How do NFTs work? Explained!

How do NFTs work? Explained!

To give you a basic understanding of NFTs and how they work I would recommend reading this article first. If you already know what NFTs are and how they are being used but are still curious about how they actually work on a deeper level, then it’s time to get deeper down the rabbit hole. The first NFT ever created gives us also a good understanding of what the concept of Non-Fungible Tokens is based on but let’s continue with how they actually work.

So how do NFTs work?

First, let’s clarify NFTs typical characteristics. They are

  • Unique: one of the biggest factors that are driving the value and price is its uniqueness. It has a unique identifier and can easily be verified of its authenticity and there can only be one original. It can not be duplicated.
  • Non-Fungible / Not Interchangeable: For example, a $100 bill can be replaced by another $100 bill and you can still buy something worth $100. You can even replace it with ten $10 bills and it’s still the same. Because every NFT is unique and is not interchangeable this is not the case with NFTs. Common examples for non-fungible items can be the original Mona Lisa painting or concert tickets. The same rule applies for NFTs, they can not be substituted, duplicated or replaced.
  • Verifiable: Every NFT has its historical information stored on the blockchain and all ownership changes are being recorded on it. That allows everyone to trace back the original creator to the actual owner at that moment.
  • Indivisible: NFTs can not be divided into smaller units, unlike bitcoin or ethereum. They exist only as a whole item and therefore can only be bought, sold or owned as a whole.

Now that we have established the characteristics of NFTs let’s continue with how they work. Most NFTs are based on the Ethereum Blockchain but are not exclusively only on Ethereum. If you know about cryptocurrencies and blockchain you know that information is stored on blocks and can be viewed by everyone.

In the case of NFTs the historical information like a unique ID that verifies its authenticity, the creator, all historical owners, and even more data can be stored on it. Having the possibility to store all that information on a decentralized digital ledger is basically the backbone of all NFTs. This data can not be altered, destroyed, or replicated. 

This is exactly why one of its best use cases is digital art. You can see who is the owner, if it’s the original and who bought and owned it. With the so-called “creator share” it’s even possible to automatically set up a percentage of royalties to the creator. If the artwork is being sold again the artist has the possibility to receive his share in form of royalties.

A great example of royalties in NFTs is EulerBeats. Named after the mathematician Leonhard Euler. EulerBeats are basically audio tracks paired with artworks. In the first week of its launch, it has generated over $1 Million in royalties for its creators. Something that would be nearly impossible to implement outside of the digital world. Not even to mention the automated process of it.

One of the collectors of EulerBeats is the billionaire and owner of the Dallas Mavericks (NBA-Team) Mark Cuban. But being just a collector of NFTs is not enough. He plans to integrate NFTs into his own business. He states that NBA fans with season tickets could profit from the NFT royalty feature by reselling their tickets for a high-demand game when NFTs are integrated with the business.

“That is the opportunity I look for: How do you use new technology to disrupt industries? Because nobody sees it coming.”

For someone who already made his fortune in the tech industry, he is still involved in a lot of new tech projects.

And this is just one of the reasons why NFTs completely disrupt the entire industry and give artists and creators more freedom and possibilities than ever before. It can all be programmed in the NFT. Maybe by now, it makes more sense why some of the NFTs are being sold for millions.

But not only digital art is an area where it’s finding its way to shape an entire industry. Sports & Entertainment, games, or collectibles are only the beginning of this shift in possibilities that are at the same time creating completely new industries. Having online marketplaces for buyers and sellers of digital items is just another area that started to become popular and pushed NFTs to new heights of popularity. Just like at the beginning of bitcoin, blockchain, and cryptocurrencies when many questioned the future of it – time proved to the doubters they were here to stay. And with NFTs, it looks like they are also here to stay.