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What's Non-Fungible Tokens (NFTs)?
Beginner
2025-07-22 | 10m
The blockchain was designed as a ledger for value exchange—until someone etched a digital cat onto it. What began as an experiment in provable scarcity has since ignited a cultural earthquake, transforming how we perceive art, ownership, and even identity in the digital age. Unlike cryptocurrencies that function like dollar bills (interchangeable and identical), NFTs are like fingerprints: no two are alike, each carrying its own history, value, and DNA encoded immutably on-chain.
What's NFT?
Non-fungible tokens (NFTs) are assets like artworks, digital content, or videos that have been tokenized via a blockchain. Tokens are unique identification codes created from metadata via an encryption function. These tokens are then stored on a digital ledger, while the assets themselves are stored in other places. The connection between the token and the asset is what makes them unique.
NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs—it all depends on the value the market and owners have placed on them. For instance, you could draw a smiley face on a banana, take a picture of it (which has metadata attached to it), and tokenize it on a blockchain. Whoever has the private keys to that token owns whatever rights you have assigned to it.
Cryptocurrencies are similar to NFTs, in that both are secured on blockchain networks. The key difference is cryptocurrencies are fungible, or interchangeable. While there's no significant difference between one bitcoin and another, no two NFTs are identical.
History of Non-Fungible Tokens (NFTs)
NFTs were developed prior to their widespread popularity in the mainstream. The first known NFT sale involved "Quantum," created and tokenized by Kevin McKoy in 2014 on the Namecoin blockchain; it was later minted on Ethereum and sold in 2021.
The majority of NFTs on the Ethereum blockchain adhere to the ERC-721 (Ethereum Request for Comment #721) standard, which specifies procedures for transferring ownership, confirming transactions, and ensuring secure transfers among other functionalities.
The ERC-1155 standard, introduced six months after ERC-721, enhances functionality by allowing multiple non-fungible tokens to be incorporated into a single contract, thereby reducing transaction costs.
One of the earliest widely recognized NFTs was CryptoKitties, a digital collectible game launched in November 2017. Each CryptoKitty is a digital representation of a cat with unique "cattributes," determined by the cat's distinct identifier on the Ethereum blockchain. Some features are rarer than others, which can influence their market value. These virtual cats can reproduce, producing offspring with combined characteristics and varying valuations. Within weeks of their launch, CryptoKitties attracted a substantial following, with enthusiasts spending millions of Ether to purchase and breed them.
Also introduced in 2017, Decentraland is a blockchain-based virtual world where users can buy and sell parcels of virtual land. Each parcel is linked to specific geographical coordinates, and some plots command higher prices due to their prime locations.
Following the early success of NFTs on Ethereum, other blockchain platforms began to develop and adopt their own NFT protocols.
The Hidden Engine: How NFTs Actually Work
Picture a museum ledger documenting every brushstroke of a masterpiece—its creator, provenance, and ownership transfers. An NFT operates similarly, but this ledger is distributed across thousands of computers worldwide via blockchain. When an artist "mints" an NFT, they embed metadata (like the artwork’s digital fingerprint) into a tamper-proof blockchain—mostly Ethereum, though Solana and Polygon now challenge its dominance with cheaper, greener alternatives.
The magic lies in smart contracts: self-executing code that automates ownership transfers and even pays artists royalties automatically on resales. Say musician 3LAU sells an NFT album. The smart contract might stipulate he receives 10% every time it’s resold—enforcing passive income in perpetuity. Unlike traditional contracts buried in filing cabinets, these live transparently on-chain, visible to all but alterable by none.
Benefits of NFTs
One of the most notable advantages of NFTs is enhanced market efficiency. Tokenizing physical assets can facilitate more streamlined sales processes and reduce reliance on intermediaries. For digital or physical artworks stored on a blockchain, NFTs enable sellers to connect directly with their target audiences, provided that the artists understand how to securely host and manage their NFTs.
Investment Opportunities
NFTs also offer potential to simplify investment procedures. For instance, consulting firm Ernst & Young has developed an NFT-based solution for a fine wine investor by securely storing wine and utilizing NFTs to verify provenance.
Real estate can be similarly tokenized—properties might be divided into multiple sections, each with distinct features. For example, one parcel could be located by a lakeside, while another is closer to a forest. Each unique piece could be priced differently and represented by an NFT. This approach could streamline real estate transactions, which are traditionally complex and bureaucratic, by embedding relevant metadata into an NFT tied specifically to that portion of the property.
NFTs can also signify ownership in a business, similar to stocks. Currently, stock ownership is tracked through ledgers that record details such as the shareholder’s name, issuance date, certificate number, and number of shares. blockchain technology provides a secure, distributed ledger, making NFTs capable of serving the same purpose. An additional benefit is that smart contracts can automate ownership transfers—when an NFT representing shares is sold, the blockchain can automatically handle the transfer process.
Security Benefits
Non-fungible tokens are particularly valuable for identity security. Personal information stored on an immutable blockchain cannot be accessed, stolen, or misused by anyone lacking proper authorization keys.
Furthermore, NFTs can democratize investment by enabling fractional ownership of physical assets. For example, art pieces need not have a singular owner; tokenization allows multiple individuals to purchase shares, effectively transferring ownership of fractions of the physical asset.
NFT Taxonomy: From Pixels to Real-World Power
The NFT universe now spans six dominant species, each evolving beyond speculation:
Digital Art & PFPs birthed the market but now embrace AI generation and cross-media IP. Pudgy Penguins exemplifies this—once just cartoon birds, now a toy empire generating $10 million revenue, backed by its own zk-Rollup blockchain.
Gaming NFTs turned play into livelihood. Axie Infinity’s pets became lifelines for Filipino gamers during economic crises, while newer "skill-to-earn" models reward expertise, not just grinding.
Virtual Real Estate like Decentraland parcels trades for over $2.4 million, hosting virtual galleries and concerts. Their value mirrors physical real estate: location, scarcity, foot traffic.
Music & Media NFTs let artists bypass labels. When 3LAU auctioned an NFT album, he netted millions while retaining creative control—a model now embraced by indie musicians globally.
Sports Moments democratized memorabilia. LeBron James’ NBA Top Shot dunk clip sold for $380,000, proving fandom needs no physical vessel.
Tokenized RWAs (Real World Assets) bridge physical and digital. Gucci’s NFT-backed virtual showrooms boosted sales 17% via AR try-ons, while companies like Courtyard tokenize luxury watches for fractional ownership.
The Tension Points: Where NFTs Spark Fire
For all its promise, the NFT ecosystem grapples with unresolved friction:
Regulatory Crossfires intensified in 2025. China banned NFT secondary trading as "illegal finance," shutting down projects like Hainan Huatie’s "Hornet King" NFTs overnight 48. Conversely, Europe’s MiCA framework treats NFTs as regulated assets, demanding transparency and anti-fraud measures—a double-edged sword that legitimizes but constrains.
Environmental Reckonings once haunted NFTs, but Ethereum’s shift to proof-of-stake slashed energy use by 99%. Newer chains like Solana and Tezos now market "carbon-negative" minting, appeasing eco-conscious creators.
Speculative Ghosts linger. Projects like CryptoPunks remain 90% below 2022 peaks, reminding investors that hype cycles burn capital. Yet volatility has birthed safeguards: platforms like OpenSea now verify collections, while smart contract audits curb exploits like the $800,000 NFT lockup debacle of 2024.
Investing in the Invisible: A Pragmatic Framework
How Does NFT Make Money? It depends on what the NFT represents. If it is tokenized real estate, the NFT would be exchanged for the property's market value, which, if it has appreciated, would generate a return for the seller. If the NFT were an image of a monkey in a hat, it would depend on that specific token's market value. If its price had increased since it was last purchased, a seller would earn a profit.
Metaverse Infrastructure
Virtual worlds will underpin a projected $6.39 trillion economy by 2030. NFTs here act as land deeds (The Sandbox), avatar skins (Ready Player Me), and event licenses—assets that appreciate as metaverse adoption grows.
Phygital Synergy
Brands like Nike now blend physical/digital value. Their RTFKT sneaker NFTs generate yield when staked, while Pudgy Penguins share 15% of toy revenue with NFT holders. These models create cash flows beyond mere flipping.
Institutional On-Ramps
VanEck’s endorsement of Pudgy Penguins signals Wall Street’s arrival. Meanwhile, DeFi protocols accept NFTs as loan collateral—turning digital art into working capital.
For investors, due diligence now demands: Revenue Verification: Prioritize NFTs tied to royalties or real yields (e.g., Nike’s staking); Chain Selection: Favor low-fee, eco-friendly chains (Polygon, Immutable X) to dodge regulatory scrutiny; Rights Clarity: Ensure IP rights transfer with NFT ownership—not all do.
Conclusion
NFTs stopped being about cartoon apes years ago. Today, they are evolving into the plumbing of digital ownership—authenticating assets, enforcing royalties, and unlocking liquidity for everything from songs to real estate. As the technology sheds speculation and embraces utility, it promises something radical: a creator economy where value flows directly to those who generate it, untangled from intermediaries. For artists, collectors, and builders, this isn’t just an investment trend. It’s the rewiring of ownership itself—one blockchain transaction at a time.
Coinglass. (2025). Non-Fungible Tokens (NFTs): A Revolution in Digital Assets. Retrieved July 22, 2025, from https://www.coinglass.com/learn/what-is-nfts-en
Cointelegraph. (2025, July 21). Blistering NFT ‘sweep’ underway as CryptoPunks, Penguins surge. Retrieved July 22, 2025, from https://cointelegraph.com/news/nft-market-rally-cryptopunks-penguins-surge-2025
Investopedia. (2025, April 18). Non-Fungible Token (NFT): What It Means and How It Works
https://www.investopedia.com/non-fungible-tokens-nft-5115211#toc-concerns-about-non-fungible-tokens
CoinCatch Team
Disclaimer: Digital asset prices carry high market risk and price volatility. You should carefully consider your investment experience, financial situation, investment objectives, and risk tolerance. CoinCatch is not responsible for any losses that may occur. This article should not be considered financial advice.
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