NFTs (Non-Fungible Tokens) Explained Like You Are 5!

Sujith Godavarthi
By Sujith Godavarthi

After the rise of bitcoin and other cryptocurrencies, it was NFTs that created huge waves in the web3 space.

You might have heard of the news that “Beeple sold a collage (a JPEG image) for $69 million”.

And the first tweet by Jack Dorsey (the founder of Twitter),  the tweet, which said “just setting up my twttr”, which was also just a JPEG was sold for $2.9 million.

Why are people buying these NFTs aka jpegs for millions of dollars?

Let’s start from the beginning.

What is an NFT?

NFT stands for Non-Fungible Token. Of course, you know that.

But let me be more clear on the words starting with the word “fungible”.

This is what the word “fungible” means, according to google: “(of goods contracted for without an individual specimen being specified) replaceable by another identical item; mutually interchangeable.

A thing is fungible if you are able to exchange or substitute that thing for equal value.

So by non-fungible, what it means is it can’t be replaced by something. No matter how identical the thing looks.

For example, if you go to the supermarket to buy milk, you just pick one tin from a bunch of them. You don’t care which one (although you might check the company name and expiry date).

But there is nothing unique about them. You can buy the same stuff in other supermarkets. There is no such thing as “Scarcity” or “Uniqueness” involved in this purchase, right?

Now, think about buying art, like the painting of Monalisa. There is only one (scarcity) in the world and it was created by Leonardo da Vinci (unique).

And you won’t trade me the real painting of Monalisa (assuming you have bought it) for the painting of Monalisa that I have because I’ve bought it from a local store (duplicate version).

So it’s a non-fungible thing.

But, not a token. To create the token, it has to be minted.

Minting is the process of adding the art (or anything that you want to convert into an NFT) to the blockchain. Once done its uniqueness is achieved. It is a non-fungible token now.

So if you want to buy an NFT, you need to send some cryptocurrency ($ETH if the seller minted it on Ethereum Blockchain – more about that later or $SOL if it’s minted on Solana or any other currencies based on which blockchain it is minted) to the seller and then the smart contract will be triggered and you’ll receive a token. And that’s a non-fungible token.

These tokens are stored in a distributed ledger called Blockchain.

Distributed Ledger? Blockchain? (More on this in the later section)

Well, the point is, that a media file (JPEG, Video, GIF, etc) is assigned a token that has all the details of authenticity and is stored in the blockchain ledger.

Simply put, NFTs are simply digital assets converted into one of a kind by adding a digital signature that defines the ownership of the asset.

Behind NFTs: Blockchain, Smart Contracts

You need to have an idea of what a blockchain is, what are smart contracts, and what cryptocurrencies are to get a whole idea of how NFTs work.

What is a blockchain and how does it work?

A blockchain is a suite of Distributed Ledger Technologies that can be programmed to record transactions (Ex: cryptocurrency) and track assets (Ex: NFTs).

So, it eliminates the middle man concept, like banks for example. We use banks as a medium (middle man) to exchange money. But Bitcoin (Cryptocurrency) with the help of Blockchain Technology behind it, proved that you don’t need a middle man to move money (in this case, it’s a cryptocurrency called Bitcoin).

Blockchain stores information in batches called groups that are linked together in a straight-line fashion. So, Blocks + Linked Together = Blockchain.

The thing to understand from an NFT point of view is each data that is stored will have a timestamp attached to it. A blockchain is a decentralized network (no single person controls it ), trustworthy tech (thanks to the cryptography), and the data is impossible to tamper with.

Are Blockchain and Bitcoin/Ethereum the same?

Well, first of all, blockchain is a technology and bitcoin is a cryptocurrency. Any kind of cryptocurrency (Bitcoin, Ethereum, Solana, etc) works on blockchain technology.

A cryptocurrency is a digital currency on a distributed ledger.

What’s The Difference Between Blockchain, Cryptocurrency, and NFTs

Blockchain is the technology that makes the existence of cryptocurrencies and NFTs possible. The latter two and built on top of the former.

It’s a distributed ledger (an open database where everyone has the exact same copy), so changing data in your database won’t be enough if you want to cheat. That’s what makes it trustless.

Cryptocurrency on the other hand is a fungible token like a physical currency. I don’t have a problem exchanging 1 ETH for 1 ETH or 10$ for 5$ and 5$.

But on the other hand, I don’t want to exchange the Monalisa NFT (Assuming that Leonardo Da Vinci would have minted it on Blockchain if he is alive today and also assuming that I am rich enough to buy that), with whatever NFT you give me in replacement.

NFTs on a fundamental level

Think of NFTs as two parts – one that is on-chain (exists on the blockchain), and the one that points to something from the chain.

So, the picture of a CryptoPunk in itself isn’t just an NFT. It has a token ID that is very unique (and registered on the Ethereum blockchain) and the ID is the representation of the URL.

Ultimately, NFT = ID + URL. Let’s understand that with an example.

Let’s take this Bored Ape as an example. On the same page, you can see details like the smart contract address and the unique ID assigned to this picture.

Now, if you click on the contract address, you’ll head to Etherscan. And there you can find the link this NFT is pointing to, buy entering the token ID (as mentioned below).

How Do NFTs Work?

First of all, the art has to be minted on a blockchain. While Ethereum Blockchain NFTs are quite famous, there are many other blockchains that support NFTs.

Once it’s on the blockchain, it be can be sold and you can set royalties (percentage). So every time that item gets resold, you’ll receive a percentage of that amount.

Once an art gets converted into an NFT through minting, a unique token identifier, or token ID which is mapped to the owner gets assigned and will be stored in a smart contract.

If someone buys that NFT, that token gets resigned to that buyer. And that buyer becomes the owner which can be verifiable on the blockchain.

What can I sell as an NFT?

NFT is a billion-dollar market now. There are many things that you can sell as NFT’s assuming that you own them. Like any physical art, anything that holds value can be sold as an NFT.

  • JPEGs
  • PNGs
  • 3D Art
  • MP4
  • MP3
  • Gifs

A few videos of NBA players with some top shots are converted into NFTs and many have bought these “NBA Top Shots“. Some of these video files sold for more than 100k$. Crazy! Right?

 Dylan Field, the CEO of Figma sold the pipe-smoking alien (CryptoPunk #7804) for 4,200 ETH, or about $7.5 million. O.M.G. So he actually resold the one he purchased quite a while back (This is also called NFT trading).

Basically, any kind of stuff that you own (Something that you minted on a blockchain and converted into an NFT or some NFT that you already purchased previously and own) can be sold.

But that’s just the basics. NFTs are gonna come in some unexpected ways in the near future.

And if you are wondering, “NFTs are just JPEGs, and can’t I right-click save?”, I’d recommend reading this Twitter thread.

How To Buy NFTs

You need to have a web3 wallet that holds some cryptocurrency (If want to buy an NFT that exists on the Ethereum Blockchain, you need to have some ETH).

A wallet is where you store your ETH. And Metamask is the very popular one out there. It’s free and very easy to use. So, download the google chrome extension of Metamask and install it.

I’d recommend following this Installation Guide: Metamask For Beginners: The Ultimate Guide To Web3/Crypto Wallet

Important: Keep your Metamask recovery phrase safe. Just understand that there is no such thing as the “Forgot Password” option. We are dealing with blockchain technology here.

Note: Try getting an ENS domain name under your name or whatever name you like. This makes it easy for people to remember your wallet address. Mine is sujith.eth.

Now that you have ETH in your wallet, you can head to any NFT marketplace that has ETH NFTs and buy them from there.

Here are some popular NFT marketplaces:

Related: How To Buy Solana NFTs: The Ultimate Beginners Guide

Now, all you need to do is head to the marketplace and connect your wallet and purchase an NFT that you like. You need to pay a gas fee (the fee goes to the miners/validators – people who maintain the blockchain). The amount of gas fee depends on the business of the network.

Once you purchase that NFT, you can see that you own it. This is the first-ever NFT I bought:

Conclusion

NFTs are here to stay. It has brought the digital scarcity that the past internet has failed to do so. And in the future, it’s not just gonna be art.

Imagine minting land titles as NFTs. Think of how many land dispute issues that is gonna solve? Imagine using NFTs as subscription passes, which you can sell if you no longer use that service? There’ll be more…

This is just the beginning!

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What Is A Smart Contract? And How Does It Work?

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