An extensive guide to non-fungible tokens (NFTs). Find out what NFTs are, how they're being used, and why they're here to stay.
Before we jump into NFTs, think about the objects that you own and interact with in your daily life. Do you own something that is verifiably unique?
At first, you may think of a rare signed movie poster or a piece of sports memorabilia that comes with a certificate of authenticity. Although these items are verifiably unique, items like clothes are also uniquely yours. Sure, someone may have that same pair of pants you bought at the mall, but their pair doesn’t have the same rips, wear, and tear that yours does. Their pair of pants wasn’t bought and worn by you.
Clothes can be bought and sold for a certain amount of money, but they’re only worth what someone is willing to pay for them. They don’t have an inherent, interchangeable value. In other words, they’re non-fungible.
Non-fungible inherently means unique.
The digital world doesn’t have the same physical constraints as the real world, so it’s far more difficult to prove that any digital property is unique and owned by a person. Digital items like music, video game keys, or even cryptocurrencies, are fungible: they can be exchanged for another item of its type and be worth the same value.
What is an NFT?
NFTs (non-fungible tokens) solve the issue of uniqueness.
An NFT is a digital item registered on a blockchain that keeps track of who owns and trades the digital item. The digital item is also verifiably unique with a code attached to it that makes it different from other digital items that may, on the surface level, look similar.
NFTs will oftentimes be a digital item, piece of art, or other file attached to the unique digital code that makes the NFT unique. Many pieces of digital NFT art are randomly generated by programs from a series of individual components and then combined into a single picture.
This image is oftentimes not stored in the NFT itself due to file size constraints. But, when you purchase an NFT, it will include a link to where the image is stored or can otherwise be reached. (Find out what it really means to own an NFT in this post.)
The NFT will then be registered, or minted, on an official blockchain. This makes it a real NFT that can be verifiably unique from other digital objects.
A brief history of NFTs
The idea of cryptocurrencies grew in popularity after the 2008 financial crisis. Its impact highlighted the need for a monetary system that wasn’t controlled by a government or other large organization.
The first cryptocurrency was Bitcoin – an entirely digital currency that wasn’t backed by a central bank or a real asset like gold. In effect, this meant that a single Bitcoin was only worth what someone was willing to pay for it.
Bitcoin was a revolutionary way to perform transactions online. It offered low fees on transfers between countries and no restrictions on what a Bitcoin could purchase. One Bitcoin still has the same value as another, that is, they are fungible.
Ethereum paved the way with smart contracts
The verifiable uniqueness of non-fungible assets came with the official launch of Ethereum in 2015, which introduced smart contracts in their network. A smart contract is a piece of code used to interact with data on the Ethereum network, which is often called a blockchain. The idea of an NFT, or digital property that could use this smart contract capability to prove its uniqueness, was experimented with for a few years after Ethereum’s launch.
Some other major milestones in the adoption of NFTs are:
- Etheria - Launched in 2015, Etheria was the first public demonstration of a decentralized world utilizing NFTs. In this game, players buy one of 457 different tiles and farm blocks on the tiles. Once you farm enough blocks, you can build objects on the tiles, similar to Minecraft. All of Etheria’s code is open source and execution, meaning all of its processes, are performed by an automated tool. In effect, this means that it’s near impossible for a person to remotely execute code in the system, making it completely decentralized and existing self-sufficiently.
- CryptoPunks - Unique, randomly generated pixel art characters. These were part of the inspiration for modern crypto and NFT art. They were started in 2017 by Canadian software developers Matt Hall and John Watkins.
- CryptoKitties - One of the first blockchain games (also started in 2017). It’s based on buying and selling tradeable cartoon cat NFTs.
The NFT market boomed in 2020, tripling in size from its previous year to $250+ million. NFT trademarks skyrocketed to 1,263 in 2021. In the same year, several high-profile sales of famous online memes were sold by their original creators as NFTs. The rise of interest in Web3, Facebook’s rebrand as Meta, and their subsequent announcement of additional funding toward the Metaverse project would all help push NFTs into the mainstream.
Blockchain: How NFTs work
NFTs are inextricably linked to blockchain. We’ve spoken about blockchain a few times, but what is it really?
A blockchain is a record-keeping system that records and stores information like any other database. However, it differs in that the information is stored in “blocks” that contain the records. When a new block is created, transactions (like NFT purchases or sales) compete to be included in blocks because once they are in they become immutable. Miners (or validators) are incentivized to add as many transactions as possible to a block.
Each block is connected to the previous block and contains a time-stamp of when it's made. The only exception to this is the first block in the chain (the “genesis block”) which does not have a previous block to refer to.
A secure record-keeping chain
If a change is made in the previous block after a new block was made, it would be immediately apparent that there was a problem because the referring data wouldn’t match and no one would pay any attention to the information on that block. It would become what is commonly referred to as an "orphaned block".
The name “blockchain” is apt for this system because it is very similar to a metal chain. If one “link” in the chain is changed or altered by someone, the chain will break. Because it’s a chain, the two halves will still be intact, but it will be obvious which link in the chain was weakened or altered. For this reason, if a hacker wanted to alter a blockchain, they would need to make changes to every single link in the chain so that the blockchain doesn’t break and notify someone of malicious activity.
This system can be used in any business that needs accurate records that are frequently updated (e.g., accounting, online databases, inventory record keeping) but it’s absolutely crucial to cryptocurrencies and NFTs. These systems can only exist when it's nearly impossible for someone to go in and make changes to the records.
In a traditional database, there is usually an administrator that’s responsible for making changes to the system. This person could, theoretically, make malicious changes to the system and no one would know. A blockchain system doesn’t have anyone in charge and only dutifully keeps accurate records of every change and transaction recorded in the system.
Blockchain enables cryptocurrencies that are decentralized with no group or corporation having absolute control of the system. NFTs require this system to function, as their verifiable uniqueness needs to be unalterable, so someone can’t just “steal” someone else's NFT by changing their unique data around.
Blockchains facilitate NFT creation
For an NFT to be created, it has to be "minted" on the blockchain.
Minting is a process that publishes your digital file into a unique asset onto blockchains like Ethereum.
To mint an NFT, you’ll need a digital wallet and a service that will generate a data packet on the blockchain that is verifiably unique. You can then upload a file like a PNG or GIF that is, effectively, a marketable NFT.
While you will eventually sell your NFT on a popular marketplace (or send it privately to your community, for instance), you can browse current NFTs on sites like Opensea or Rarible to see what else is out there. Most of the NFTs on these sites will be digital art pieces, but NFTs can be used for a multitude of different things.
What are NFTs used for?
NFTs are designed for any digital property that needs to be unique and non-fungible. There are many different ways to use NFT technology, like art, games, social tokens, virtual world products, and real estate. Let's look at a few of them.
One of the greatest perks of buying an NFT art piece from a collection is access to exclusive groups and communities for NFT owners. The famous Bored Ape Yacht Club has an exclusive Discord Server where other NFT owners can socialize and chat, as they would in a real-life Yacht Club.
Using NFTs as tickets brings unique benefits to ticket buyers. Not only can NFT tickets extend ticket lifecycles, but they also prevent fake tickets and scams which are rampant in the industry. According to Action Fraud, “ticket fraudsters duped victims out of almost £4 million” in 2021, in the UK alone.
Due to the blockchain's immutable characteristics, all parties can be confident knowing they can authenticate tickets themselves. Organizers can get a better hold on reselling and scalping by making NFTs non-transferable. NFTs as tickets allow for endless revenue opportunities.
Brands can reward their customers in novel ways with NFTs, and have new opportunities to create brand advocates. Advocates can in turn help the business to develop by building a super-fan community.
Communities and brand advocates are powerful marketing tools. Research by Salesforce shows that 70% of customers are influenced by a company’s community involvement.
The gaming industry has slowly adopted NFTs into games that have a play-to-earn (P2E) model. These games will have you play for a certain amount of time in order to earn certain rewards, often having optional in-game microtransactions but initially being free-to-play (F2P).
Games like Splinterlands, a blockchain-based card game, allow unpacking, trading, and playing with cards as you normally would in real life. The cards are verifiably unique from one another and come in a variety of different rarities. They can be bought and traded for on an online official market, but they’re only effectively worth what someone is willing to pay, they don’t have an inherent value.
Many celebrities, athletes, and internet stars have been using NFTs as social tokens that allow greater levels of engagement between celebrities and their fans. These celebrities may create a variety of social tokens that act as “badges” to give fans access to certain perks like exclusive content or community servers to socialize in. Certain outstanding members in a creator’s community may also be given a unique social token to separate them from others as someone to look up to.
Real estate may not be the first thing that comes to mind when thinking of NFTs. However, EstateX allows you to invest in real estate without needing hundreds of thousands of dollars. With their $ESX token, you can purchase a smaller portion of a property alongside other anonymous investors. The goal is to eventually grow this platform to a point where individuals looking to buy a home will no longer have to go through banks for mortgages.
Fantasy football is easily one of the most accessible ways to get involved with professional football. With NFTs, digital sports will soon have the same capabilities as Battle Infinity. This gaming platform hosts battle games integrated with the Metaverse where people can watch and play online games while earning IBAT tokens. Battle Infinity uses VR headsets and has access to multiple different types of games.
What are "utility NFTs"?
When an NFT has extra applications beyond being just a unique digital asset, it’s often called a “utility NFT”. In this case, the NFT can now provide you with more tangible benefits like, gated access, merch, and in-game rewards. (Explore some of the top utility NFT use cases in this post: NFT Utility and the Real World Benefits of NFTs.)
In Web3 the potential for rewards and utility are endless. While regular NFTs are unique for the sake of the object, utility NFTs are unique to identify the owner of the NFT.
NFTs with extra benefits
An example use case of an NFT utility can be demonstrated with a party. Say you can invite 100 people to a party and want to keep track of who’s who. You could issue 100 invitations in the form of NFTs and not have to worry about people stealing or falsifying information, as the NFT is minted on the blockchain and associated with a specific individual.
Utility NFTs can act as identity verification for several different events and functions. For example, tickets to concerts or season tickets to sporting events could be issued as NFTs and come with other potential online perks. Utility NFTs could also act as a way to verify your identity in case you need to sign a digital document or online contract.
NFTs, because they are stored on the blockchain, can also be a powerful record keeper of changes to an object or property. It’s been suggested that ownership history and other alterations to real estate can be much more accurately tracked if a property has an NFT associated with it. Potential buyers would be able to easily access an irrefutable record of the property’s history to assess whether or not they’d be interested in purchasing the property.
Utility NFTs are being used for customer loyalty
Over the last few years, household names like Starbucks, Adidas and Red Bull have turned to NFTs to reward customer loyalty. Starbucks incentivizes its customers to keep coming back by rewarding them with personalized, unique NFTs that can be redeemed for rewards or displayed to other people in the digital community. Adidas has partnered with popular NFT collections like Bored Ape Yacht Club and Punks Comic to release exclusive NFTs that came with physical NFT-themed merchandise. Red Bull Racing introduced NFTs that provided special access to a secret ops room during the second practice for the 2022 Dutch Grand GP on September 2nd, 2022.
Smart contracts 101
For NFTs to have a verifiable, unique owner, it needs a smart contract to operate. Obtaining a smart contract for an NFT is part of the minting process where the NFT is stored on the blockchain.
A smart contract is an automated execution of an agreement when predetermined conditions are met. The smart contract system was first proposed by computer scientist Nick Szabo in 1997. He used the analogy of a vending machine to describe the system:
"The vending machine is a contract with bearer: anybody with coins can participate in an exchange with the vendor. The lockbox and other security mechanisms protect the stored coins and contents from attackers, sufficiently to allow profitable deployment of vending machines in a wide variety of areas. Smart contracts go beyond the vending machine in proposing to embed contracts in all sorts of property that is valuable and controlled by digital means.
"Smart contracts reference that property in a dynamic, often proactively enforced form, and provide much better observation and verification where proactive measures must fall short."
– The Idea of Smart Contracts, Nick Szabo
If this machine was a smart contract, this transaction would be recorded and stored so anyone operating the vending machine could see who purchased products from it. Then, if you were to give the soda to someone else for, say, a bag of chips, this transaction would be stored and this other person would now be the owner of the bag of chips.
Information about the transactions occurring is stored on the blockchain with a new block of code that has the transaction and ownership information. The “chain” is the other blocks that hold the history of who else created and owned the product.
When an NFT is minted (i.e. published on the blockchain), a smart contract is created that has a piece of executable code with the NFT information on it. An NFT smart contract includes more than just the price, it also includes:
- Who created the NFT
- How much the creator will get in royalties every time it’s sold
- The NFT’s ownership history
- Who currently owns the token
Every time the NFT is bought and sold, it’s managed with a smart contract that automatically updates the ownership information on the blockchain.
Note that oftentimes, the actual NFT is the code on the blockchain. Owning an NFT will usually include a link to an image or GIF of what we consider the NFT. This is due to images having a much larger file size than code, so it’s impractical for a blockchain to store this information.
What determines an NFT's value?
When an item is considered “fungible”, it can be exchanged for the same object of its type that has the same value. A $1 bill is considered a fungible object, as a single dollar bill can be exchanged for another dollar bill of the same value. While this may seem obvious, it’s due to the fact that the United States Federal Reserve is backing the value of this dollar bill – they guarantee that a dollar bill is fungible.
As explained earlier, NFTs are non-fungible, which means that one object can’t be exchanged for another object and have the same exact value. No two tokens will have the same inherent value to them.
Perception is everything
The real-life comparison to NFTs is often rare items like baseball cards, movie memorabilia, or other collector memorabilia. These items are valuable because they’re rare and don’t have an inherent value to them, meaning they’re only worth what someone is willing to pay for them. Art is also considered non-fungible, so it makes sense why the collectors' art market is analogous to NFTs.
Non-fungible items like collector sports cards, also commonly have communities surrounding buying, selling, trading, and appraising their value. Valuing a non-fungible item and understanding its rarity is a pillar of these communities and is part of the reason other people will get into collecting them.
Non-fungible items can also be bought as investments, as their value may increase over time. NFTs, in particular, are often seen as investments as their value often fluctuates depending on several factors. An NFT art collection, for example, may only mint a certain number of new NFTs every month, increasing or decreasing the scarcity of their product depending on the market. Certain early internet memes were considered akin to classic art pieces and auctioned online for large sums of money.
How much should you pay for an NFT?
Before buying an NFT, it’s worth researching how NFTs of that collection type are made and how many are made. If someone is going to purchase the NFT primarily for the social experience, the value is whatever that person is willing to pay to become part of a group. Patreon is a platform currently used by many creators to include certain perks with a monthly subscription. Consider researching how creators value the different subscription tiers, as well as how that value is proportionate to their audience. Your NFT’s value could be, for example, equal to a year of a Patreon subscription to a creator that has a similar following as you.
On the other hand, if you’re buying an NFT as an investment, you’ll need to do a lot more research to understand when new NFTs are put into the market and how often/how many are minted at a time. What global factors will increase the token's sales? What factors will decrease its sales?
How do you make an NFT?
Before you start sketching out artwork or designing the changeable parts of an NFT avatar, there are a few fundamental questions to ask yourself:
- Why are you interested in launching an NFT collection? Why now?
- What are you trying to accomplish with the collection?
- Are the results you want measurable?
- Who is the target audience for your collection?
- Why should your target audience care about this collection?
Two routes to start minting
Artists are using NFTs to expand and transform the ways they create and market their artwork. But brands are using the tech to expand the customer experience. The goals, and approach, of launching a collection as an independent artist vs as a major brand are going to be dramatically different.
The two main routes for minting an NFT are:
- A self-service or “DIY” mint where you do all the legwork.
- With a minting partner (e.g a Web3 agency)
You could get support with a few stages of the process or opt for a full turnkey solution. A turnkey solution is where you let your NFT partner take care of everything, from beginning to end. This can involve additional steps to minting like marketing, community management and creating an NFT marketplace.
Whether you opt for an NFT partner or choose to go it alone, it’s good to know the general steps. Let's take a look.
1. Find a blockchain that supports NFTs
- The most commonly used blockchain for NFTs is Ethereum, which supports creating smart contracts that will support ownership, security, and metadata details. The downside of Ethereum is additional fees like gas fees (fees for the energy required to process your transaction).
- Other blockchain options exist, but you will need to do your research to find an option that best suits your needs.
2. Create a digital wallet
- Once you decide what blockchain you want to use, you need to open a digital wallet that will support that network. A digital wallet allows you to buy and store cryptocurrency securely.
- A popular digital wallet often used is Coinbase, which will support the most common blockchains.
3. Choose a marketplace to sell on
- We mentioned before that NFTs are sold on online platforms like OpenSea, which supports NFTs on the Ethereum blockchain and allows you to create and browse NFT collections.
- Other crypto exchanges may also support NFT buying and selling, but it will differ from platform to platform.
- Some online platforms also have fees to post or sell NFTs on their store, so try to get a quote on how much it will cost to understand if making new NFTs is sustainable.
4. Create the NFT in the platform of your choice
- Connect your digital wallet to the platform you choose and go to the section for NFT creation. You will need to upload the digital file you want to be linked to the NFT and fill out the options on what makes the NFT unique, as well as what perks you’d like someone to have when they purchase it.
- Select the blockchain you want to mint your NFT on and then create the NFT! Note that once you mint your NFT, you won’t be able to change what blockchain it’s on.
5. Sell the NFT
- Many NFT platforms and marketplaces will have options for selling your NFT built into the creation process. So, you can more or less just pick your price and post your NFT. Selling it may come with certain transaction fees, however, and it may cost far more than you may think, depending on what the fees are like at the time you list it.
- A big part of choosing an NFT platform that’s right for you is understanding these fees, so do your research!
How does Web3 relate to NFTs?
Blockchain, cryptocurrency, and NFTs are all considered technologies that will enable the next phase of the internet: Web3. But what is Web3? And for that matter, what are Web1 and Web2?
Web3 vs Web2 vs Web1
The world wide web is commonly thought to have different phases, much like how people have generations like GenX or GenZ. Similar to generational groups, the eras of the internet aren’t neatly defined. Rather, the phases of the internet are defined by what people use it for.
The early internet, or Web1, was broadly defined as not having much connectivity between users and being focused on sharing content that was created outside of the online realm such as music, movies, and other media.
Web2, often thought of as the current phase of the internet, is defined by having far more content generated by normal users of the internet. This is the idea that anyone online can have a platform to generate and share content, potentially having just as loud of a voice as a celebrity. The content created and shared in Web2 exists on large social media platforms like Twitter or Facebook. Because of this, Web2 is thought to be heavily centralized. This refers to the fact that a few big companies are responsible for facilitating the connections between users.
Certain poignant names in the cryptocurrency industry like Ethereum co-founder Gavin Wood are critical of this aspect of Web2. He stated that our current iteration of the web requires users to put too much trust into a few private companies that control the sites we use. The idea of decentralizing the internet, or taking the control of content sharing away from the hands of a few large companies, is an often speculated part of the next phase of the internet: Web3.
What is Web3 exactly?
Web3 is an emerging version of the internet, with decentralization via blockchain at its heart.
Web3 is thought to have capabilities for people to live in an entirely virtual world that isn’t run by a single large company. Users would be able to work and share content freely. A decentralized internet means not having to rely entirely on advertising for monetization or creating content that adheres to the sites’ parent company shareholder goals.
While it may seem impossible to have internet platforms not run and funded by a large company, public blockchains are generally thought to be the solution to this problem. Blockchains enable public, verifiable ownership of digital property through NFT technology. It’s thought that most online transactions we do through digital platforms can be entirely automated with a public blockchain. And with cryptocurrencies, the money that we spend can exist entirely online.
If you’re interested in learning more, here are five resources to get you started:
- Our easy guide to Web3
- Ethereum’s Web3 Vision
- CNBC article on Gavin Wood’s vision for Web3
- What is Web3?
- NY Times definition of Web3
Remember that while Web3 is an exciting potential version of the future of our internet, the true definition of Web3 won’t happen until we’re well into it and onto the next phase. Much like the year ranges generational phases, it’s much easier to define things in hindsight than try to predict the future.
Why is it so expensive to mint an NFT?
We talked about before what the steps are for creating your own NFTs, but you may have noticed that it can get kind of expensive to mint your own NFTs on most mainstream services. So what is NFT minting? Why does it get expensive?
Minting an NFT is the process in which you transfer a digital property to an asset that’s “stored” on the blockchain and verifiably unique. This means that all transitions that happen with the NFT will be tracked on the blockchain system. When you mint an NFT, you’ll likely sign a series of agreements saying how much the host site will get when the NFT is bought or sold.
It’s possible to mint an NFT for free, but there will likely be a royalty amount that you’ll have to pay the minting service when you sell the NFT. Free NFT minting is often referred to as “lazy minting” and won’t incur fees at first. This can be nice if you’re trying to figure out how the process works early on, but it is impractical for minting an NFT collection. The more specialized and niche the NFT collection, the more complicated the minting process can get.
The most successful NFT collections often have additional perks and benefits that come with buying and owning a token. Reward systems that emphasize the social features of tokens have been proven to be very successful. But, these can be particularly difficult to set up and are far easier to make with the use of a minting service.
Fortunately, we can help you with this!
Step3 is a Web3 platform and development agency that helps creators and brands grow and nurture communities around utility-focused NFTs. We offer custom NFT minting services to get you started on your NFT journey and a self-service platform to deliver ongoing rewards and experiences that keep your new community energized and engaged.
- Create diverse rewards and experiences for NFT communities in just a few clicks.
- Reward types include Merchandise, Coupon Codes, Gated Content, Event Passes, NFTs, social tokens, and more.
- Target multiple NFT communities with each reward (Great for a project or brand collaborations).
- Publish rewards to a secure, customizable Step3 page or embed them directly on your website.
Custom NFT creation
- Step3 helps brands understand the Web3 landscape and craft an NFT strategy that takes advantage of their existing value propositions and market reach.
- Create and sell utility-focused or dynamic NFTs that have enduring value for their holders.
- Provide easy onboarding for non-crypto users with credit card payments.
- We specialize in creating unique mints and sale flows that can't be satisfied by off-the-shelf, no-code services.
Whether you're a creator looking to take your roadmap to the next level, or a brand wanting help with your NFT strategy, Step3 can help.