What are NFTs? A beginner's guide to digital ownership and NFT trends

Non-fungible tokens (NFTs), often celebrated for their ability to authenticate and tokenize digital content, have transcended mere financial instruments. They've become a canvas for artists, a marketplace for collectors, and a technological innovation with the potential to redefine how we perceive and engage with the digital realm.

Whether you're a creator seeking new avenues to showcase and monetize your work, a trader exploring the potential of digital assets, or simply curious about the transformative power of blockchain technology, this guide serves as a comprehensive exploration into the world of NFTs. Here, we'll explore the various types of NFTs, their popularity, and the opportunities and challenges NFTs present.

What are NFTs?

An NFT is a one-of-a-kind, uniquely identifiable digital asset that serves as proof of ownership and authenticity. Using blockchain technology, its origin and ownership history are transparent and accessible to the public. The immutable nature of blockchain makes sure that these details remain securely recorded for the duration of the blockchain's operation.

NFTs have gained widespread attention in the art world and beyond, with artists, musicians, and creators exploring new ways to monetize and distribute their work through tokenization.

Details of Bored Ape #7656 NFT from the Ethereum blockchain. Source: Etherscan

A tangible example of a non-fungible asset would be your car. You could have the same make and model as your neighbor, but the color might be different, and the registration plate is unique to your vehicle. You couldn't reasonably swap this car for another car.

This isn't the case with fungible assets such as fiat currency. For example, a $1 note is the same as any other $1 note, which can be used in exchange for goods and services.

In the early 2000s, the trading card game Pokémon became a huge hit. Created in Japan, the game was culturally significant to the generation growing up at the time. Because only a limited number of first-edition cards were printed, these are now highly valued, with rarer cards such as the one pictured below selling for $420,000.

Widely considered one of the holy grails of trading cards — a Pokémon trading card. The above is a 1999 Pokémon base set shadowless first edition holo Charizard #4. Source: PSA

NFTs, especially those portraying digital collectibles, exhibit parallels with traditional trading cards. The key distinction lies in the digital medium, where blockchain technology is employed to validate ownership of these digital items.

How do NFTs work?

The NFT creation process is termed "minting," and involves the issuance of a token onto a blockchain. During minting, users engage with code in a smart contract, generating a new token on the blockchain tied to the public address that initiated the transaction. This establishes verifiable ownership, as the blockchain logs a new block containing the token specifics and the associated address — essentially, possessing the private keys linked to the public address confirms NFT ownership.

Subsequently, NFTs can be bought and sold on dedicated marketplaces such as the OKX NFT Marketplace, OpenSea, or LooksRare. Ethereum-based platforms dominate NFT trading due to Ethereum's introduction of the ERC-721 token standard, a pioneering framework in the NFT ecosystem.

Ethereum dominates NFT trading volume. Source: The Block

What is the ERC-721 standard?

ERC stands for Ethereum Request for Comment. ERCs are rule sets defining the parameters a smart contract will follow. Fungible tokens on the Ethereum blockchain use the ERC-20 token standard. Examples include Tether (USDT), USD Coin USDC, Chainlink (LINK), and Shiba Inu (SHIB).

On the other hand, most non-fungible tokens use the ERC-721 standard, which provides different functionalities. While ERC-20 tokens are fungible, divisible, and typically used for interchangeable assets, ERC-721 tokens are non-fungible, indivisible, and designed for representing ownership of unique, distinct assets on the blockchain.

Types of NFTs

NFTs have taken many forms since the technology first arrived. Here are some examples:

Digital art

Beeple, an artist who's produced a piece of digital art every day since 2007, has monetized his work through NFTs. Source: Beeple

For years, digital artists have faced economic challenges, relying heavily on commission to sustain their creative endeavors. The ubiquity of online copying often complicates proper attribution of digital artwork. NFT art offers a solution for digital artists to monetize their creations, allowing them to sell NFTs to a dedicated audience they've cultivated. Through this process, artists gain visibility into the public addresses of their audience, while owners can demonstrate ownership of an authentic piece of art by the original artist, facilitated by blockchain technology.

Digital collectibles

Among the highest-ever recorded NFT sales, CryptoPunk #5822 fetched 8,000 ETH, equivalent to $23.7 million at the time of its sale on February 12, 2022. Source: CryptoPunks

In terms of volume, digital collectibles have gained the most traction, popularized by profile picture (PFP) collections. One example is CryptoPunks, which consists of 10,000 unique 24x24 pixel art characters. The images for each CryptoPunk were algorithmically generated, making them one of the earliest examples of generative art in the NFT space.

Digital collectibles share a cohesive project design and a single smart contract. That said, individual NFTs within a collection have distinct traits, contributing to variations in rarity. The success of CryptoPunks has spurred the launch of numerous NFT collectible projects featuring 10,000-piece collections. While many have fallen short of replicating the fervor around CryptoPunks, a few, such as the Bored Ape Yacht Club, have achieved comparable success.

Tweets

Source: OpenSea

Jack Dorsey, the co-founder and former CEO of Twitter (now X), famously sold his first tweet as an NFT collectible for $2.9 million. The tweet posted in March 2006 reads, “just setting up my twttr.” It was bought by Sina Estavi, the CEO of blockchain project Bridge Oracle, on March 22, 2021.

Game items

In-game assets and characters can be tokenized as NFTs. Players can buy, sell, and trade these assets within the game or on external marketplaces. An example of in-game NFTs can be found in the popular blockchain-based game Axie Infinity. In Axie Infinity, players can own, trade, and battle fantasy creatures known as Axies, each represented as an NFT on the Ethereum blockchain.

Virtual real estate

Similar to in-game items, certain blockchain-based games introduce the concept of virtual real estate as NFTs. Players can own parcels of virtual land within the game world, with ownership details recorded on the blockchain. This allows users to develop, monetize, and engage in various activities on their virtual properties. Decentraland is a notable example, where users can buy, sell, and explore virtual land represented as NFTs on the Ethereum blockchain.

Music

Musicians can tokenize their music or related assets, allowing fans to own a unique piece of the artist's work. This could include audio files, concert tickets, or special editions. An example is the release of Kings of Leon's album "When You See Yourself" as an NFT in March 2021.

Domain names

NFTs can also represent ownership of digital domain names on blockchain platforms. Users can buy and sell these domain names as unique digital assets. An example is the Ethereum Name Service (ENS), a decentralized domain name system built on the Ethereum blockchain. ENS allows users to register and manage domain names ending in ".eth," simplifying interactions with various Ethereum-based resources, such as wallet addresses, decentralized websites, and decentralized applications (DApps).

Liquidity provider tokens

Decentralized exchange Uniswap allows users to concentrate their liquidity position by minting an NFT within a specific price range. Users can provide liquidity to the exchange by pairing ERC-20 tokens and, in return, receive an NFT representing the position.

Why are NFTs popular?

NFTs have garnered extensive popularity and mainstream attention for various reasons.

• Scarcity and digital ownership: NFTs introduce scarcity to the digital realm by creating unique and limited digital assets. In a world where digital content is often replicable, NFTs offer a way to establish ownership and uniqueness in the digital space.

• New revenue streams: NFTs introduce novel ways for creators, including musicians, game developers, and content creators, to generate income. Creators can tokenize their creations, reaching a global audience and potentially gaining revenue through sales and royalties.

• Celebrity and brand participation: Celebrities like Snoop Dogg, Paris Hilton, and Justin Bieber, alongside established brands, have ventured into the NFT space, drawing considerable mainstream attention. Their endorsements and collaborations play a pivotal role in amplifying the overall popularity and cultural significance of NFTs.

• Community and identity: NFTs facilitate the creation of vibrant communities centered around shared interests, collections, and projects. Users find common ground, fostering a sense of belonging and shared identity within these digital communities. The ownership of unique digital assets, such as collectibles and virtual real estate, also contributes to the formation of a distinct digital identity within the broader NFT ecosystem.

From $63 million traded in January 2021, monthly NFT trading volume is regularly in the billions just one year later. Source: Footprint Analytics

Top NFT projects

CryptoPunks

CryptoPunks are one of the earliest collections of NFTs on the Ethereum blockchain. There are 10,000 unique 24x24 pixel art characters, each with distinct attributes, such as hairstyles, accessories, and facial expressions. Initially offered for free to the public, users could claim these digital characters, making them one of the first experiments in distributing NFTs.

Despite being freely distributed at the beginning, CryptoPunks gained significant value and recognition over time, becoming highly sought after in the NFT market. The average price for a CryptoPunk NFT on the secondary market ranged from $50 to $150 in 2017. However, in the span of five years, the average cost has soared to over $200,000 per NFT.

CryptoPunk #3100. Source: OKX NFT Marketplace

Transitioning from relative obscurity, CryptoPunks garnered attention through multiple high-value sales at the beginning of 2021, triggering a surge in NFT trading. As one of the earliest collections to achieve mainstream popularity, CryptoPunks played a major role in shaping the trajectory of the NFT market.

Bored Ape Yacht Club

The Bored Ape Yacht Club (BAYC) is a prominent NFT collection and community known for its hand-drawn art of anthropomorphic apes. Each Bored Ape NFT represents ownership of a specific ape character, and owning one grants access to the exclusive Bored Ape Yacht Club community. BAYC has gained significant popularity, with members engaging in social activities, events, and collaborations within the community. The project has contributed to the broader trend of picture-for-profile (PFP) NFTs and the rise of digital collectibles in the NFT space.

Bored Ape #528 displaying the rare golden fur trait. Source: BAYC

Yuga Labs, the entity behind BAYC, has rewarded NFT owners by distributing additional NFTs through airdrops and introducing a corresponding token called ApeCoin (APE) for them to claim.

Pudgy Penguins

Pudgy Penguins is a collection of 8,888 charming, chubby cartoon penguins. Each penguin possesses rarity traits such as shirts, hats, glasses, and backgrounds, contributing to their uniqueness. Holders enjoy exclusive perks, experiences, and IP licensing opportunities associated with the project.

Pudgy Penguin #4829. Source: OKX NFT Marketplace

Under Luca Netz's leadership, Pudgy Penguins saw significant developments, including licensing deals for physical toys at Walmart, a surge in popularity during the 2022 Christmas season, and a $9 million seed funding round led by 1kx.

Azuki

Another NFT collection to rise to similar levels to CryptoPunks and BAYC is Azuki. This anime-style collection was one of the quickest to hit a 10 ETH floor price, reaching the figure in just under a month.

The anime aesthetic of Azuki inspired a new wave of avatar collectibles. Source: Azuki #5728

Following the approach of BAYC, Azuki holders have received airdrops as a token of appreciation, and the team has teased fresh innovation that could further enhance the value of the collection.

Art Blocks

Generative art platform Art Blocks pioneered algorithmic art NFTs. Multiple generative artists have used the platform to launch their own art projects, with the buyer getting a unique, random piece of digital art based on the artist’s design.

Chromie Squiggles by Snowfro was the first NFT collection to be produced on the Art Blocks platform. Source: Chromie Squiggle #9

The cumulative volume of Art Blocks trading is over $1.6 billion, making it one of the most successful digital art platforms to date.

NFT criticisms

While NFTs have gained widespread popularity and adoption, they're not without their share of critics and concerns. Several key issues have been raised regarding the environmental impact, market volatility, and potential for fraud within the NFT space.

• Environmental concerns: One major criticism of NFTs revolves around their environmental impact, particularly when associated with blockchain networks that use Proof of Work (PoW) consensus mechanisms. The energy consumption of PoW blockchains, driven by the process of validating transactions through complex mathematical puzzles, has raised environmental sustainability concerns. Critics argue that the carbon footprint associated with some NFT transactions contributes to the overall carbon emissions associated with blockchain technology.

• Market volatility and speculation: The NFT market has been characterized by rapid price fluctuations and speculative behavior. Critics express concerns about the speculative nature of NFTs, drawing parallels to market bubbles. Instances of inflated prices, sudden drops in value, and market manipulation have led to skepticism regarding the long-term financial viability and stability of NFTs.

• Lack of regulation and fraud risks: The decentralized and often pseudonymous nature of NFT transactions has raised concerns about the potential for fraud and lack of regulatory oversight. Cases of unauthorized sales, intellectual property disputes, and misleading practices in the NFT space have prompted calls for increased regulation to protect both creators and buyers. The absence of standardized industry practices and clear legal frameworks contributes to uncertainties in the market.

• Accessibility and exclusivity: Some critics argue that NFTs perpetuate exclusivity and may contribute to a digital divide, as ownership of digital assets is often linked to financial means. The high transaction fees associated with minting, buying, and selling NFTs on certain platforms can limit accessibility for creators and collectors with smaller budgets, potentially excluding diverse voices from participating in the NFT ecosystem.

• Permanence and storage challenges: Despite the notion of immutability associated with blockchain technology, the long-term preservation of NFTs faces challenges. The dependence on external platforms and file hosting services to store associated content raises questions about the durability and accessibility of NFT-linked digital assets over time.

The final word

A close look at the NFT space reveals that this technology isn't merely about ownership or economics — it's a cultural phenomenon that's ignited conversations on authenticity, creativity, and the democratization of the digital landscape. The intersection of blockchain technology and artistic expression has given rise to new possibilities for creators and collectors alike. However, it's crucial to approach the NFT space with scrutiny. While the potential for innovation and collaboration is immense, so too are the challenges, ranging from environmental concerns to market volatility and fraud.

Whether you're an artist exploring new avenues for showcasing your work, a collector seeking unique digital assets, or a trader navigating the dynamic market, the world of NFTs invites you to be a part of a cultural shift. As the technology evolves and the community grows, there's a large opportunity to unlock the potential of NFTs and discover new use cases for interacting with the digital space.