What are NFTs and How They Work: A Comprehensive Guide



Navigating the world of NFTs can be daunting, but fear not! This guide breaks down the complex into digestible chunks, answering key questions and shedding light on the fascinating realm of Non-Fungible Tokens or NFTs. What are NFTs and How They Work?

What Exactly Does an NFT Do?

Unveiling the Purpose

NFTs, or Non-Fungible Tokens, function as digital representations of ownership for distinct items. These tokens enable creators to tokenize various assets, including artworks, collectibles, and even real estate. Safeguarded by the Ethereum blockchain, each NFT has a singular official owner at any given moment. The record of ownership is immutable, and the creation of a new NFT cannot be altered or duplicated through copy/pasting.

Are NFTs cryptocurrency?

NFTs and cryptocurrencies exhibit certain similarities, yet they also diverge significantly. The primary distinction lies in their fungibility, where cryptocurrencies are fungible, while NFTs, as the name implies, are non-fungible. In simpler terms, one Bitcoin is interchangeable with another Bitcoin, but the same cannot be said for NFTs. Each NFT asset possesses uniqueness, and its value is shaped by market dynamics.

What is an example of an NFT?

While NFTs originated in the realm of digital art, their scope has expanded considerably. Nowadays, you can purchase a diverse array of NFTs, ranging from music, sports highlights, video games, and fashion to trading cards, event tickets, memes, domain names, and beyond. Notably, even Twitter founder and CEO Jack Dorsey’s inaugural tweet was sold as an NFT in 2021. However, subsequent media reports indicated that this might not have been a lucrative investment for the buyer.

Is an NFT a Bitcoin?

Decoding the Relationship

While both NFTs and Bitcoin fall under the umbrella of cryptocurrencies, they serve distinct purposes. Let’s demystify the connection.

Bitcoin vs. NFTs: A Comparative Analysis

On one hand, Bitcoin stands as the pioneer and quintessential cryptocurrency, embodying the principles of decentralization, security, and digital scarcity. On the other hand, NFTs, or Non-Fungible Tokens, represent a novel and evolving facet of the blockchain space, emphasizing the uniqueness and individuality of digital assets.

Bitcoin, conceived as a decentralized digital currency, operates on a blockchain where each unit, or Bitcoin, is interchangeable with another, making it fungible. Its primary purpose is to facilitate peer-to-peer transactions, offering an alternative to traditional fiat currencies with its decentralized and borderless nature.

In contrast, NFTs introduce a paradigm shift by focusing on the non-fungible aspect. Each NFT represents a unique digital asset, whether it be digital art, music, or even virtual real estate. The distinctiveness of NFTs is safeguarded by smart contracts on blockchain platforms like Ethereum, ensuring transparent ownership and scarcity.

The Blockchain Connection

Explore the shared foundation of blockchain technology and how it intertwines with both Bitcoin and NFTs.

How Does an NFT Make Money?

Profitable Possibilities

NFTs aren’t just digital novelties; they can be lucrative. Let’s explore the various avenues through which NFTs generate income.

Art, Music, and NFTs

Artists and musicians find in NFTs a groundbreaking avenue to transform their creative endeavours into viable revenue streams. The emergence of Non-Fungible Tokens (NFTs) has revolutionized the traditional landscape of art and music monetization, providing a direct and decentralized means for creators to showcase, sell, and retain control over their digital works.

Through NFTs, artists can tokenize their digital creations, be it paintings, illustrations, or digital sculptures, imbuing them with uniqueness and provable ownership on blockchain. This process not only safeguards the authenticity of the art but also enables artists to monetize their work by selling these tokenized assets to collectors and enthusiasts.

Musicians, too, have harnessed the power of NFTs to redefine how they engage with their audience. NFTs allow musicians to tokenize their music, creating limited edition and exclusive digital assets that can be owned and traded by fans. This introduces a novel revenue stream, as fans are not just purchasing music; they are acquiring a unique piece of the artist’s catalogue with the potential for future value appreciation.

The decentralized nature of blockchain ensures that artists and musicians can directly connect with their audience without intermediaries. Smart contracts embedded in NFTs automate royalty payments, guaranteeing that creators receive a fair share each time their work is resold in the secondary market. This democratization of revenue distribution empowers artists, fostering a more equitable ecosystem for the creative industry.

NFT Trading and Investment

NFT trading involves the exchange of these tokenized assets in a vibrant and decentralized marketplace. The process entails individuals acquiring and selling NFTs, ranging from digital art pieces, collectibles, virtual real estate, to various other forms of unique digital content. The marketplace operates on blockchain platforms like Ethereum, ensuring transparency, security, and irrefutable ownership through smart contracts.

Investing in NFTs, on the other hand, signifies a strategic approach to capitalize on the potential appreciation of these digital assets over time. NFTs are not only collectibles but also commodities with fluctuating market values influenced by factors such as the rarity of the asset, the reputation of the creator, and current market trends. Investors may choose to buy NFTs as a form of speculative investment or to support creators whose work they believe will gain value.

The allure of NFT trading and investment lies in the decentralized and democratic nature of the market. Anyone with access to blockchain technology can participate, eliminating traditional barriers to entry. Moreover, the secondary market for NFTs enables individuals to buy and sell these assets after their initial creation, fostering a dynamic and liquid environment for trading.

Smart contracts embedded in NFTs facilitate automated royalty payments to creators each time an NFT is resold, creating a sustainable ecosystem where artists and investors can mutually benefit. This convergence of art, technology, and finance has given rise to a vibrant NFT community, where individuals actively engage in exploring, trading, and investing in digital assets, shaping the future of decentralized markets.

Why Would Anyone Buy an NFT?

Motivations Behind Ownership

The allure of NFTs extends beyond mere possession. Explore the motivations driving individuals to invest in these digital assets.

Collectibles and Rarity

The fundamental motivation behind individuals purchasing NFTs stems from the intrinsic human inclination to collect and possess items that are one-of-a-kind. NFTs, inherently exclusive and rare, encapsulate this essence, as each token signifies a unique piece of digital content. Whether it be digital art, virtual trading cards, or other collectibles in tokenized form, people are captivated by the appeal of owning something both scarce and exceptional.

Supporting Creators and Artists

Acquiring NFTs transforms into a means of offering direct support to creators and artists. In contrast to conventional art markets, where intermediaries frequently claim a substantial portion, NFT transactions empower creators to garner a more significant share of the sale. This financial empowerment establishes a direct and meaningful connection between creators and their audience, reshaping the dynamics of patronage in the digital age.

Participation in a Community-Driven Ecosystem:

The success of NFTs is rooted in a decentralized and community-driven environment. Buyers play pivotal roles within communities focused on specific artists, projects, or themes. The communal aspect of owning NFTs enriches the overall experience, cultivating a feeling of belonging and mutual appreciation among participants.

What Is the Difference Between NFT and Cryptocurrency?

Distinguishing Features

While NFTs share a common origin with cryptocurrencies, they embody distinct characteristics. Let’s unravel the dissimilarities.

Fungibility vs. Non-Fungibility

At its core, the primary difference lies in the concept of fungibility. Cryptocurrencies, such as Bitcoin and Ethereum, are fungible, meaning each unit is interchangeable with another of the same value. In simpler terms, one Bitcoin holds the same value as another Bitcoin. This fungibility facilitates seamless transactions, making cryptocurrencies a medium of exchange and a store of value.

On the contrary, NFTs are inherently non-fungible, as implied by their name. Each NFT represents a unique and distinct digital asset, whether it’s a piece of art, a collectible, or even virtual real estate. This non-fungibility imparts individuality to each NFT, with no two tokens being identical. The uniqueness is secured by smart contracts on blockchain platforms like Ethereum, ensuring verifiable ownership and scarcity.

Use Cases and Applications

The applications of NFTs and cryptocurrencies further underscore their differences. Cryptocurrencies primarily serve as decentralized digital currencies, providing an alternative to traditional fiat currencies. They facilitate peer-to-peer transactions, acting as a medium of exchange in a trustless and borderless manner.

In contrast, NFTs extend beyond the realm of currency, functioning as digital certificates of ownership for various forms of digital content. Artists tokenize their creations, musicians tokenize their music, and even tweets or virtual real estate can be represented as NFTs. The applications are diverse, highlighting the adaptability of NFTs to represent ownership in the digital space.


Q1: Can I sell an NFT if I don’t own the copyright? A: Yes, but be cautious. While you can sell the token, the copyright remains with the creator unless explicitly transferred.

Q2: Are NFTs only for digital art? A: No, NFTs cover a broad spectrum, including music, virtual real estate, and even tweets.

Q3: Can I buy an NFT with traditional currency? A: Yes, many platforms accept traditional currency for NFT purchases, simplifying the acquisition process.

Q4: Are NFTs environmentally friendly? A: The environmental impact varies. Some blockchains, like Ethereum, are working on eco-friendly solutions.

Q5: Do NFTs have real-world value? A: Yes, based on their scarcity, uniqueness, and demand, NFTs can possess significant real-world value.

Q6: Are NFT transactions reversible? A: No, NFT transactions are typically irreversible due to the nature of blockchain technology.


Embark on your NFT journey armed with knowledge. From their functionality to the motivations behind ownership, this guide equips you to navigate the exciting world of NFTs.