What are NFTs and how do they work? A simple guide to non-fungible tokens

A complete overview of blockchain-enabled non-fungible tokens. What are NFTs, their meaning and applications in the crypto market?

By Rarespot Staff
6 mins read


The overall blockchain and crypto industry has significantly matured in the last few years. Innovative blockchain products have been making headlines owing to the wide implications of their use-cases in several industries. One such innovation that has been gathering significant attention is the concept of Non-Fungible tokens or NFTs.

NFTs are the latest blockchain phenomenon to take the crypto-verse by storm. While the concept of NFTs has existed for a while now, it started driving buzz after the record-breaking $69 million digital NFT art sale at Christie’s auction. Since then, several NFTs in different forms have been sold and they continue attracting more attention. In this article, we decode what are NFTs, their unique properties, and more importantly ponder upon why is everyone talking about them?

What are NFTs?

NFTs refer to a collectible and identifiable digital asset representing a broad set of physical and nonphysical things. In essence, NFTs prove the ownership of intellectual properties such as images, pictures, audio, GIF, video, or a tweet, in the same manner, cryptocurrencies like Bitcoin are owned.

Unlike standard digital currencies, NFTs are not mutually interchangeable. The reason being that NFTs are unique, and none is identical to the other, hence non-fungible. On the other hand, regular cryptocurrencies are similar, and they are all priced the same. As such, they are easily exchanged with each other; hence they are fungible.

NFTs work on blockchain technology. They are created and recorded on a blockchain. A blockchain is a peer-to-peer distributed ledger system or database where data or transactions are stored in blocks. All these transactions are immutable meaning nobody can undo or reverse the transactions.

NFTs were first built from ERC-721 tokens on the Ethereum blockchain network. When a transaction occurs, it is permanently recorded in the blockchain and gives ownership to the purchaser. Similar to the blockchain, the transaction on NFTs cannot be interchanged. NFTs use smart contracts for the settlement of agreements between the two parties and helps in the transfer of ownership. Hence, NFTs are neither identical nor can be interchanged due to their foundation set on blockchain networks.

Apart from Ethereum, other blockchain networks such as Neo, Tron, and EOS have launched their own token standards to motivate developers to create and sell NFTs on their networks.

How do NFTs work?

At a time when everything is getting digitized, NFTs are produced from virtual materials that exemplify both physical and nonphysical items such as pictures, sports highlights, sportscard, music, artwork, GIFs, in-game avatars, digital sneakers, digital real estate.

Surprisingly, Twitter’s chief Jack Dorsey sold an NFT version of his first tweet for almost 3 million on the Valuables platform, run by blockchain-based social network Cent. In simple terms, NFTs are equal to physical collector items, only in digital form.

NFT owners are granted exclusive custodianship rights since they can only have a single custodian at a time. Thus, their singular encrypted information acts as the provenance of ownership. In addition, NFT owners can easily store data in them. For instance, a cryptocurrency holder might decide to hide their private keys, the keys to access digital assets, inside NFTs or an artist can add their signature inside an NFT’s metadata, like a virtual autograph.

The significance of NFTs

There has been a sharp uptick in demand for digitization across various industries. NFTs have unlocked an opportunity for multiple sectors to harness the luxuries associated with the crypto-verse. Their particular properties make them desirable. A core aspect of NFTs is provenance, which is recorded on the blockchain and visible to everyone. You can easily confirm whether an NFT is genuine through the blockchain by simply checking whether the NFT’s contract addresses match the one with that of the creators.

In addition, NFTs don’t need the storage cost associated with the physical form of any creation like books, art, content, etc. NFTs are hosted on the blockchain, and you don’t need an art gallery or a book store to store your NFTs. The only storage cost associated with the storage of NFTs is a digital wallet, which can be acquired for free.

Ownership of NFTs

The new blockchain prodigy is especially appealing to individuals who enjoy collecting relics or unique items. The pleasure of owning a unique masterpiece overrides the joy of having everyone view your NFTs on the internet. Although the digital objects that NFTs represent are readily available for all to see through the internet, owning the original version makes it more valuable.


NFT data is recorded on the blockchain through smart contracts. Smart contracts are programs that are automatically executed when a pre-defined condition is met. Once the information has been recorded on the blockchain, it becomes immutable, meaning it cannot be changed or deleted. As such, their authenticity can be easily verified, and they cannot be stolen.

History and provenance

NFTs are still in their early stages but do they have any historical significance? Early NFTs might play a considerable role in the future once this blockchain phenomenon realizes its full potential. For instance, Cryptopunk is viewed to be among the pioneering NFT collectibles, which is why it is considered valuable. Additionally, given their immutability, you can quickly check out their history of ownership. Who were the prominent owners of an NFT? The provenance of past owners might raise the value of an NFT further, especially if a famous person used to own it before. Well, that is if the previous owners had made their addresses public.


NFTs are uniquely created through blockchain technology. They cannot be replicated, and it’s why they are called non-fungible tokens. Scarcity creates value, explaining the exorbitant prices we have heard in the burgeoning NTFs marketplaces.

Applications of NFTs


The sale of NFT artwork for $69.3 million by digital artist Beeple at Christie’s caused shockwaves across the cryptocurrency industry. NFTs soon became the talk of the town soon after the record-breaking auction. Digital artwork is the most common utility of NFTs, creating a perfect blend of creativity and technology. For a long time, digital artwork has been massively undervalued to a considerable degree because they are easily acquired over the internet. NFTs presents artists with an alternative revenue model by amplifying their value through the element of scarcity. Besides, NFTs have helped artists reach a broader audience worldwide.


While most NFT marketplaces are focused on art, fashion-focused NFTs have begun emerging with significant capital to back up their offers. For instance, Mintable, a market for NFTs, partnered with A Bathing Ape and raised $13million in capital. As a result, scarcity and the ability of NFTs to create value have caught the eyes of the fashion and luxury industry. Until today, spending real funds on digital clothes has been a thing of the gaming world and not the real world. In the luxurious fashion world, NFTs have enabled fashion collectors to differentiate fake and genuine properties easily. Major fashion brands such as Gucci, LVMH, and Champion have either joined or expressed their intention to join the NFTs craze. To understand the wider implications and applications of NFTs in different sectors, refer to this article.

Final Thoughts

The utilities of a non-fungible token have gained considerable popularity across a myriad of industries. The digital collectibles are steadily forming a base for the utility of digital assets in different sectors. The adoption of NFTs will be central in tackling problematic issues such as counterfeits, theft of intellectual properties, fraud, and copyright issues. Therefore, we are likely to see more applications of NFTs soon.