What is NFT and how it works ?

What is a Non-Fungible Token?

Non-fungible token “NFT” is a blockchain asset that has gained significant popularity in last one year.

In order to understand NFT, one need to understand what is Fungible and what is non-fungible.

As per the economic theory, a fungible asset is something which can be converted into another asset like money. With money, one can convert a $10 note for two $5 notes and it will have the equal value.

A non-fungible asset is something which cannot be converted into another asset. Non-fungibility is result of unique property in the asset due to which it cannot be interchanged with some other asset.

The underlying virtual asset under NFT could be a painting or craft or art etc. It is a virtual asset but there will not be existence of original tangible items. When it comes to trading NFTs can be bought and sold like any other piece of property, but they do not have tangibility on their own. The digital token is considered as certificate of ownership for virtual or physical asset.

How NFT Works

With the use of blockchain technology, NFTs can be tokenised and certificate of ownership is issued which can be traded openly in a decentralised way. The buyer of NFT owns a certificate which shows that they have copy of the original art.

NFTs are tokenized on the Ethereum blockchain. Ethereum is a cryptocurrency, however it is also a technology platform on which NFTs can be managed in a decentralised way. Other blockchain platform can also implement their own versions of NFTs.

An NFT code has a signature from its creator that authenticates the token on any server, browser or platform, making it verifiable in a decentralized way. Therefore, no one entity is responsible for hosting an NFT.

For example, if an NFT is created of a concert ticket, that ticket does not have to be verified through a ticket selling platform like Ticketmaster. It can be verified through any blockchain. For trading NFTs, there are mainly three platforms: OpenSea, Rarible and Nifty Gateway. On these platform, people can either place bid for NFTs (like ebay).

When buying an NFT, you will have the unerasable ownership of virtual asset and access to the actual asset. At the moment they’re mostly works of digital art or trading cards.

As NFT certificate is stored on the blockchain via smart contracts, each token cannot be destroyed, removed or replicated. This contrasts with buying things like image where purchasers don’t actually own what they’re buying, they just purchase the license to have the ownership.

Also, as the NFTs are on decentralised blockchain, the underlying assets can be authenticated without the need of third party verification.

Conclusion

It is just the beginning of the NFTs in the digital world. We expect to see more applications of NFTs on the goods and assets that we exchange in the real world be extrapolated to the blockchain.

Futurist, Member of APF

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Ajit Kumar Jain

Ajit Kumar Jain

Futurist, Member of APF

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