What is an NFT?

A Step-by-Step Guide to Understanding One of the Most Popular Apps in Crypto

By: Rahul Nambiampurath Loading...

What is an NFT?

What Are NFTs?

Figuring out non-fungible tokens (NFTs) has become a joke. People are agog at how a .jpeg monkey image can cost the same as a mansion? By the end of this NFT tour, you will wonder how it was possible to ever be confused about NFTs.

NFTs are unique tokens. This is unlike an asset like bitcoin, where 1 BTC is effectively the same as another Bitcoin. It is the idea of non-fungibility that makes an NFT different from any other token of the same type. The unique properties of an NFT make it impossible to create a new token of the same type or modify its ownership record.

In other words, the asset’s attributes are so non-fungible that they must trigger value speculation. For centuries, physical artwork has triggered such speculation, often resulting in astronomically priced art pieces. This cannot happen with fungible assets like money, as one banknote holds the same value as any other equally denominated banknote.


Bitcoin is valuable because each BTC is cryptographically recorded as a block on a blockchain. For this chained money ledger to be altered, one would have to start a new chain — a hard fork — from the existing one. This is why blockchain is often called an immutable record.

By the same token, an NFT is immutably recorded on a blockchain. This cements its veracity, provenance, and authenticity. This technology makes it possible to integrate tokenized assets into a variety of markets and social media platforms.

A non-fungible token is a blockchain record of ownership facilitated by smart contracts. A token is something that is presented as something else. For this reason, when one sees a Bored Ape Yacht Club NFT, like #1837, which was purchased for $1.57 million, one doesn’t see an actual NFT.

Ape #1837: Source: OpenSea

What you see there is a digital asset — a representative picture — which is different from a blockchain record. One can easily right-click on it and save it as an identical image file. That doesn’t mean that $1.57 million NFT ownership is transferred to you. Instead, that particular NFT is actually a smart contract recorded as a data block on a blockchain, publicly verifiable on the Ethereum blockchain via Etherscan.

In other words, a digital asset — image file, video, e-book, audio, etc. — is anchored into an immutable smart contract, which is the NFT itself. In turn, this smart contract shows the entire history of the asset in question: the original creator, how many times it has been sold, by how much and by which wallet.

Transaction history of Ape #1685. Source: Etherscan

Furthermore, smart contracts are extremely flexible. One could mint (tokenize) a digital asset, and set a royalty percentage for each subsequent sale, embedded in the smart contract. This itself is revolutionary, as one would’ve needed a series of expensive mediators to do so before blockchains and smart contracts.

This allows artists, musicians, and authors to effortlessly manage income from their own work. On top of that, their fans know most of the money goes to the creator instead of some faceless corporation. Grimes, Steve Aoki, Kings of Leon, and Eminem are just some of the artists who used NFTs to become their own publishing and distribution houses.

NFT Implications

Here’s two key questions:

  1. If an NFT is a blockchain record, in which a digital asset is anchored into a smart contract, it relies entirely on a blockchain network. What happens if the network goes down?
  2. If any digital asset can be tokenized, what prevents someone from copying that asset (such as saving an image file) and then minting that file as a new NFT?

What if the Blockchain Network Fails?

Storing smart contracts on a blockchain is critical. Blockchain technology was designed as the ultimate counter to central-point-of-failure systems.

People who hold their BTC in non-custodial wallets (not on exchanges), truly own their assets, as they can send or receive Bitcoin without permission from anywhere in the world.

Time Atlas by Paolo Tonon. Source: Art Blocks

To facilitate this, 14,000 nodes (each containing a full blockchain copy) make up Bitcoin’s decentralized network. In other words, decentralization translates to redundancy and failure-resistance. The same applies to Ethereum, with its 5,675 nodes, as the host of most NFT marketplaces.

Furthermore, NFT marketplaces also store NFT metadata on the IPFS — InterPlanetary File System — a peer-to-peer (P2P) storage network. For example, the metadata for one of the most expensive NFTs ever sold, Beeple’s EVERYDAYS: THE FIRST 5000 DAYS, which sold for $69.3 million, is stored on this IPFS address. IPFS itself is spread out across 200,000 nodes.

When all things considered, it is equally likely that the internet itself would fail before an entire blockchain network.

Protecting One’s Intellectual Property (IP)

To answer the second question, how does one prevent someone else from copying the same digital asset and then minting it as a new NFT? This practice is known as “copymint.” First of all, this would constitute plagiarism, which would be easily detectable by algorithms, just like copyright strikes are detectable on YouTube or TikTok. For instance, the largest NFT marketplace, OpenSea, instituted a multi-layered verification system to prevent copyminting.

Space Doodle #7232

Furthermore, there is a preemptive way to counter copymints. Before a digital asset is shown to the public as an NFT, one can register it with the Electronic Copyright Office (eCO). This is part of the Library of Congress, and registering an asset there grants a certificate for a fee. Such a certificate then grants a legal standing to remove copymints wherever they are found on online platforms.

Lastly, each NFT issuer has their own set of rules on how a purchased NFT can be used. For example, CryptoKitties team created an NFT license to make it clear that their NFTs can only be used for non-commercial, personal use.

NFT Exploration

Circling back to microtransactions in gaming, imagine how wasteful that was. All of those assets are forever locked and isolated to people’s gaming accounts. As non-tokenized virtual goods, they cannot be exchanged between wallets and traded for or even upgraded, thanks to flexible smart contracts.

In that market alone, we are bound to see a huge NFT boom, as already demonstrated by Axie Infinity’s $1.3 billion revenue last year. In addition to play-to-earn gaming, we are also seeing a boom in play-to-move (gamified fitness), powered by NFTs in games like StepN. Let us also not forget that NFTs as virtual goods can also be tied to physical items.

'Believe It!' How a Manga-Loving Geek Exposed the Scam Targeting Naruto NFTs

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Journalist Dan Kahan loves manga. When he saw the famous Naruto series was being turned into NFTs he uncovered a new type of copyright fraud.

The Defiant The Defiant

This not only applies to shoes from Adidas or Nike, but to real estate as well. CityDAO is exploring physical land ownership and management in Wyoming, in which each land parcel is represented by an NFT, as a legal record of ownership.

Yet, such projects are just the cusp of NFT exploration. Ownership has always been the most powerful civilizational force, and NFTs are yet to transform it for the digital era.

Series Disclaimer:

This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.