NFTs: What are they and how do they relate to blockchain?

By James Robert- Jul 19, 2023 32

The term NFT is an abbreviation of "Non-Fungible Token". If something is non-fungible, it means that it cannot be replaced by another identical object or that it is not mutually interchangeable. It's actually a legal term that represents a state of the property, and that's what an NFT is: a digital asset stored in a digital file.


Digital assets exist on a blockchain that supports their creation, trade, and storage. They are always connected to a user (via a single blockchain address like a digital wallet). This means you can always see who owns it and who created an NFT or Non-Fungible Token.


In essence, non-fungible tokens (NFTs) are an online-only tradable asset, effectively making digital artworks tradable for physical cash in the same way that physical artworks are traded. They represent digital or non-digital property and cannot be copied, forged, or stolen. The NFT marketplace is credited with starting the wave of digital artwork within the metaverse as well as holding real potential utility in commerce, finance, marketing, and business.


If the question "What are NFTs" prompted you to visit this article, then you have come to the right place. After reading this guide, you will have answers to every question you have regarding NFTs. Let's start!


What is the purpose of NFTs?

The purpose of a non-fungible token (NFT) is to represent an asset, online or offline. They are cryptographic tokens stored on the blockchain and cannot be copied, forged, or replaced. 

One of the main objectives of such technology is to limit fraud and counterfeiting. Each digital asset, or NFT, has its own unique hash. A hash is a string of numbers and letters that gives a resource its unique identity. This means that you cannot buy a fake trading card or fake artwork; Each resource is verified and authentic. 

Some popular secondary objectives in the cryptocurrency industry are: 


      Impersonation and verification of identity

      Real estate transactions

      Supply chain management

      NFT games 


How do NFTs work?

Non-fungible tokens (NFTs) are representations of digital or non-digital assets on the blockchain.



Most NFTs are located on the Ethereum blockchain - a "public ledger" that tracks transactions.



Each NFT is a single token (or digital file) that stores specific information. It can be represented as an image, video, audio, etc.



The value of an NFT is determined by market demand and ultimately how much money one is willing to pay to purchase that NFT. Like physical art or other physical goods, this demand waxes and wanes according to cultural trends.


      Security and property

NFTs' unique data makes it easy to verify and verify their ownership and transfer tokens between owners.


Example: NFT on the Ethereum blockchain network

NFTs are represented on the Ethereum network as ERC-721 tokens. These tokens are unique in both content and value. An NFT gives you the ability to assign or claim ownership of an asset at an address on the Ethereum network. They are fully traceable to the Ethereum ledger which stores all transaction history


A key part of how NFTs work is their portability. This is done using smart contracts, which is why only some networks, such as Ethereum, can support NFT.


The initial phase of creation, or minting, activates the code in the smart contract and assigns ownership of the NFT asset. Once this happens, it must be verified through the same process as any transaction executed on the Ethereum network. Once verified a block is created, the transaction is confirmed, and then marked on the Ethereum distributed ledger.


Because each ERC-721 token, or NFT, is linked to an Ethereum address, it can never be copied or mistaken for an asset. It's extremely easy to see who created it and who owns it, creating a strong layer of security, a fundamental part of an NFT asset.


Why are NFTs important?

NFT and the NFT market are important because it is a new technology with many potential uses. They offer a way to provide digital proof of ownership and can include things like rights to physical assets or access to exclusive content. 

NFTs attract attention for two main reasons. 

      First: Even if this reason is superficial and already widely understood: people are making a lot of money mining, trading, and selling non-fungible tokens.

      Second: NFTs provide a form of online verification (derived from the blockchain) without the need for a centralized authority. As the name suggests, these resources are not expendable and hence each one is completely unique.


Why do NFTs attract controversy?

There are three main reasons why NFTs remain a controversial asset class. Currently, they use a lot of resources, possibly discourage "real" artists, and are often associated with scams. We outline each factor in more detail below.


Resource consumption

The resources required for NFT transactions are really huge and this is a common problem shared with cryptocurrencies. The problem is that blockchain networks require large amounts of computing power to support them. All transactions executed across a network with proof-of-work consensus mechanisms use large amounts of computing power to create blocks, verify transactions, and store data.


Disincentivizing digital artists and fraud

This second point is debatable, but many believe that the world of NFTs, or forms of non-fungible tokens, is having a negative impact on artists. First, many artists' work is actually used by celebrities and influencers to create an NFT, or non-fungible token, from which the artist himself sees no financial benefit. Similarly, sports figures or musicians can use their clips without any control over the content. Some suggest it's a form of fraud, but that's hard to determine without a case-by-case approach. But, one could argue that this could start a shift from traditional art to digital art, possibly to the detriment of the traditional artist community.


How to make money with NFTs?

What are NFT royalties?

NFT Royalties are a new way to earn and earn money, even after you no longer own a specific asset. This is due to the way blockchain technology works. Using smart contract technology, NFTs can contain code that automatically sends a percentage of the proceeds to the original owner or creator after the NFT is sold. This means that it is possible to make money even if you no longer have NFTs. 

For example, when a manufacturer designs an NFT collection they can mandate that 10% of all secondary sales after minting go to the developer. This may also apply to those who mint an NFT. For example, 10% of all secondary sales of an NFT may go to the person who first minted it.


Why are NFTs bad for the environment?

Currently, NFTs are very expensive in terms of resources and environmental impact. In particular, blockchain technology consumes a large number of resources. An NFT called Space Cat was recently reported to have the same carbon footprint as an EU resident for two months. It is truly an incredible statistic that reveals the energy consumption of these resources.


Why do NFTs consume so much energy?

Ethereum, the platform on which most NFTs are created, currently uses a proof-of-work consensus mechanism. It requires miners to solve complex mathematical problems with large levels of computing power to verify transactions on the network in exchange for rewards. Its main features are: 

      Very high energy consumption

      Required for specific hardware components

      Continuous and indefinite mining troubleshooting and block verification 

Thus, NFTs are not directly harmful to the environment, but this effect is caused by the network used. Other networks like Solana offer viable alternatives, but Ethereum is currently the dominant force in the market and will be for the foreseeable future.