What is an NFT? [and how does it work?]

Pictures of cartoon apes and pixelated images are selling for millions. Communities of thousands of people rally around NFT collections, discussing which ones are best.

At the same time, NFTs are used to “tokenize” real-world assets like paintings, diamonds, houses, and whiskey casks, and others say that NFTs could change the gaming sector forever…

The possibilities are endless, and the excitement around digital ownership is growing fast (which is what NFTs offer). 

But if you’re new to the concept, it can all be a bit confusing.

What exactly are NFTs? What can they be used for? And how do they work? 🤔

I’ll answer all these questions (and more) in this post.

NFT Meaning - What Does NFT Stand For?

First things first: what does “NFT” mean?

NFT stands for Non-Fungible Token.

But that probably doesn’t get you any closer to understanding what it is…

At their core, NFTs have a lot in common with cryptocurrencies (or fungible tokens) like Bitcoin or Ethereum. However, unlike these tokens, NFTs are not interchangeable.

For example, with Bitcoin, any one coin is identical to another, so it doesn’t matter which one you hold—they’re all the same value. With NFTs, each token represents a unique item or piece of content such as digital art, certificates, or in-game items, making them one-of-a-kind.

In this case, you would care if your NFT was swapped with a different one because the one you own is unique. 🖼️

A short History of NFTs

So, we know that NFT stands for Non-Fungible Token and what that means. But where did NFTs come from?

Well, the first ever NFT was called Quantum.

This was a digital art piece created by Jennifer and Kevin McCoy, but it wasn’t called an “NFT” back in the day. The McCoys just wanted a way to sell digital art with a verifiable ownership history. However, the infrastructure to support that didn’t exist yet. So they teamed up with tech entrepreneur Anil Dash to explore using blockchain technology.

In 2014, they minted Quantum, creating what is now known as the world’s first-ever NFT...

But Quantum was quickly forgotten, as it was “too ahead of its time.” It would take another couple of years before the general idea of NFTs would resurface.

Fast forward to 2017, when Matt Hall and John Watkinson created thousands of pixelated humanoid characters known as CryptoPunks. Originally, they envisioned it as a new smartphone app or game.

They had no idea that their work would revolutionize digital art and ownership…

Much like Jennifer and Kevin, Matt and John wanted a way to represent ownership over their creations. So they started modifying tokens on Ethereum. Whether they were aware of the Mc Coys’ Quantum is unknown.

The duo's work inspired others to create a token standard designed specifically for NFTs: the ERC-721 token standard, which came out in 2018. Feel free to forget that instantly- what’s important is that this standard made it possible for NFTs to spread like wildfire!

What Are NFTs Used For?

After the creation of ERC-721, NFTs became accessible to more people. And over time, they gained popularity even though they initially had limited functionality. Early collections were mostly PFP (profile picture) collections, used by people as profile images online.

In these early years, it wasn’t so much about utility with NFTs, it was all about community. Being part of something and showing that by owning an NFT. 

But as NFTs evolved, we began to see how digital ownership opened doors to new possibilities in the digital world.

NFTs don’t have to be PFPs though. They can represent anything- they are simply tokens used to represent ownership in the digital world. 

Some of the many uses for NFTs include:

• Digital Collectibles (like PFPs)
• Real-World Asset Tokenization (RWA)
• Event Ticketing
• Crowdfunding
• Brand NFTs
• Access Passes
• Investing

These examples are just a few possible use cases. I’m sure that there are people using NFTs in ways I’m not even aware of yet. And the list of applications will continue to grow exponentially in the coming years! 🙂

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NFT Examples

To give you a better idea of how these use cases work in practice, let’s look at a few examples.

As we know, NFTs are currently most used for PFP collections. Popular examples include Bored Ape Yacht Club, CryptoPunks, and Azuki. These NFTs usually don’t provide any utility; they’re all about branding and community.

But I want to show you a great example of a different way to use NFTs, based on a live use case.

A company called Cask Capital is revolutionizing whisky cask ownership, and they’re using NFTs to do so!

I won’t go into great detail about the whiskey industry, but here’s a quick overview of how NFTs fit into this.

NFTs are used for investment by tokenizing whiskey casks and enabling fractionalized ownership. But they’re also used to build a community around the brand. Here’s how that works:

1. A buyer purchases 1/20th of a whiskey cask and receives an NFT that includes a certificate of ownership. This NFT can easily be traded, with one person selling their ownership of the cask to another without any middleman involved.
2. NFTs also help build community. Focusing on community-building can be very powerful when creating a brand. For this, they will use what we call Brand NFTs.

These Brand NFTs will not be tied to physical whiskey casks, but they offer exclusive access to their community which has "Token Gated Content" around the topic of Whiskey.

This is enabled by platforms that allow a project to "gate" their social space with their NFTs. This means that you must hold at least one of the Brands NFTs to access that space.

Here, a company can create posts (and do a whole lot more), exclusively for those who hold their NFTs. This helps to turn “followers” into “holders”, which in turn creates a stronger relationship between a company/brand and its community. 

This example of Cask Capital shows how NFTs can be used for RWA, Access Passes, and Brand NFTs—all within one company to increase reach, accessibility, transparency, and community engagement.

How Do NFTs Work?

What does NFT mean? Check ✅

How did NFTs come into existence? Check ✅

What are they used for? Also check ✅

But how do NFTs actually work? 👇🏽

Non-fungible tokens are digital assets recorded on a blockchain (a distributed ledger that records transactions). They are created through a process called minting, which involves recording information about the asset on the blockchain.

This information is called metadata, which typically includes:

• A link to the Media File*
• Collection information
• Serial number
• Description
• Traits/Attributes

*Media Files are often stored using Arweave or IPFS. Metadata contains a CID (content identifier) or URI (unique resource identifier) that points to the content associated with the NFT.

All NFTs are linked to a unique identifier: a token ID. When NFTs share the same token ID, it means they're part of the same collection.

This token ID is linked to a specific account/address on the blockchain. This is the account of the collection owner and is called the treasury account.

When an NFT is sold, a fixed percentage of that sale (called the Royalty) goes to the treasury account. When creating a collection, the creator sets the percentage of Royalties. 

NFT Private Keys

This part may seem technical or boring, but it’s essential for understanding how NFTs work and what can and can’t be done.

As you might know, one reason NFTs are popular is their immutability—once you own one, it’s yours, and it can’t be changed or taken away from you.

Imagine if you owned a Picasso painting; you wouldn’t want Pablo to show up at your door someday to repaint it. Or actually... now I say that, that does sound kinda cool. So maybe in some cases, you actually do want the creator to be able to alter the NFT later.

Or maybe you don’t want them to be able to change the image, but it would be handy if they could change the percentage of royalties or the collection info for example.

So this is where it gets tricky. Because even though it’s tempting to retain a lot of power over the collection, that’s not what collectors generally like to see. As I said, NFTs are popular partially because of their immutability. So if you own an NFT, you want to know exactly what the issuer is capable of doing after you bought it.

For some use cases, it makes sense to maintain control over a collection. 👍🏽 And for some, it doesn’t. 👎🏽

And this is where Token Private Keys come into play. When creating an NFT collection, creators can choose which keys to generate, which defines how much control they’ll have. Each blockchain offers different key options. For instance, on Hedera, private keys include:

1. Supply Key: Allows minting more NFTs within a collection’s max supply or burning NFTs held in the treasury account.
2. Admin Key: Lets creators update details like the token name or symbol, though they can’t add new keys after the token is created.
3. Pause Key: Stops any activity involving the token, like transferring or minting.
4. Freeze Key: Blocks a specific account from transferring NFTs.
5. Wipe Key: Lets creators remove NFTs from a specific account.
6. KYC Key (long story, unimportant)
7. Fee Key: Allows updates to royalties.
8. Metadata Key: Allows updates to the NFT’s metadata, meaning the creator can modify the NFT.

The Future of NFTs

Alright, so now you know what NFTs are, how they’re used, how they work, and a bit about their history. 🙂

Now you might be wondering what the future of NFT looks like. And while no one knows exactly how they will evolve, it’s clear that NFTs are here to stay. And I think that they’ll be used everywhere, by everyone.

We are shifting from what’s called “the Internet of Information” to “the Internet of Value.” And NFTs are an important part of this change. Until now, we’ve only used the internet to exchange information.

Money transfers, pictures, documents, we never actually sent anything of value over the internet. We were only sending and receiving information about it.

But we’re entering a new era. And it almost seems like the internet until now was just a preview of what it’s always meant to be. Digital ownership has flipped a switch for the internet.

The digital world will start to behave more like the physical world, and the two will be more interconnected than ever.

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Conclusion

I hope this post has helped you understand NFTs a bit better. After covering their history, their future, how they work, and more, you should have a decent understanding of the concept now.

But NFTs are still new, and we’re just scratching the surface of what they can do. Since their inception, they’ve come a long way, but you’re still early enough to get in before the masses do. You’re still early enough to beat the crowd. 

So if you’re interested in exploring NFTs further, check out some of my other posts for the next steps in learning about creating, trading, and collecting NFTs!

Thank you for reading this post! 

https://www.kabila.app/post/how-to-buy-and-sell-nfts-in-2024-and-the-best-marketplaces-to-use