What are NFTs and how do they work?

What is a Non-Fungible Token (NFT)?

Non-fungible tokens, or NFTs as they are popularly called, are best explained as digital assets. These assets exist in the blockchain ecosystem and have been tokenized to have a unique identification code, making them the only ones.

They can be differentiated from other tokens regardless of their semblance with another through their codes. This phenomenon makes it possible for two NFTs to exist in a blockchain and look identical, but they are not interchangeable. There are many NFTs, and these include videos, cards, artwork, pictures, and other digital representations.

Like cryptocurrencies, NFTs can serve as a money tender in trades and transactions in the crypto economy, as they are seen as valuable items. The use of NFTs in the market for trades and exchanges largely depends on the market value of the NFT in question.

The only difference between NFTs and cryptocurrencies like Bitcoin and Ethereum is the subjective value placed on the NFTs. While an NFT might be worth millions to its owners, some might find it worthless. However, this doesn’t mean NFTs are worthless; their value is only subjective. Another difference is the interchangeability feature of cryptocurrencies. You can exchange one crypto for another crypto in the same blockchain, but you cannot do this with NFTs.

How do NFTs work?

Unlike cryptocurrencies created through mining, non-fungible tokens are made through a minting process. Most of these NFTs are mined on the Ethereum blockchain. The minting of NFTs is a process of recording the unique data of a digital asset on a blockchain.

This data is then validated by a validator, which closes the blockchain, making the NFT unique since the blockchain is no longer available to mint another NFT. As these tokens are minted, they are given a unique tag that shows their personalized blockchain number and all the details of the NFT.

Due to NFTs being digital assets owned by people, smart contracts are used to protect these NFTs from theft and keep validators accountable. Ownership information is usually available to the public as well to dissuade theft. These features make them valuable and useful for trade.

They can be bought and sold as willed by the owners and, in some cases, represent physical material in the real world. Business experts have said that the tokenization of materials may be the next best thing for owners who want to safeguard themselves and their properties against fraud as the process is efficient.

Examples of NFTs

When NFTs began, they were majorly known for their interest in arts, photography, and collectibles. These days, any item can become a non-fungible token once taken through the validation process and gets a unique identifier.

The list below shows the various examples of NFTs in the ecosystem today.

  • Photographs: These are still very common in the ecosystem today. Photographers have found a niche for themselves on various NFT platforms. They sell their pictures in whole or part to anyone willing to buy them at the market price.
  • Music: The ecosystem has expanded into music. Now, artists can tokenize their songs, granting buyers rights over the music. This process is usually finalized with a smart contract in place.
  • Art: NFTs around art are common in the ecosystem and often sell for a high price.
    Collectibles: If you are an NFT enthusiast, you must have come across some NFT collectibles. Some common ones are the Bored Ape Yacht Club, Pudgy Panda, and others. Users can trade these cards; some collectibles are used in video games.
  • Virtual World: With the increased development of the metaverse, NFTs have found their way to the virtual world. Virtual NFTs grant owners items usable in the virtual world. These are avatars, wearables, and other items needed in the virtual space.

Benefits of Non-Fungible Tokens


NFTs are a perfect way to safeguard people’s identities. Blockchains used for minting are closed off when done, locking information into them that another individual cannot access. This feature makes identity theft almost impossible, as these blockchains will require keys to get access.

Market Efficiency

Like decentralized finance, NFTs curbed the need for a third party in business and trade. When you tokenize your physical assets, and they go into the NFT space, buyers will approach you directly. Since there is no space for fraud or theft, you can easily trust the smart contracts used in such transactions. This process makes trading and the market efficient.


NFTs are now being used as an investment tool. Ernst & Young, in recent times, has helped one of its prominent customers protect its provenance by using NFT to lock up pieces of information about the business.

Experts are beginning to realize the use of NFTs in investment as they represent ownership. Investors can transfer this feature to business concepts such as ownership similar to stocks and shares.

Real Estate

Real estate can be minted and turned into NFTs. As a user, you can use NFTs to divide up your real estate and sell or transfer ownership. Because an NFT works with a blockchain and smart contract, it is far easier for users to track transactions and ledgers.

This benefits you as a user because once an NFT representing whatever you want is sold, the blockchain automatically handles everything else. This cuts away the bureaucratic nature of the real estate market and simplifies it for all to access.

Shared Ownership

With NFTs, shared ownership is possible and simplified. Multiple people can purchase rights to an item that the owner shares in a ratio beneficial to them. Users can do the same for real-world objects that their owners have tokenized. This arrangement could increase the value of the item and the level of security needed for such an item.

Also read: What is an IDO?

The risk of NFTs and Cryptocurrency

The publicity around NFTs and cryptocurrencies in media has led to a massive influx of youths into the ecosystem and market. Some don’t take the time to understand its related risks because they love the tailored content. But here are a few risks worthy of note if you want to get into the NFT and cryptocurrency spaces.

Inadequate knowledge of NFTs and Cryptos

One of the most significant risks associated with NFTs and cryptocurrency is that they require some degree of secondary knowledge to deal with them. The media is filled with news about cryptocurrencies and NFTs that many users pump their money into without understanding the concept or protocols before dealing with them.

Losing money

Investing in NFTs and crypto is a high-risk business, similar to stock trading and gambling. It takes a certain amount of courage to invest in these digital assets, as their prices fluctuate and they are susceptible to external influence. You will need deep knowledge before investing in NFT if you do not want to lose your money.

Influencer promotion

Like every other asset, NFTs are susceptible to external influence; some of these are influenced by people. Protocol developers sometimes pay people who influence products and services to influence their NFTs or crypto.

Because they believe in such influencers, users flock to such promoted protocols. This sort of risk exists in the NFT ecosystem, and as a user, you must be careful how and where you invest.

The ecosystem is unregulated

NFTs and crypto battled legalization and are still in that battle in some states due to the inability of state regulation. This means that when something goes wrong—wrong sales, fake NFTs, or scams—there is no legal platform for redress-seeking for users.

Due to the social image and publicity attached to NFTs and cryptocurrency, there are many swindlers and fake NFTs. Some NFTs are carbon copies of an original piece but lack the authentication code to make it authentic. Users sometimes fall for these scams, and they lose their money.

Low financial benefits

For many, NFTs are a source of income, but the truth is that NFTs do not present a substantial financial reward to users. NFTs and cryptocurrencies take time and a bit of luck to reign in massive cash due to the fluctuating habits of the market. Influencers who help promote NFTs have a secondary source of income attached to their NFT and crypto trading habits. As a new user, you should be wary of how much content you believe.

How to buy NFTs?

NFTs are usually minted on the Ethereum blockchain, making them accessible to people with the ether coin. This makes it your first step as a user if you want to purchase an NFT. You must own a digital wallet and store some ether (ETH) there. If you do not hold ethers but some other coin, you will need to change your coin for some ethers.

You can do this on platforms like OpenSea, Paypal, Kraken, et cetera, which allow you to purchase ETH or switch your coins to ETH. Once this is done, you can then go ahead and look for a space that deals in NFT sales.

Platforms like OpenSea, Rarible, and SuperRare are known to have some of the best NFTs in the market; however, most of these platforms charge a token of your crypto as a transaction fee.

What are some popular NFT marketplaces?

There are many NFT marketplaces out there, and as the market expands, other platforms will continue to spring up. As a user, you should be careful of the platform you buy from, as it might be filled with fake NFTs by fraudsters.

Try to dive deeply into the platform by understanding its protocol, website, and features before dealing with them. This act helps save you from fraud and money loss. Here are a few of the most popular NFT marketplaces that are safe and trusted.


Foundation is an NFT platform that is secure to trade on. The platform requires that an existing NFT seller invite a new seller before such a seller can sell on the platform. This process makes seller verification possible, as the invitation is a security measure to dissuade scammers. The platform boasts an exclusive, safe, and secure network for users.


The Rarible platform allows for collaboration and transparency in transactions. At Rarible, as a seller of an NFT, you can weigh in on price and other market issues or concerns. It is one of the most democratic NFT marketplaces since it allows input from users and sellers. The smart contract is usually prepared with the information of the seller.


OpenSea is one of the most popular NFT marketplaces, and many people use it. Due to the ease of access the platform gives its users, accompanied by an extensive collection of NFTs and collectibles, OpenSea is a people’s favorite. What you will need as a user to gain access is just your digital wallet and a click on the signup button.

What is the relationship between NFTs and cryptocurrencies?

There are a lot of similarities between cryptocurrencies and NFTs. Cryptos are mined, while NFTs are minted. Cryptocurrencies need miners, while NFTs need a validator.

These two digital assets exist on a blockchain protocol. Traders can use these two items for trade and transactions as they are both monetary tenders in the decentralized financial framework. However, the relationship between these two is that NFTs are built on a cryptocurrency blockchain, Ethereum.

To purchase an NFT, you need to have a crypto wallet with ETH. This wallet is also where you will store your NFT keys and collections for safeguarding. Finally, the most prominent relationship we are yet to see but know will happen soon is that NFTs and cryptocurrencies will be a considerable part of Web3 and the metaverse.

Read More:

What are NFTs and how do they work?

What are NFTs and how do they work?

By Ehis Ohiwerei - min read
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