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How Do NFTs Work?

An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.


Although they’ve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFTs since November 2017.



NFTs came to prominence in 2017 with a game called CryptoKitties, which enables players to buy and “breed” limited-edition virtual cats. From there, game developers adopted NFTs in a big way to allow gamers to win in-game items such as digital shields, swords or similar prizes, and other game collectibles.


Tokenization of game assets is a real game-changer, since it enables transferring tokens between different games or to another player via NFT specialized blockchain marketplaces.


Besides gaming, NFTs are frequently used to sell a wide range of virtual collectibles, including NBA virtual trading cards, music, digital images, video clips and even virtual real estate in Decentraland, a virtual world.


NonFungible.com, a website that tracks NFT projects and marketplaces, puts the value of the total NFT market at $250 million, a negligible fraction of the total crypto coin market but still highly attractive to content creators.


The contract behind the token, based on the ERC-721 standard for creating NFTs, can be set to let content creators continue to earn a percentage from all subsequent sales.


The NFT market is likely to grow further because any piece of digital information can easily be “minted” into an NFT, a highly efficient way of managing and securing digital assets.


Blockchain’s carbon footprint


For all the excitement, there are also concerns that NFTs are not eco-friendly because they are built on the same blockchain technology used by some energy-hungry cryptocurrencies.


For example, each NFT transaction on the Ethereum network consumes the equivalent of daily energy used by two American households. Security for most of today’s blockchain networks is based on special computers called “miners” competing to solve complex math puzzles.


This is the proof-of-work principle, which keeps people from gaming the system and provides the incentive for building and maintaining it. The miner who solves the math problem first gets awarded with a prize paid in virtual coins.


The mining requires a lot of computational power, which drives electricity consumption.

Ethereum blockchain technology is evolving and moving toward a less computationally intensive design.


There are also emerging blockchain technologies like Cardano, which was designed from the outset to have a small carbon footprint and has recently launched its own fast-growing NFT platform called Cardano Kidz.


The speed of transformation of blockchain technology into a newer, more eco-friendly variant might well decide the future of the NFT market in the short term. Some artists who feel strongly about global warming trends are opposed to NFTs because of perceived ecological impact.


The coming crypto-economy


Whether or not the current NFT craze can keep its momentum going, NFTs have already accelerated a larger trend of digital economic innovation.


NFTs have confirmed that the public is feeling increasingly favorable toward a crypto-economy and is embracing short-term risks in return for creating new business possibilities.


NFTs have already made significant inroads into the luxury and gaming industries, and have plenty of room to grow beyond these initial applications.


The art sector will continue to be an important segment of the overall NFT market and is likely to gradually reach maturity over the next couple of years, although it is likely to be surpassed by other digital certificate applications like trademarks and patents, training and upskilling certificates.


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