Ultimate Guide to NFTs: How does it work

  • Published on : October 4, 2023

  • Read Time : 14 min

  • Views : 6.3k


Let’s discuss what is NFT, we bring you the ultimate guide to NFTs and how they work?

Meet Cleve, a music artist who creates music for companies like Zee Music and T-series.

He was proud of his masterpiece creations going viral.

Wanting to have some side-earning, Cleve decided to sell his digital music online.

However, that was a juggle because of the marking and ownership process involved.

Of course, the buyer always wants to be sure they possess the original pieces not the pirated digital copies.

Otherwise, who’s going to pay a big, hefty price for it?

Now here NFTs come into play.

Initially, Non-Fungible Tokens (NFTs) are cryptographic assets that are based on blockchain technology and can be used to record transactions. Although NFTs have been around since 2014 but gained the limelight in past few years.

Surprisingly, in 2017 the first NFT was launched named Crypto Punk. The same year, another project named Crypto Kitties went viral and generated a massive investment of 12.5 million USD.

An interesting fact about NFTs is that every NFT is unique and rare on its own. They can’t be destroyed or harmed, unlike physical artwork.

If you’re unaware of what is NFT and how it works technically, then keep reading to explore the revolutionary world of NFTs in detail through this blog.

What is NFT?

NFTs aka non-fungible tokens are unique digital assets that represent ownership or proof of authenticity of a specific item or piece of content.

NFTs are rare of their kind and can’t be replicated. They can neither be replaced nor interchanged. Existing on the blockchain, they are used to certify ownership and authenticity.

Here are some key points about NFTs:

  • Blockchain Technology:  NFTs use a special kind of tech called blockchain to make sure they’re real and that you really own them. Most NFTs are on a platform called Ethereum, but there are others like Binance Smart Chain and Flow.
  • Smart Contracts:  They follow special computer rules called “smart contracts” to keep track of who owns what. This helps prove where an NFT came from and who owns it.
  • Provenance and Authenticity:  NFTs also keep a clear and unchangeable record of where they’ve been and who’s owned them. This proves they’re real and shows who really owns them. This is really important, especially for digital art, so people know it’s genuine and valuable.
  • Marketplaces:  People buy, sell, and trade NFTs on special websites. Some popular ones are OpenSea, Rarible, and SuperRare.

Remember, owning an NFT doesn’t automatically mean you own the rights to the actual digital stuff. You own the special token, but not the content itself. That’s an important thing to remember!

Here are a few real-life cases of NFTs trading that became internet sensation over time:

Nyan Cat, a cute video meme became an internet sensation in 2011. This Nyan Cat NFT was sold for $600,000 and reclaimed by the owner.

Gucci Ghost, another NFT that sold out in just 12 seconds. To create this masterpiece, Artist Trevor Andrew combined the Gucci logo with his graffiti art.

Jehan Chu, who is a Hong Kong-based crypto advisor purchased a domain name NFT for $84,000 on Handshake blockchain. Buying this NFT allowed him to own the rights of the domain company.

Now most of the domains are overseen by central authorities, like the .com address is registered through the company Verisign.

Virtual hoodie by Overpriced, the streetwear brand Overpriced released a virtual hoodie NFT and sold it for $23,722. It was sold to an anonymous bidder who can scan the code & wear this NFT in virtual environments.

Most Expensive NFT Ever sold

NFT Timeline: It’s Beginning & History

NFTs are the real game changers, centrally structuring the digital world by taking blockchain to unparalleled glory in the budding era of Web3. The journey of NFT marketplace began when the first NFT named Quantum was created. In 2014, Quantum was minted by Kevin McCoy on Namecoin.

A year later in 2015, the first-ever blockchain-based game “Spells of Genesis” was launched.

Came out in 2016, Rare Pepe NFT was influenced by Spells of Genesis and became the first crypto art market.

However, these NFTs failed to grab much popularity. They remained unfamiliar to all those who were well-updated about cryptocurrencies and blockchain technology.

Finally, in the year 2017, NFT gained its mainstream momentum. The launch of the first NFT project CryptoPunk on the Ethereum blockchain by a two-person team. Matt Hall and John Watkinson created 10,000 punk-rock-looking pixelated avatars and issued an NFT for each character.

The same year, Crypto Kitties caught the attention immediately after its arrival. It generated an investment of an enormous $12.5 million.

Then the latter year, John Crain created SuperRare. A platform to sell digital art NFTs and earn from selling the work. SuperRare instead of taking 50% commission from art sellers like big art galleries, would take 15% only benefiting the artists. It also gave a 10% royalty for every successive sale of an artist’s digital art NFT.

Next year in 2019, a SuperRare artist sold an art NFT for $1,000. It’s the first time an art NFT reached a four-digit amount. Fellow artists named him “King Coldie”.

Subsequently, by 2020, another SuperRare artist Matt Kane broke the 6-digit record by selling an NFT of a digital artwork. The following year, the 7-digit bar was broken by Pak, and his artwork “The Pixel” was sold for $1.96 million.

Surprisingly, on 11 March 2021, Beeple’s Everyday- The First 5000 Days was sold for $69 million at Christie’s auction. It’s the highest price paid for an individual piece NFT.

Wait there’s more. The record for the most expensive NFT ever sold was by Pak of $91 million.

How Do NFTs Work?

Non-fungible tokens are unique digital tokens that are stored and managed on a blockchain. Specifically, they are held on the Ethereum blockchain, whilst other blockchains also support it.

NFTs are like physical accumulator pieces but in a digital form. Therefore, instead of getting actual artwork to hang on the wall, the NFT purchaser gets the ownership rights of its digital file.

But how do NFTs work technically? To answer this, read below:

Well, NFTs are created through a process known as minting. In this process, the information or data of the NFT is recorded or stored on a blockchain.

The information of NFT is created, then validated by a validator, and the block is closed.

This minting process often involves including smart contracts that allocate ownership and monitor the transfer of NFT.

Now as the tokens are minted, they’re assigned with a distinctive identifier that links it directly to one blockchain address.

Thus, each token has an owner and the address in which the minted token is stored (ownership information) is openly available.

Even if 1,000 NFTs of the same items are minted, every token has a unique identifier to distinguish from others.

Use Cases of NFTs in Various Industries

The use of NFTs ranges widely across various industries by providing a new flow, enhancing user satisfaction, and bringing transformation in ways such as:

  1. Art & Collectibles

The art industry is revolutionized by NFTs, artists get new ways to take ownership of their work and build new projects. It guarantees that original owners get fairly paid for their work.

  1. Music & Entertainment

Music is undoubtedly, one of the most popular use cases of NFTs. It’s a new way to monetize artists’ work and allow fans to support their favorite artists.

  1. Event Ticketing

NFTs can be used to create distinct and secure tickets for events and functions. Eventually, saving from the risk of fraud, scams, and ticket breakdown. Though NFT is new and not used widely in ticketing but holds great potential to gain popularity.

  1. Sports & Gaming

The NFT gaming market is growing at an exponential rate. Most of the games have their distinctive currencies to help users play, trade, or sell them. NFT enables users to become the owners of their virtual items.

  1. Finance and supply chain

By storing metadata of items in the supply chain, NFTs can improve their operations. NFTs in finance help in storing and transferring digital assets on a blockchain network. It also aids in keeping sensitive information secure and private.

  1. Fashion & Luxury

In the world of fashion, NFTs offer a novel way to tokenize luxury items. This introduces a new level of authenticity and exclusivity. Thus, allowing enthusiasts to own unique pieces and designers to protect their creations.

  1. Intellectual Property & Licensing

NFTs hold immense potential in the realm of intellectual property. They can be used to represent copyrights, patents, and licensing agreements. Thereby, ensuring creators receive proper recognition and compensation for their innovative work.

  1. Education & Certification

NFTs are transforming the education sector. Digital diplomas, certificates, and even courses and workshops can be securely stored and verified through NFT technology.

This not only proves that the achievements are real but, also makes it easy to show off one’s special skills.

  1. Charitable Donations

NFTs are making charitable giving more engaging and impactful. Through digital fundraising tokens, charities can attract supporters. They can offer unique incentives for their generosity.

This is all done while ensuring transparent and traceable transactions. Additionally, limited edition merchandise and collectibles for a cause can be utilized for fundraising efforts.

  1. Virtual Events & Experiences

The world of virtual events and experiences is being revolutionized by NFTs. From immersive virtual reality events to enriching online workshops, experiential NFTs provide attendees with exclusive access and memorable moments. All of this is secured through blockchain technology.

How to Buy NFTs?

If you want to start collecting your own NFT pieces, you’ll be required to start with these steps:

  1. Select & fund a crypto wallet

Before buying NFTs, firstly you need tools to transact on the NFT market. You will require a crypto wallet with cryptocurrency to start with any transactions and store your digital assets. There are some popular wallets that you can opt such as MetaMask and Coinbase Wallet.

  1. Choose a marketplace & create your account

Secondly, decide which marketplace or NFT exchange you want to use and create an account. Depending on that, complete the further processes like adding personal information.

  1. Link your wallet to exchange

The most important step is to connect your crypto wallet to your selected exchange or marketplace. This will allow you to make transactions and buy the NFTs you want.

  1. Choose & buy NFT

After establishing the connection of your crypto wallet with the exchange, you can select the NFT you want. Then click the buy now button, confirm the transaction, and pay the amount to own the specific NFT.

  1. Save your NFT

Once the purchasing of NFT is done, it will be stored in your wallet, and you can view or sell it anytime.

What’s Next for NFTs?

Currently, NFTs are still in the germinating phase. But that doesn’t mean there can’t be a future. Whatever the scenario, the future looks bright for NFTs. It will possess a market value of more than 230 billion USD by 2030.

NFTs are showing a new scope to the market besides art, for instance, the creation of an NFT marketplace application. There are several trends and potential applications that could shape the market in the forthcoming years.

NFTs are used as a tool to solve challenges in certain industries, support artists, charities, fundraising, and supply chains. There is a possible chance of developments of NFTs in trademark laws, copywriting, etc.

Now technologies like AI and metaverse are revolutionizing almost every industry. There’s a possibility of AI helping speed up the creation of images and asset management for NFTs.

The Bottom Line

Non-fungible tokens draw the attention of businesses these days towards tokenization and developers towards minting. There is a rising interest in the collector’s community for gaining digital objects. Undeniably, there’s a huge span of development and growth in NFT. The range of possibilities with blockchain is diverse and unlimited as well and a number of industries to adopt blockchain in the future.

While considering the surpassing demands- Codiant can help your business requirements by building NFT marketplace applications. Connect with our expert team to discuss your idea & begin the development process.

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