What an NFT really is

An NFT, or non-fungible token, is a token that is one of a kind. It is recorded in a smart contract as belonging to one address. This lesson explains what that record is, and what buying an NFT does and does not give you.

Fungible and non-fungible

Lesson 9 introduced the difference. One unit of a fungible token is the same as any other, in the way one dollar is the same as another. A non-fungible token is distinct. It cannot be swapped one-for-one for another, because no other is identical.

What the token is

On Ethereum most NFTs follow a standard called ERC-721. A contract that follows it keeps a simple list: token number 1 belongs to this address, token number 2 to that one.

Each token has an ID number. The contract's address together with that ID is unique across the whole blockchain. Anyone can ask the contract who owns a given token and get the same answer.

That is all the token is: an entry that says this address holds item number so-and-so in this collection. A second standard, ERC-1155, lets one contract hold many kinds of token, some unique and some issued in batches.

What NFTs are used for

The standard's own documentation lists collectible items, access keys, lottery tickets and numbered seats for concerts and sports matches. Digital art and profile pictures made NFTs famous. Lesson 55 looks at other uses.

What you own

You own the token. Whether you own anything else depends on terms that sit outside the blockchain.

• The image or file. Usually stored somewhere else and only pointed to by the token. Lesson 52 explains where.
• Copyright. Buying a painting does not give you the right to print posters of it. An NFT is the same. Any rights to copy or sell the artwork come from a licence the creator chooses to attach, and some attach none.
• Promised benefits. Access to events, future drops or a community are promises by a project. The token does not enforce them.

In March 2024 the US Copyright Office and the US Patent and Trademark Office reported to Congress on NFTs. They found widespread confusion, noting concerns that "buyers and sellers do not know what IP rights are implicated" when an NFT is made or sold. They recommended public education, not new law.

Anyone can also copy the image itself. What cannot be copied is the entry in the contract.

What it is worth

An NFT is worth what someone will pay for that specific token. There is no formula, and no guarantee that a buyer exists.

The market shows how fragile that is. According to DappRadar, a data firm, NFT trading reached $57.2 billion in 2022. In 2024 it was $13.7 billion, less than a quarter of that.

Before you buy

• Know what the token points to and where that is stored.
• Read the licence, if there is one.
• Treat promised benefits as promises.
• Assume you may not be able to sell.
• Check that you are looking at the real collection. Lesson 54 covers fakes.