Everything About Non-Fungible Tokens (NFTs)

Understanding the Core of NFTs

Digital Properties and Uniqueness

We live in a digital era where one of the most fundamental characteristics of digital content is its ease of replication. Anyone familiar with computers knows that selecting text and pressing 'Ctrl C + Ctrl V' creates an exact copy. This applies not only to text but to all digital formats—images, audio, and video files can be duplicated effortlessly.

This ease of replication leads to a critical property of digital content: abundance. When something can be copied infinitely, it becomes commonplace. As items become more abundant, they lose their uniqueness and struggle to maintain value. This presents a fundamental challenge in the digital realm—how can we establish scarcity and authenticity when everything can be copied perfectly?

The digital landscape has long grappled with this paradox. Traditional methods of establishing ownership and authenticity in the physical world simply don't translate to digital environments. A painting hanging in a museum has inherent uniqueness—it exists in one place, bears the physical marks of its creator, and has a documented provenance. Digital files, by contrast, are fundamentally identical whether they're the original or the millionth copy.

Why NFTs Are Gaining Attention

You may have encountered news stories about digital artworks selling for millions of dollars as NFTs. These pieces are often simple digital images that anyone can easily copy and paste. So what exactly are buyers purchasing?

The crucial point to understand is that an NFT doesn't represent the image itself. Rather, it's an electronic record stating something like: "This is the original work titled 'Everydays: The First 5000 Days' created by the artist Beeple." To use a real estate analogy, an NFT isn't the apartment itself—it's the deed proving ownership of a specific property at a specific address.

When someone trades an NFT, they're exchanging rights to the original work, not merely the digital file. This concept of "rights to the original" is fundamental. Even before NFTs existed, art collecting was essentially about purchasing original traceability—the documented chain of custody proving a work's authenticity.

Consider Leonardo da Vinci's Mona Lisa, which has countless reproductions and forgeries. The authentic painting at the Louvre Museum is priceless, yet if you placed it alongside skilled forgeries, most people couldn't distinguish the original. What makes the Louvre's painting valuable isn't just its visual appearance—it's the documented history showing it passed from da Vinci's hands to its first owner, then through various collectors over centuries. These records prove authenticity. Art acquisition, therefore, centers on original traceability rather than the visual content itself.

How NFTs Prove Original Traceability

The most widely used NFTs are typically created using the Ethereum ERC-721 standard. This format allows creators to mint media files—whether images, text, audio, or video—as NFTs stored on the blockchain. The blockchain records when the NFT was created, who created it, and every subsequent owner. This comprehensive record-keeping is how NFTs establish original traceability and why they've captured significant attention in the digital asset space.

The blockchain acts as an immutable ledger, creating a permanent record that cannot be altered retroactively. Each transaction is cryptographically secured and verified by the network, ensuring the authenticity of ownership claims. This technological foundation provides a level of certainty about provenance that was previously impossible in the digital realm.

How NFTs Operate and Storage Mechanisms

As explained earlier, an NFT isn't the artwork or media file itself—it's more like a deed or certificate of ownership recorded on the blockchain. But this raises an important question: where is the actual media file stored when you create an NFT?

While it's technically possible to store media files directly on the blockchain, this approach is often impractical. Blockchain storage incurs fees based on data size, meaning storing large image, audio, or video files would require prohibitively expensive transaction fees. To address this challenge, most NFT creators use alternative storage solutions.

The most common approach involves storing media files on IPFS (InterPlanetary File System), a peer-to-peer distributed storage network. The NFT record on the blockchain then contains a reference to the IPFS address where the actual file resides. This hybrid approach keeps blockchain costs manageable while still maintaining a permanent record of ownership.

It's important to understand that IPFS isn't a blockchain—it's simply a distributed file storage system designed to prevent data loss and hacking through its peer-to-peer architecture. Multiple nodes store copies of files, providing redundancy and reliability.

This storage architecture does introduce potential vulnerabilities. Consider a scenario where someone purchases an NFT of the Mona Lisa, but the IPFS system storing the actual image file is compromised. The blockchain record proving ownership would remain intact, but the owner might be unable to access or view the artwork they purchased. This highlights an important consideration in NFT ownership—the distinction between owning the rights to something and having access to the thing itself.

Characteristics of NFT Trading

Since the cryptocurrency bull market in recent years, NFT-specific marketplaces have proliferated. Major platforms include Blur, OpenSea, Rarible, CryptoSlam, AtomicAssets, and SuperRare. These platforms facilitate NFT trading through auction-style mechanisms similar to traditional art markets.

The trading process typically works as follows: NFT holders list their tokens on these marketplaces, and interested buyers submit price bids. The highest bidder, or someone willing to pay the seller's set asking price, acquires the NFT. This model mirrors traditional art auctions, where unique items are sold to the highest bidder.

These marketplaces provide essential infrastructure for the NFT ecosystem. They offer user-friendly interfaces for browsing collections, placing bids, and completing transactions. Many platforms also provide additional features like collection analytics, rarity rankings, and creator verification systems. The marketplace model has proven effective for high-value, unique items where each transaction is significant and worthy of individual attention.

However, this trading model has limitations. Like traditional art markets, NFT markets can suffer from low liquidity—there may be few buyers for any given NFT, and transactions can take considerable time to complete. This illiquidity can make NFTs challenging to value and difficult to sell quickly when needed.

Can NFTs Be Traded Like Regular Tokens? The ERC-404 Standard

Consider the nature of art trading in the physical world. Artworks are unique items with distinct value, making them difficult to buy and sell. Sellers are scarce, buyers are selective, and transactions are infrequent. In cryptocurrency terminology, art is an "illiquid asset."

NFTs share these characteristics with traditional art. However, recent innovations have explored ways to make NFT trading more fluid, similar to how fungible tokens (FTs) are traded. This is where the ERC-404 standard enters the picture.

Real-world parallels exist for this concept. Apartment trading provides a useful example. While buyers typically inspect properties before purchase, high-end apartments with standardized construction and quality can sometimes be bought based solely on brand reputation and location. Wealthy Chinese real estate investors, for instance, sometimes purchase Korean apartments sight unseen, relying on brand recognition and standardized quality.

The NFT market hasn't yet developed equivalent "premium brands" that guarantee consistent utility and value. However, as Web3 becomes more prevalent and the metaverse expands, such standardization may naturally emerge in the digital realm. Understanding NFT fundamentals positions investors to recognize opportunities as new variations and standards develop. This knowledge becomes particularly valuable as the technology evolves and new use cases emerge.

The ERC-404 standard represents an experimental approach to increasing NFT liquidity by combining characteristics of fungible and non-fungible tokens. While still in early stages, such innovations demonstrate the ongoing evolution of NFT technology and its potential to address current market limitations. As the digital asset ecosystem matures, we can expect further innovations that balance uniqueness with tradability.

FAQ

What is NFT (Non-Fungible Token)? How does it differ from Bitcoin and Ethereum?

NFT stands for Non-Fungible Token, representing unique digital assets on blockchain. Unlike Bitcoin and Ethereum, which are fungible and interchangeable, NFTs are indivisible and unique, representing ownership of specific items like digital art, collectibles, or virtual assets.

What are the practical applications of NFTs? Why are people willing to pay high prices for digital assets?

NFTs serve gaming, digital assets, identity verification, DeFi, and collectibles. People pay premium prices due to scarcity and uniqueness, comparable to physical art. Blockchain verification ensures authenticity and ownership, driving market demand and high valuations for rare digital items.

How to buy and sell NFTs? What wallets and platforms are needed?

Set up a crypto wallet like MetaMask, add ETH funds, connect to NFT platforms, browse and purchase NFTs via auction or fixed price. To sell, list your NFT with your desired price and wait for buyers to transact.

What risks exist when purchasing NFTs? How can I avoid scams and asset loss?

NFT purchases carry fraud risks including fake marketplaces, counterfeit assets, and phishing schemes. Protect yourself by verifying creator authenticity, using strong passwords with two-factor authentication, checking URLs carefully, comparing prices on official platforms, and never clicking suspicious links or sharing private keys.

What is the essential difference between NFTs and fungible tokens (FTs)?

NFTs are unique digital assets with individual IDs, while FTs are interchangeable units. Each NFT represents specific items like art or collectibles, whereas FTs represent abstract value or currency with no uniqueness.

How is the current state of the NFT market? What are the future development prospects?

The NFT market currently shows consolidation after 2021-2022 peaks, with selective project recovery. Future prospects remain positive, driven by improved utility, institutional adoption, and real-world asset integration. Market maturation and regulatory clarity will fuel sustainable long-term growth.

How to create and mint your own NFT? What technical requirements are needed?

Choose a blockchain like Ethereum or Binance Smart Chain, set up a wallet such as MetaMask, select a platform like OpenSea or BakerySwap, upload your digital artwork, and pay the minting fee. No advanced coding required.

What is the legal status and tax treatment of NFTs?

NFT legal status varies by jurisdiction. In the US, NFTs are treated as property; in China, they're called digital collections with restricted secondary trading. Tax treatment includes: 6% VAT on sales in China, 20% capital gains tax on individual sales, and 28% for collectible NFTs in the US. Enterprises may benefit from lower rates when NFTs are linked to physical goods.