What are NFTs and How do they work?

Humans are extremely possessive beings. The truth of this statement can easily be observed in relationships between kids and their toys and with adults and their “big” toys, pets, and a host of all other things of value, including social relationships. The degree of importance of the subject matter can almost be gauged by the number of persons that have lost their lives as a result of possession disputes and conflict.

Considering the above and how we easily throw the word ‘mine’ around, it’s utterly surprising how we’ve advanced so far and so long into the digital space without a means to provably declare ownership without relying on a central digital authority or institution who cunningly provide us with passwords to access “what’s ours”, while still being fully aware of these access means and reserve the rights take down what we claim to be ours on a whim.

In truth, we were banking our digital belongings with these authorities. Given all of the power they had over our digital assets, they actually belonged to these authorities, and we had to trust that they give us access and not erratically and tyrannically take it down.

The realization of the above leads to discovering the importance of NFTs, which are an offshoot of the technology that offers its users a transparent distributed record/storage devoid of any tyranny but governed by network consensus. Blockchain technology causes a shift from the traditional centralization theme of the internet to a contemporary decentralization theme with ownership of digital assets and resources. Simply put, the technology in its different applications makes it possible to immutably record transactions of all sorts, including that of ownership and its transfer. It has even been applied in storing resources in a decentralized manner so that no one but the owner can have access to it or take it down, provably.

What are NFTs?

NFTs are getting arguably just as famous as Elon in the entire tech ecosystem, especially its digital or information technology arm. It is only expected that this is so considering that NFT trading volume for the third quarter of the year on the Ethereum blockchain alone has almost climbed $6B, and it’s still on the rise.

Before you get misled by the Elon comparison above into thinking NFTs are a nick for another billionaire serial tech entrepreneur, NFTs are actually tokens on the blockchain. In fact, NFT is an acronym for Non-Fungible Token (add an ‘s’ at your detriment, ha!). The descriptive adjective in its name is pertinent because its true power and significance lie therein — in its non-fungibility — as blockchains also have fungible tokens, which are mostly referred to as just tokens or coins if they are chain native.

Fungibility is the keyword that needs to be fundamentally understood to essentially grasp what NFTs are. Money is fungible, we were told in economics class. This characteristic describes the interchangeability or indistinguishability of its units of the same amount regardless of what form they come, coin or notes. This property lets you borrow a $100 bill from a friend yet pay back $10 bills and some coins, all of which sum up to the same $100 borrowed. In fact, it is the fungibility property of money that lets you repay the friend with a different $100 bill rather than the one borrowed even when the bill you’re paying back with looks crinkled, rougher, and scarier than the one collected.

Non-fungibility then is a property that refers to the uniqueness and distinctiveness of the units of a commodity, good or token, in this case, that is described as such. Non-Fungible Tokens, now popularly referred to NFTs for short, were birthed first on the Ethereum blockchain. They needed to be named NFTs because the Ethereum blockchain has another protocol — The ERC20 protocol — with which it creates tokens that are fungible like its native token or currency — Ether but with a different tokenomics.

NFTs on Ethereum, on the other hand, are minted ( a fancy crypto word for created ) by the ERC721 protocol, and every unit of the token minted are cryptographically unique. They can also be minted on Ethereum with the ERC1155 protocol ( which allows you to mint fungible tokens as well ) and on other blockchains with other protocols, e.g NEP-5 on Neo blockchain, VIP-181 on Vechain, CIS-1 on Concordium, etcetera. Some very popular examples of NFTs are Cryptopunks, EtherRocks, Bored Apes Yacht Club, Beeple’s Everydays art, Cryptokitties, NBA Top Shots e.t.c.

How do NFTs work?

The mainstream exposure alone attained by NFTs makes it irresistibly compelling to dive into fundamentally understanding its inner workings, let alone its immense utility. NFTs stretch the transformation and innovation tentacles of blockchain technology beyond money. It brings provable scarcity, provable ownership, censorship resistance, and self-custody to every digital item and, gradually, physical Items — a house was auctioned as an NFT on Opensea.

Taking advantage of the distinctive nature of NFTs, its unalterable unique cryptographic nature, which includes a timestamp, serves as a certificate of authenticity, originality, and ownership to whoever possesses the keys of the addresses which hold the NFT. Any digital item can be an NFT, such as a text document, image, video, gif, audio, e-tickets, or even a listed asset combination. The list goes as far as your thoughts can travel — by far, I mean very far, even code, tweets, and grandmaster moves of an entire chess game have been sold as NFTs, just to give you a clue of how notorious the NFT craze is.

Tokenization of digital items best describes how NFTs serve their purpose — representing digital and physical resources with blockchain-based tokens, in this case, a non-fungible one. These tokens are minted in any amount desired based on how rare or scarce the NFT is needed to be. i.e., the lesser the number of NFTs holding a particular item, the rarer the digital item’s ownership will be. You may rightly wonder if NFTs represent a digital file on the blockchain, where the original file is held, and how reliable and securely is it stored? Have we just disguised the traditional process of giving custody of our digital belongings to some external central authority with NFTs? No.

Minting, whose name sounds as tough as quarrying or blacksmithing, but is as actually as simple as uploading a picture on Facebook (some user-unfriendly platforms disagree), is a process that can be fundamentally broken down into three sub-processes; storing the file and mapping or tying the content identifier to the unique token(s) created for its ownership, and linking it to an Ethereum address — the transaction initiator or sender. Regarding storage, files are usually not stored on the blockchain due to cost and size limitations. However, the distributed ledger technology, aka blockchain technology, has been explicitly applied to file storage — creating a decentralized tamper-proof storage system so that files can be stored off-chain, but without any compromise to the blockchain theme of secure decentralized immutability. Such storage systems are called InterPlanetary File System or IPFS for short. The files are split and stored on different nodes on the incentivized peer-to-peer hosted network. Some providers of this kind of file system are Filecoin, Storj etcetera.

Hence, only the content addressing feature and proof of ownership are stored on-chain. This file system extends the limit of what NFTs can be without bloating or bugging down the blockchain. Suppose all of these files resided on on-chain, considering the exponential rate at which NFTs are minted now. In that case, Ethereum may have come to a full-blown halt just like it did with Cryptokitties or punished us all with fees all above 1ETH for whatever size of transaction we made. Thank goodness that isn’t the case!

NFTs always remember their creators. The address which went through all of the stress, figuratively, in minting them is always in the tokens’ history. As a matter of fact, the creator address can be utilized to receive royalties for every resale of that NFT in the secondary market giving more power to creators over their digital creations.

Speaking of NFT sales, several marketplaces exist for trading NFTs both primarily and secondarily. A number of them have added a minting function to further simplify the user experience. Some of the most popular NFT marketplaces are Opensea, SuperRare, Rarible, KnownOrigin, Foundation, Nifty Gateway etcetera. While some are open to anyone, like Opensea, obviously, others are heavily curated like the Nifty Gateway by Gemini.

Some of the most Expensive NFTs ever sold includes;

  • Everydays: The First 5000 Days by Beeple. The compilation of Beeple Winkleman’s art Journey was collected for over $69M.
  • Stay Free by Snowden. A portrait image of the NSA whistleblower, Edward Snowden sold for over $5M.
  • Cryptopunk #7523 sold for approximately $12M.
  • Cryptopunk #7804 sold for $7.5M
  • EtherRock #55 was sold for $3.6M.
  • EtherRock #27 was bought for $2.8M.
  • Bored Ape #8817 was acquired by an unknown buyer for $3.4M
  • Genesis Tweet on Twitter was sold for $2.9M by the CEO Jack Dorsey.

Source: Cryptoart.io & Wikipedia

It is mind-boggling to know that NFTs of the same type as some of the above, namely, Cryptopunks and EtherRock, were airdropped for free in their early years, and many missed it. See how much they are worth now, wow.


The point of NFTs is authenticity and ownership, and the immutable and transparent nature of the blockchain helps us conveniently track that. We can tell how important this is today by the billions of dollars that have exchanged hands because of these unique tokens. Indeed, it is tempting to think that NFTs are dumb because of the ease with which we can get our hands on an NFTnized image, “I can just grab it from Google”, as it’s popularly teased. While that is true, that doesn’t mean it’s yours and NFTs are there now to serve as a piece of evidence against you in court that you just might be a digital criminal.

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