Understanding NFTs: Tokens That Represent Ownership

NFTs have made headlines with multi-million dollar sales of digital art and collectibles, but their impact extends far beyond hype. They introduce a way to verify and trade digital assets (and real assets) securely, enabling new forms of commerce, creativity, and identity in the digital world.

What You’ll Learn

• What NFTs are and how they work
• The difference between NFTs and cryptocurrencies
• How NFTs represent digital ownership with real-world examples
• Key use cases and industries leveraging NFTs
• Challenges and future potential of NFTs

What Are NFTs?

NFT stands for Non-Fungible Token. Unlike cryptocurrencies like Bitcoin or Ethereum, which are fungible (meaning one unit is interchangeable with another), NFTs are unique and cannot be replaced by an identical token.

Each NFT has a distinct digital signature recorded on a blockchain, making it verifiable and immutable. This makes NFTs ideal for representing ownership of digital assets such as artwork, music, videos, in-game items, domain names, and even real-world assets.

NFTs are typically stored on blockchain networks like Ethereum or Solana, utilizing protocol standards like ERC-721 and ERC-1155. The actual content (e.g., an image or video) is often stored off-chain, linked via decentralized storage solutions like IPFS (InterPlanetary File System).

NFTs vs. Cryptocurrencies: What’s the Difference?

‍

‍

How NFTs Represent Ownership

‍

NFTs act as proof of ownership for digital and sometimes physical assets. But what does ownership really mean in the context of NFTs?

Key Aspects of NFT Ownership

1. Provenance & Authenticity – The blockchain provides a transparent history of an NFT, showing its origin and every transaction associated with it. This ensures authenticity and prevents forgery.
2. Scarcity & Rarity – Many NFTs are created in limited editions, making them scarce by design. For example, an artist might mint only 100 copies of a digital painting, each as a separate NFT.
3. Smart Contracts & Royalties – NFTs often come with self-executing smart contracts that can enforce royalties, ensuring creators receive a percentage of sales when the NFT is resold. Introducing freedom for the artists to connect directly with their collectors, without needed intermediaries like brokers or auction houses.

Getting Started with NFTs

NFTs can be bought, sold, and traded on decentralized marketplaces, which are platforms that facilitate transactions between buyers and sellers. There are several marketplaces that offer NFT trading, the most popular being OpenSea, MagicEden and Rarible. These marketplaces offer multi-chain NFTs, which means you can buy NFTs available on different blockchain networks such as Ethereum, Solana, Base or others.

Navigating an NFT Marketplace

1. Choosing a Marketplace – Different marketplaces support different blockchains. For example, OpenSea supports Ethereum, Polygon, Base, Ape Chain and others, while Magic Eden offers NFTs on Solana, Ethereum, Base, Polygon, Artbitrum and many others.
2. Creating a Wallet – To purchase or sell NFTs, you need a crypto wallet like MetaMask (Ethereum) or Phantom (Solana).
3. Exploring Collections – Marketplaces categorize NFTs by collections, creators, and trending items. Buyers can browse collections, verify authenticity, and make purchases using cryptocurrencies.
4. Buying & Selling – Buyers place bids or purchase NFTs directly. Sellers list NFTs for a fixed price or accept offers. Some platforms also enable royalty payments, ensuring creators earn revenue from secondary sales.

By understanding how marketplaces function, users can safely explore the NFT ecosystem and make informed buying or selling decisions.

Step 1: Choosing a Marketplace

NFT marketplaces operate on different blockchains. OpenSea supports Ethereum, Polygon, and Solana, while Magic Eden focuses on Solana and Bitcoin NFTs. Choose a marketplace based on the blockchain you want to use.

Opensea :

Magic Eden :

‍

Step 2: Setting Up a Crypto Wallet

‍

To interact with a marketplace, you need a crypto wallet. Popular options include MetaMask and Phantom. Install the wallet extension in your browser and create an account. Think about your crypto wallet as your digital identity, a bit like federated identities such as "Login with Facebook" or "Login with Google".

Check out our " Create a crypto wallet and blockchain identity" guide for details on setting up your crypto wallet.

‍

Step 3: Connecting Your Wallet to a Marketplace

‍

• Visit OpenSea or MagicEden and click on the "Login" or "Connect wallet" in the top-right corner. For this guide, we will explore MagicEden with our phantom wallet.

• Select your wallet provider (e.g., MetaMask or Phantom) and choose the chain you want to connect to. Phantom, Metamask and other wallet apps like Rabbit, all support multiple chains, but you would need to ensure you have a wallet created on the chain you want to explore.

• Click "Connect" and then "Confirm" to connect and login.

• You are now logged in and ready to explore the world of NFTs. You can see you balance and will be able to buy/sell NFTs. Once you purchase an NFT, it is transferred into your wallet and you own it :).

‍

Step 4: Exploring NFT Collections

• Use the search bar to find collections or browse trending NFTs on the homepage.

• Click on an NFT collection to view details, including inventory, Floor price, transaction history and existing bids.

• Click on the filter icon to reveal the filters for traits and you can explore the different trait based rarities of the collection.

Real-World Applications of NFTs

‍

NFTs have extended beyond digital art into multiple industries, proving their versatility and capability. NFTs offer a unique and novel way of 'Tokenizing" real world assets by providing digital provenance and automated transaction mechanisms, without involving intermediaries..

1. Digital Art & Collectibles

Artists can tokenize their work, sell it directly to buyers, and earn royalties on secondary sales. Platforms like OpenSea, Foundation, and SuperRare facilitate this. Example: Beeple’s NFT artwork sold for $69 million at a Christie’s auction.

2. Gaming & Virtual Goods

Gamers can own and trade unique in-game items as NFTs, creating a player-driven economy. Games like Axie Infinity allow players to earn cryptocurrency by battling with NFT-based characters, while The Sandbox lets users buy and develop virtual land.

3. Music & Entertainment

Musicians and content creators can release exclusive music, concert tickets, and fan experiences as NFTs. For instance, Kings of Leon released an album as an NFT, granting owners special perks like limited-edition vinyl and front-row concert seats. NFTs offer the perfect platform for democratizing digital ticketing, that allows artists to directly connect with their fans, offer benefits and reduce intermediary costs and commissions.

4. Virtual and traditional Real Estate

Metaverse platforms like Decentraland and The Sandbox allow users to purchase virtual land as NFTs, which can be developed, leased, or sold. Businesses and celebrities, including Snoop Dogg and Adidas, have already invested in virtual real estate. The same concepts can be applied to actual real estate assets, where the transaction can all be transparently executed on-chain, via NFTs that represent the ownership and value of real asset. No need for intermediaries, trust and logistics of transactions are securely managed on-chain.

5. Identity & Membership

NFTs can function as digital identity markers, membership passes, and proof of participation. Proof of Attendance Protocol (POAP) NFTs are used to verify attendance at events, while exclusive clubs use NFTs as membership tokens. This opens up opportunities to fully digitize memberships through on-chain provenance, without intermediaries. Pure peer-to-peer digital identities and membership.

‍

Challenges & Criticism

While NFTs present exciting opportunities, they are not without challenges:

• Fraud and Scams – The NFT space is plagued by phishing attacks, counterfeit NFTs, and 'rug pulls', where bad actors deceive buyers with fake projects or manipulated markets, making security and due diligence critical for participants.
• Speculation & Volatility – The NFT market has seen extreme price fluctuations, leading some to view it as a speculative bubble.
• Copyright & Intellectual Property Issues – Owning an NFT does not necessarily grant ownership of the underlying content’s copyright. Many legal aspects remain unresolved.

‍

Wrapping Up

NFTs are evolving beyond hype, integrating into industries like gaming, social media, ticketing, and finance. Innovations such as soulbound tokens (SBTs), fractional ownership, and cross-chain compatibility could redefine how digital ownership works in the future.

NFTs have the potential to shape how we own and trade digital assets, bringing real-world value to the virtual world. Whether you're an artist, gamer, investor, or casual internet user, understanding NFTs can help you navigate the future of digital economies and ownership.