze. Before you can get started on NFTs, you’ll need to sign up for an Ethereum wallet and add some ETH into it. Metamask.io is the most common Ethereum wallet.

Metamask

Metamask.io (Image credit: Metamask)

1. Create an account on Mintable.app. There are other top NFT marketplaces, but Mintable is preferred (Mark Cuban uses it, too). Other platforms are pricier, have file limitations below 50 megabytes, and suffer from other less desirable qualities.

2. Ensure your Metamask wallet is connected to Mintable by clicking “Connect a Wallet” on the home page.

3. At this point, you must know that creating an NFT requires a gas fee, which is a payment for the computing energy needed for minting non-fungible tokens. You’ll need to pay your gas fee in ETH. Gas fees fluctuate every day — one Redditor reported that he had to pay $100 to mint his NFT.

4. Navigate to “Mint an Item.” Make sure "Advanced" is toggled on. Next, you can choose between “Traditional” (pay the gas fee now) and “Gasless” (gas fee is paid by the buyer when sold). To show you how you’d pay for gas fees, choose “Traditional.” 

Mintable NFTs

Mintable NFTs (Image credit: Mintable)

5. Select the category your NFT falls under: Art, Collectibles, Game items, Music, Domains and Templates.

6. You’ll have the option to choose whether you’d like to create your own store (it’s like having your own domain to sell goods, but it gets pricey) or sell your NFTs on the Mintable marketplace. We’ll go with the latter. Make sure “Only mint my token” is ticked.

7. Now, you can fill in the rest of the form, which requires you to name your token, create a listing title and add subtitles. Next, upload your digital asset.

8. Click on “List this item.” A pop-up window will warn you that you’re about to send your NFT to the blockchain. Click “Proceed.” A Metamask window will appear to tell you how much your gas fee will cost.

9. Once you accept the gas fee, you’ll get an animation of confetti with a window congratulating you on your new NFT. You’ll have to wait a bit, though, before your NFT is fully minted and ready to be sold (The Ethereum blockchain is not only expensive, but it’s slow, too).

You should also be aware of Mintable’s transaction fees. Mintable makes 2.5% from traditional NFTs and 5% from gasless NFTs.

How do I buy an NFT? 

Aside from Mintable, there are other popular NFT marketplaces such as Opensea, SuperRare and Rarible where you can buy your own non-fungible tokens. Similar to minting NFTs, if you’d like to purchase an NFT, you’ll need to connect an Etherum wallet to the platform. Once you’ve done that, you can hunt for digital creations that catch your eye. Most NFT marketplaces have an intuitive interface, but let’s use Opensea as an example of how to purchase an NFT.

Opensea.io

Opensea.io (Image credit: Opensea.io)

1. Go to Opensea.io and click on the avatar icon on the top-right corner.

2. Click on “My Profile.” You’ll be prompted to create an account with Metamask, a digital wallet that functions as a Google Chrome extension. Follow the instructions to buy and deposit Ethereum into Metamask. Make sure you have enough ETH in your wallet to purchase the NFT you desire.

3. Navigate back to Opensea.io and click “Explore,” which will lead you to the NFT marketplace. Depending on what you’re looking for, you can filter the NFTs by category (i.e. Art, Domain Names, Virtual Worlds, Trading Cards, Sports, Collectibles and Utility).

4. Click on an NFT that interests you. NFT prices will be offered in ETH, but you’ll also see the USD conversion in parentheses.

5.Click on “Buy Now.” A window will pop-up telling you the total cost of the NFT. If you’re OK with it, click on “Checkout” and you’re good to go.

Can you invest in NFTs? 

Some people wonder if NFTs are an investment vehicle like Bitcoin and other virtual tokens. NFTs are riskier than other digital assets. With Bitcoin, for example, you can make a wise bet that its value will go up significantly in the future as it becomes more widely accepted as a form of payment. NFTs, on the other hand, are more of a collectors’ token for fans of crypto art. On top of that, NFTs are still in the infancy stage. They have not yet gained mass acceptance — it’s a speculative investment and it’s dicey.

However, this doesn’t mean that using NFTs as an investment tool is out of the question. One way you could get lucky with an NFT is if you purchase a non-fungible token album from a well-known musician for $400,000, and a year later, something significant happens to the artist like a tragic death or their fame skyrockets to mind-blowing levels. You can likely resell the musician’s album NFT and potentially double, triple or quadruple your initial investment. But you’ve been warned — NFTs could suffer steep drops in value as non-fungible token hype and demand wanes. It’s also worth noting that if the value of Ethereum falls, NFTs will take a tumble, too.

Bottom line

It’s difficult for some to wrap their minds around the concept of NFTs. Why would someone spend millions of dollars on something they can’t even touch? Well, think of non-fungible tokens as a niche for high-brow, digital-art enthusiasts. The same way art collectors wouldn’t mind giving up an arm and a leg for a one-of-a-kind Picasso painting, there are virtual-art lovers who see true value in owning the original source of a scarce, culturally relevant digital asset. 

NFTs

(Image credit: Snappa)

I can also imagine athletes like Cristiano Ronaldo, Stephen Curry and Tom Brady monetizing their career highlights and selling them as NFTs to wealthy fans who’d give up their soul to own high-value, sports-memorabilia digital assets like the LeBron James dunking video. In fact, I foresee NFTs being a boon for all industry titans — not just sports stars. Hell, electronic-music artist Justin Blau scooped up a whopping $17 million from selling his music NFTs, which has been a benediction for him considering how the pandemic has negatively affected the music industry.

I truly hope NFTs are not just a fad. This new crypto-art craze is an amazing new way for talented, underappreciated artists to earn income and royalties as live performances and art shows are paused in many states.