An NFT is a piece of digital content, such as an image, song, video, or object from a video game. They are traded digitally, usually for bitcoin, and are built on the same underlying technology.

Although NFTs have been present since 2014, they are currently seeing a surge in popularity as a means of transacting in digital artwork. The value of the NFT market reached an astounding $41 billion in 2021, which is close to the sum total of the value of the worldwide fine art market.

Similarly to how NFTs often are one-of-a-kind or part of a small production run with its own unique identifier, NFTs are highly rare. “Essentially, NFTs generate digital scarcity,” explains Arry Yu, managing director of Yellow Umbrella Ventures and chair of the Cascadia Blockchain Council of the Washington Technology Industry Association.

In sharp contrast, digital works are typically inexhaustible. Assuming there is demand for an asset, its value should theoretically increase if the supply is suddenly cut off.

Many NFTs, at least in the beginning, were merely securitized versions of digital works that already existed elsewhere, such as famous highlights from NBA games or Instagram photos.

Perhaps the most well-known NFT of 2021 was “EVERYDAYS: The First 5000 Days,” a composite of 5,000 drawings by the famed digital artist Mike Winklemann, better known as “Beeple,” which sold at Christie’s for a record-breaking $69.3 million.

The photographs are available for free internet viewing by anyone, both individually and as a whole collage. Why, then, do people shell out millions of dollars for something they could get for free online?

For the simple reason that with an NFT, the purchaser gets the chance to keep the original. Along with that, it has in-built authentication that can be used as a kind of ownership verification. Those “digital bragging rights” are almost as valuable to collectors as the item itself.

Is There a Difference Between an NFT and a Cryptocurrency?

The acronym NFT refers to “non-fungible token.” It shares certain similarities with cryptocurrencies in terms of construction, such as Bitcoin and Ethereum, but that’s about where the similarities end.

Fiat currency and digital currencies are both fungible in the sense that they can be swapped for one another. Coins of either type are always worth the same amount; dollars are always worth dollars, and bitcoins are always worth bitcoins. Since crypto can be freely exchanged for other crypto, it is a reliable method of making blockchain-based financial transactions.

In contrast to conventional financial instruments, NFTs are unique. The unique digital signatures of each NFT renders their exchange or parity impossible (hence, non-fungible). If we use the NBA Top Shot as an example, just because two videos are both NFTs does not mean they are equivalent. (For that matter, not every NBA Top Shot clip is the same as every other NBA Top Shot clip.)