NFT: how do they work?

Beatrice Borghi - June 21, 2022
art blockchain cryptovalute deskresearch nft web3

NFT: how do they work?

NFT how they work - PXR Italy

You may have heard of them, and many of you may be wondering "What exactly are NFT(s) and how do they work?". In fact, for several months now, the acronym NFT has been appearing frequently on the web and has become a real trend: despite its undeniable fame, an aura of mystery remains surrounding the functioning and usefulness of NFTs. Let us discover in more detail this phenomenon that has innovated the world of Digital Arts over the last year.

NFTs create a Blockchain-based digital certificate (a computer ledger divided into blocks) designed for the collection of users' digital objects, including games, music, art and many others. By acquiring this certificate, digital artworks acquire a unique and rare identity (like non-digital artworks). 

However, we find several differences between how NFTs and cryptocurrencies work. The main one lies in the fact that cryptocurrencies like Bitcoin and Ethereum are fungible tokens, which means they are interchangeable with each other, just like normal currencies (called FIAT currencies, like the dollar, euro, etc.). NFTs, on the other hand, are a unique and non-replicable - or non-fungible - token, so exchanging them for an asset of the same value is impossible. The value of the NFT depends (as with works of art) on its valuation, which is closely linked to the supply and demand for NFTs on the market.

An application example of NFT is the Crypto Punks collection - a project by 'Larva Labs', with designers John Watkinson & Matt Hall - which allows you to buy, sell and store up to 10.000 artworks, with proof of ownership stored on the Blockchain.

What makes non-fungible tokens special?

Works of art, transformed into NFTs, are secured against any kind of counterfeiting and acquire a special value.

The uniqueness of the technology and of how NFTs work lies in the fact that they are inextricably associated with a personalised digital signature; the latter defines the ownership of the NFT, which can be bought and sold for FIAT money (dollars, euros, etc.), cryptocurrencies or any other asset (these are always non-fungible tokens).

Each represents unique assets owned by a specific person. Instead, as mentioned above, fungible tokens (as well as some cryptocurrencies) are interchangeable and can be divided into smaller units to form the same value.

Let us give a few examples.

A one hundred dollar note is fungible, as it can be exchanged for five twenty dollar notes or two fifty dollar notes. The painting of the Last Supper is not fungible, as it cannot be generated en masse, and even if a copy is created, it will never be authentic. 

Each NFT contains distinguishable and unique information of who owns the digital asset and who sold it. These are easily verifiable, as it is impossible to forge such a certificate guaranteeing the originality of the painting: this is what makes NFTs unique. 

The NFTs market

In 2022, the Nfts market grew by 138,7%. Digital trading increased significantly during the summer of 2021, due to tokens gaining wide popularity in a short time.

NFTs hit the headlines in March 2021 to be exact, when Beeple's 'First 5000 Days' crypto-art became the world's most expensive non-fungible token ($69 million).

Furthermore, according to a survey conducted by Morning Consult, millennials are the generation most involved in the world of crypto art. Based on this, we can say that NFTs are part of our present and future in the coming years.

(NFT how do they work?) If you are interested, read our article NFT: a new guarantee in the world of investment.

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