What is an NFT and how it works

If you are still trying to understand why people are paying millions for digital art, continue in this article to see how NFT works and why it is one of the hottest blockchain topics nowadays.

As we have explained in our article Blockchain Explained: 10 terms that will help you understand this technology, NFT or non-fungible tokens are unique tokens generated specifically for each digital asset. With this unique token, every transaction that involves that digital asset is recorded in blockchain and can be traceable in the future.

Just as every digital asset is unique, so are NFTs. They are exclusive, unreproducible and 1 NFT can never be traded by another NFT, since they have different values.

But does this mean exactly?

It means people can own digital art such as music, tweets and even memes. Even though they can still be freely reproduced online, the simple fact that one original digital asset has this crypto authenticity stamp makes it more valuable and rarer.

The principle is the same as having an original Monet painting in your living room. There are copies running around, but only you will have the original. With digital art, only one person will have the authentic digital asset with the unique token to prove that they own it.

And just as Monet paintings are more valued over time, so will digital art be. In the future their value should increase rapidly, offering NFT’s early adopters the chance of profiting from it.

How are blockchain and NFTs related?

As we spoke, NFT transactions are placed in blockchain, mostly famous for cryptocurrencies trades. Blockchain eliminates the need to have a third-party institution to place transactions, allowing seller and buyer to validate their trading in blockchain.

Thanks to the way it works, blockchain ensures that NFTs are safe and indestructible. Therefore, these digital assets are even more rare and valuable, since only this technology can confirm its authenticity.

How NFT works

Summarizing everything we have seen so far: NFTs are non-fungible tokens that authenticate a digital asset that can be bought and sold through a blockchain network. Differently than cryptocurrencies, which are fungible items also traded in blockchain, NFTs are used to trade unique and unreproducible digital products.

The difference between NFT and other fungible items is their verifiable digital scarcity, only possible thanks to the unique digital token associated with it. In these tokens there are some stored information such as name, symbol, owner, transaction data, metadata, much like a smart contract.

This is all to ensure that NFT is a true digital authenticity stamp that cannot be corrupted, reproduced or violated.

Practical use of NFTs

Digital art is the most popular case of NFTs use. With NFT one can have their digital art freely reproduced, while preserving their rarity. Even so, the value of a given NFT is barely related to the art itself, rather to the act of proving ownership and therefore the rarity of such art.

Music NFTs are also receiving a lot of attention since the band Kings of Leon launched a new album that included NFT versions with exclusive benefits for its buyers. These benefits included privileged seats in live concerts, special album, and exclusive art. Although anyone can listen to their latest release, only the buyers will own the original items, that may have their value increased over time.

The NFT universe is just getting started, but the possibilities for its application are endless. Early adopters will have a clear advantage by investing in such promising technology.

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