What Are NFTs and How Do They Work: Easy Guide

Non-fungible tokens (NFTs) have taken the world by storm, with major companies and celebrities jumping headfirst into the craze. While it’s possible to find affordable NFTs, some have been sold for incredibly high amounts. Because of this, the NFT market has seen a great sum of money come its way in recent years. Global trading across the gaming, art and financial markets has seen volumes of $41bn.

So, other than being a major economic innovation, what are NFTs and how do they work?

What are NFTs and how do they work? NFTs and IP Law: Who Owns What?

What are NFTs?

NFTs are unique digital assets that can’t be traded or exchanged, which makes them valuable. An example would be an original trading card. Since it’s one-of-a-kind, it can’t be replicated and there are no duplicates.

These tokens can be found almost anywhere: artwork, music, videos – you name it. They can be used as a representation of real-world items, an individual’s identity, property rights and more. In the rising digital age, artists and brands are able to express their creativity through NFTs.

Instead of being traded, NFTs are bought and sold using blockchain technology. They can be released either individually or in collections, like the ‘Bored Ape Yacht Club’. Each NFT has a unique identification code as well as metadata that distinguishes them from others, meaning there can only be one original.

Difference between fungible and non-fungible tokens

Fungible tokens, or assets, store value; non-fungible tokens store data. A fungible token isn’t unique and can be exchanged with something equivalent. For example, a bitcoin can be exchanged for another bitcoin. Fungible tokens are also divisible, whereas non-fungibles aren’t.

Challenges and risks associated with NFTs

Buying an NFT gives you the right to hold onto it or trade it. However, there are some challenges and risks involved with the buying and selling of NFTs:

  • You can never truly ‘own’ an NFT: Although you’re given ownership, you won’t have any other rights to the work. For example, an NFT may be your property but it doesn’t mean you have the right to make the work accessible to the entire world.
  • Scams, cyber threats, and online fraud: This includes fake marketplaces and sellers. As NFTs become more popular, the chances of cyber threats have also begun to rise.
  • NFTs are bad for the environment: The buying and selling of cryptocurrencies have generated millions of tons of carbon dioxide emissions.
  • NFTs don’t protect artists: Their work can be repurposed without consent.
  • Intellectual Property Rights: NFT marketplaces have no relation to traditional property laws. New intellectual property rights need to be brought into consideration.
  • Legal challenges: Since there isn’t a legal definition of NFT across the world, each country has its own approach to NFT classification.

It’s important to fully understand and evaluate these challenges and risks before you make the leap into NFTs. Luckily, we have a guide on how to invest in NFTs.

NFT terminology

Learning NFT terminology is almost like learning a new language. Here’s a list of terms to get you started:

  • Blockchain: A digital ledger system that records any changes or transactions.
  • Cryptocurrency: A type of digital currency that uses cryptography.
  • Ethereum: A cryptocurrency, the blockchain that supports NFTs.
  • Gas: An amount required to run cryptocurrency transactions.
  • Wallet: Stores tokens when they’re not in use. It could be a cold storage wallet or a place where you can send and receive items.

It can be overwhelming at first, here is a glossary of all the essential NFT terms you need to know.

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