Non-Fungible Tokens (NFTs): A guide to what they are, how they work, and their real-world impact

Non-Fungible Tokens, better known by their acronym NFT, have emerged as a technological phenomenon that is revolutionizing the way we understand and trade digital assets (Bridget et al., 2022). Although often associated with exorbitantly priced digital art, their scope and potential are far broader, capturing the attention of investors (Chohan, 2021), artists, major brands, and entrepreneurs alike.

Many experts consider NFTs a cornerstone of the metaverse and Web 3.0, redefining concepts of ownership, authenticity, and value in the digital world. In 2021, the NFT market reached a value of nearly $34.5 billion (Wang et al., 2022), and while it has experienced fluctuations, its underlying technology continues to be integrated into new and surprising sectors.

Much of the current non-fungible token market is centered on collectibles such as digital artwork, sports trading cards, and other rarities (Sharma, 2022). However, NFTs can also be used for event tickets, discount coupons, certificates, conferring ownership, facilitating loans, processing donations, and even for trading physical objects (Chandra, 2022).

But what exactly is a non-fungible token? How does this technology work, and why should you care? In this definitive guide, we will break down everything you need to know about non-fungible tokens: from their definition and characteristics to their practical applications, controversies, and a basic guide to understanding how they are created.

Key takeaways

• An NFT is a digital ownership certificate: It represents the unique and verifiable possession of an asset (digital or physical) on a blockchain, making it impossible to counterfeit.
• Its value lies in its uniqueness and programmability: Unlike cryptocurrencies, each NFT is unique. Their smart contracts can automate actions such as royalty payments to creators.
• Applications go far beyond art: NFTs are being adopted in video games, real estate, ticketing, music, and to verify the authenticity of products, demonstrating their versatility.
• Environmental impact has been significantly reduced: With Ethereum’s upgrade to Proof-of-Stake and the use of more efficient blockchains, concerns about energy consumption have drastically decreased.
• They involve significant risks: The market is volatile, and it is crucial to understand the legal aspects of copyright and tax obligations before investing in or creating NFTs.

What Is a Non-Fungible Token (NFT)? Understanding the Meaning

To understand what a non-fungible token is, we must first understand the concept of fungibility.

A fungible asset is something that can be exchanged for an identical one without any loss or gain in value. The clearest example is money: a $10 bill is equal to and worth the same as any other $10 bill. They are interchangeable.

Conversely, a non-fungible asset is unique and irreplaceable. It cannot be swapped for an identical one because no two are the same. Think of the original Mona Lisa painting. You can have millions of prints or photographs, but there is only one original. That artwork is non-fungible.

A Non-Fungible Token (NFT) is, therefore, a digital certificate of ownership and authenticity for a unique asset, whether digital or physical. This certificate is recorded on a blockchain—the same technology used by cryptocurrencies like Bitcoin or Ethereum—which guarantees its immutability and transparency. However, it has a key difference from them: NFTs are not interchangeable or fungible (Borri et al., 2022).

Meanwhile, Wang et al. (2022) define a non-fungible token system as a combination of technologies consisting of a blockchain, a storage application, and a web application. In this regard, Bao and Roubaud (2022) classify NFTs into six main categories based on their use: art, collectibles, games, metaverse, utility, and other.

In short, an NFT is not the asset itself (the image, video, etc.), but rather the digital representation of its ownership on a secure, public ledger.

Characteristics of Non-Fungible Tokens

Chandra (2022) highlights that the main characteristics of non-fungible tokens are uniqueness, non-interchangeability, authenticity, scarcity, resale, and collectibility. Table 01 details the researcher’s proposed characteristics.

Table 01. The Characteristics of Non-Fungible Tokens (NFTs).

Source: Chandra (2022).

How do NFTs work? The technology explained simply

Although it may sound complex, the functionality of an NFT can be broken down into several key components:

• Blockchain: This is the decentralized, public digital ledger where all transactions are recorded. Most NFTs reside on the Ethereum blockchain, although others like Solana, Polygon, and Cardano are also popular. Each transaction is grouped into a “block” that is cryptographically linked to the previous one, creating a secure and immutable chain.
• Smart Contracts: These are programs that automatically execute on the blockchain when certain conditions are met. For an NFT, the smart contract defines its rules: its unique identifier, creator royalties, and how ownership can be transferred.
• Token Standards: For NFTs to function consistently across different platforms (wallets, marketplaces), they follow certain standards. The most common are:
  • ERC-721: The original standard for NFTs on Ethereum. Each token is strictly unique (a 1-of-1 work of art).
  • ERC-1155: A more advanced standard that allows a single smart contract to manage both fungible and non-fungible tokens. It is useful for collections or video game assets (e.g., 100 identical swords within a game).
• Minting: This is the process of creating an NFT. When a creator “mints” a digital asset, they are publishing the token to the blockchain via a smart contract. From that moment on, the NFT officially exists and can be bought and sold. Chohan (2021) describes the NFT creation mechanism as uploading a file to an NFT auction marketplace; the file is then registered on the digital ledger as a non-fungible token and can subsequently be bought or sold using digital currencies.

A brief history of NFTs: Beyond the recent hype

Although it may seem like a phenomenon of the last few years, the idea of unique digital assets on a blockchain is over a decade old.

• 2012 – Colored Coins: Considered the earliest predecessor. These were small fractions of Bitcoin that were “colored” or marked with specific information to represent real-world assets like stocks or property.
• 2014 – Quantum: The first work of art tokenized as an NFT, created by Kevin McCoy on the Namecoin blockchain.
• 2017 – CryptoPunks: A collection of 10,000 unique pixelated characters on the Ethereum blockchain. They were initially offered for free and laid the groundwork for digital collectibles and profile picture (PFP) projects.
• 2017 – CryptoKitties: A game based on breeding and trading unique digital cats. Its popularity was so massive that it congested the Ethereum network, demonstrating the viral potential of NFTs.
• 2021 – The Boom: The sale of the artwork “Everydays: The First 5000 Days” by artist Beeple for $69 million at Christie’s auction house catapulted NFTs into global consciousness.

Properties of Non-Fungible Tokens

Non-fungible token schemes are essentially decentralized applications. Wang et al. (2022) summarize the key properties of NFTs as follows:

• Verifiability: The NFT, along with its token metadata and ownership, can be publicly verified.
• Transparent execution: The activities of non-fungible tokens, including minting, selling, and buying, are publicly accessible.
• Availability: The NFT system has no downtime. Alternatively, all issued tokens and NFTs are always available for purchase and sale.
• Tamper-resistance: The non-fungible token’s metadata and its trading records are stored persistently and cannot be manipulated once transactions are considered confirmed.
• Usability: Each NFT has the most up-to-date ownership information, which is user-friendly and clear.
• Atomicity: The trading of non-fungible tokens can be completed in a single atomic, consistent, isolated, and durable (ACID) transaction. NFTs can execute in the same shared execution state.
• Tradeability: All non-fungible tokens and their corresponding products can be arbitrarily traded and exchanged.

How can you benefit from NFTs?

Non-fungible tokens (NFTs) are revolutionizing how digital information is organized, consumed, transferred, programmed, and stored. Their adoption has seen exponential growth in sectors as diverse as art, sports, broadcasting, content creation, and cryptotechnology (Bridget et al., 2022).

The technology behind non-fungible tokens offers key benefits:

• Verifiable ownership: They guarantee the ownership of a digital asset without the risk of loss or forgery.
• Traceability: They simplify the process of tracking the ownership history of each asset transparently.
• Security and anti-fraud: They significantly hinder unauthorized duplication, effectively preventing fraud.
• Secure storage: They provide a robust and decentralized method for safeguarding valuable data.

The fundamental characteristic of non-fungible tokens is their unique and unrepeatable nature. This means each token is distinct from any other, making them ideal digital assets to be used as certificates of authenticity and collectibles.

How can NFTs help your business?

Non-fungible tokens (NFTs) have ushered in a new era of entrepreneurship in the digital environment, opening up a range of unprecedented opportunities and possibilities (Chandra, 2022).

Opportunities for creators, entrepreneurs, and brands

• For artists and creators: NFTs represent an innovative channel for monetizing creative work. They have become established as the evolution of art and collectibles investment, and as a new asset class within the cryptocurrency ecosystem (Rossolillo, 2022).
• For entrepreneurs: This technology enables the democratization of investment through the tokenization of physical assets, such as real estate. Sharma (2022) notes that it is much simpler to divide a tokenized real estate asset among multiple owners than a traditional physical asset.
• For brands: From a marketing perspective, NFTs can function as digital representations of a brand’s key elements (products, logos, etc.). According to Colicev (2022), this allows companies to build and foster highly engaged and participatory brand communities.

New markets and business models

Chandra (2022) identifies four main categories of opportunities offered by NFTs:

1. Virtual assets: Such as digital art pieces and in-game items.
2. Hybrid assets: For example, event tickets or music albums that connect a physical experience with a digital component.
3. Physical/Virtual interface: Products like sneakers or watches that have a virtual replica or certificate of authenticity.
4. Metaverse assets: Land, avatars, or exclusive tools within a virtual universe.

These possibilities extend to the creation of innovative markets and investment methods. Along these lines, Valeonti et al. (2021) explore the use of NFTs to fund cultural institutions like galleries and museums through the sale of certified digital replicas of their collections.

Buying Non-Fungible Tokens

The non-fungible token (NFT) market gained momentum in early 2017, when thousands of unique digital characters were created and registered as assets on the Ethereum blockchain, laying the groundwork for the boom in digital collectibles (Dowling, 2022).

Market analysis: Volatility and links to cryptocurrencies

The relationship between NFTs and cryptocurrencies is complex. A study by Dowling (2022) yielded two main conclusions:

1. Independent volatility: The volatility of NFT prices does not seem to be directly caused by fluctuations in cryptocurrency prices.
2. Correlated movement: Despite the above, both markets tend to move in similar directions under certain conditions.

Meanwhile, Kong and Lin (2021) observed that while NFTs may offer higher returns than traditional financial assets, this opportunity is accompanied by inherent high volatility.

Key factors in the purchase decision

Several factors influence the intention to acquire an NFT. Recent research highlights:

• Investor expectations: The expected economic return and perception of risk are crucial (Vega & Camarero, 2024).
• Trust and security: Perceptions of platform security and data privacy directly influence user trust (Wu et al., 2024).
• Hedonic value: The personal pleasure and enjoyment derived from owning the asset are also a key purchase driver (Vega & Camarero, 2024).

Where to buy and how to stay informed?

NFTs are acquired on specialized marketplaces. Some of the best-known include OpenSea, Rarible, Zora, and SuperRare. To analyze market performance, websites like Cryptoslam, NonFungible, and DappRadar offer detailed statistics on sales volumes and prices—useful tools for researching before you buy.

Important! Risks to consider before investing

Like any digital asset, investing in non-fungible tokens carries significant risks that must be carefully evaluated. The main ones include:

• High volatility: Prices can experience extreme fluctuations in very short periods.
• Security risks: There is a possibility of suffering hacks or scams (phishing).
• Regulatory uncertainty: The legal framework governing NFTs is constantly evolving and varies across different countries.
• Speculative bubbles: The value of many assets may be driven more by speculation than by their utility or intrinsic value.

Examples of Non-Fungible Token uses

The initial NFT market focused on collectibles and digital art, but its utility is expanding to numerous sectors. Here are some examples of non-fungible tokens:

• Digital Art and Collectibles: The most well-known application. It allows artists to sell their works directly to collectors and receive royalties from future sales. Projects like the Bored Ape Yacht Club (BAYC) have created entire communities around their collections.
• Video Games (Play-to-Earn): NFTs allow players to be the true owners of their in-game assets (characters, weapons, land). They can buy, sell, and even use them in different games. Models like “Play-to-Earn” enable players to generate real income (Hasan et al., 2024).
• Real Estate: They are used to fractionalize the ownership of a property, allowing multiple investors to buy a digital “stake” in a house or building, thus facilitating real estate investment.
• Event and Show Tickets: A ticket as an NFT can eliminate fraud and illegal resale. Additionally, it can be programmed to become a collectible item with extra benefits (exclusive videos, discounts) after the event.
• Industrial Metaverse: The study by Hasan et al. (2024) concludes that the synergistic integration of the metaverse, digital twins, and blockchain technologies—especially through dynamic and composable NFTs—presents promising avenues for transforming industrial applications, revolutionizing processes, and enhancing efficiency, security, and innovation across various sectors.
• Music and Royalties: Musicians can sell their albums or songs as limited-edition NFTs, and the smart contract can automatically ensure they receive a percentage of all future sales.
• Healthcare: Nunes et al. (2024) studied the transformative potential and versatile applications of Non-Fungible Tokens (NFTs) in the healthcare sector, finding that NFTs are applied in areas such as medical devices, digital pathology exams, smart diagnostics/machine learning, pharmaceuticals, medical record management, healthcare products, patient consent, medical waste management, research funding, and identity management.
• Digital Identity and Certificates: University degrees, professional certificates, or medical records can be issued as NFTs to guarantee their authenticity and give the individual full control over who can access them.
• Supply Chain: Luxury brands can associate an NFT with a physical product (a watch, a handbag) so that the customer can verify its authenticity and trace its origin, thereby combating counterfeiting. The study by Helo et al. (2025) presents the key technology and processes of NFTs, providing a basis for understanding their application in operations and supply chains.

The controversies and challenges of NFTs

Despite their potential, NFTs are not without significant criticisms and challenges that are crucial to understand.

Environmental impact and sustainability

According to Ali et al. (2023), one of the biggest criticisms has been the high energy consumption of blockchains like Ethereum, which uses a consensus mechanism called “Proof-of-Work.” However, the industry is evolving:

• The Ethereum Merge: In 2022, Ethereum transitioned to a “Proof-of-Stake” mechanism, reducing its energy consumption by over 99%.
• Eco-Friendly Blockchains: Other networks like Solana, Tezos, and Flow were designed from the ground up to be energy-efficient.

Volatility, speculation, and bubbles

The NFT market is highly volatile and speculative. Prices can rise and fall drastically in a short time. Many projects lack long-term value and are considered a speculative “bubble,” an investing high-risk endeavor.

Copyright and Intellectual Property

There is significant confusion about what is actually being purchased. Buying an NFT does not automatically grant the copyright or intellectual property rights to the underlying asset. Generally, one only acquires the right to use, display, and sell that specific tokenized copy. The rights transferred depend on the terms and conditions set by the creator in the smart contract. In this regard, Taherdoost (2023) highlights that many works traded as NFTs are protected by copyright, and there is a lack of clarity about what exactly is acquired when buying an NFT. The author notes that NFTs are not subject to digital rights management, which allows access to multiple users at once.

Tax and accounting implications

The tax regulation of NFTs is still developing in many countries. Profits from the sale of an NFT are typically subject to capital gains taxes, and it is essential for investors and creators to keep detailed records of their transactions to comply with their tax obligations. On the other hand, NFTs currently lack global government regulation, which means there is little to no legal protection for those who create, sell, buy, or invest in them (Ali et al., 2023).

Quick guide: How to create or mint an NFT?

If you are a curious artist or creator, the process of minting your first NFT is more accessible than it seems. Here are the basic steps:

1. Choose a Blockchain: Ethereum is the most popular, but options like Polygon are cheaper and faster in terms of transaction fees (“gas fees”).
2. Get a Crypto Wallet: You will need a digital wallet compatible with your chosen blockchain, such as MetaMask or Trust Wallet. This is where you will store your cryptocurrencies and NFTs.
3. Buy Cryptocurrency: You will need to purchase the blockchain’s native cryptocurrency (e.g., ETH for Ethereum) to pay for minting fees. You can do this on platforms like Binance, Coinbase, or Bitso.
4. Select an NFT Marketplace: Platforms like OpenSea, Rarible, or Foundation allow you to connect your wallet and upload your digital file (image, video, audio).
5. Upload Your File and Mint: Follow the marketplace’s instructions to upload your work, add a title, a description, and set the royalties you wish to receive from future sales. Then, you will pay the “gas fee” to register your NFT on the blockchain. And that’s it—your NFT is created!

Conclusions

Non-fungible tokens are much more than just JPEG images on the internet. They represent a paradigm shift in how we certify ownership and value in an increasingly digital world. According to Popescu (2021), non-fungible tokens can revolutionize the world of property and reshape different industries like gaming, media, and the arts.

While they face significant challenges regarding regulation, sustainability, and speculation, the underlying technology of NFTs has the potential to democratize content creation, empower artists, and transform industries ranging from finance to video games.

Understanding what they are, how they work, and, above all, what they are used for is fundamental to navigating the emerging Web 3.0 ecosystem and the digital economy of the future.

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Frequently Asked Questions (FAQ)

References

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Milthon Lujan Monja

Editor and founder of “Innovar o Morir” (‘Innovate or Die’). Milthon holds a Master’s degree in Science and Innovation Management from the Polytechnic University of Valencia, with postgraduate diplomas in Business Innovation (UPV) and Market-Oriented Innovation Management (UPCH-Universitat Leipzig). He has practical experience in innovation management, having led the Fisheries Innovation Unit of the National Program for Innovation in Fisheries and Aquaculture (PNIPA) and worked as a consultant on open innovation diagnostics and technology watch. He firmly believes in the power of innovation and creativity as drivers of change and development.