What is an NFT? Non-fungible tokens in plain words

An NFT, or non-fungible token, is an entry on a blockchain that records who owns one particular, unique thing, most often a digital image, but also a ticket, a name or an item in a game. Unlike a bitcoin, which is interchangeable with any other bitcoin, each NFT has its own ID. What an NFT usually holds is a link to a file stored somewhere else, not the file itself.

In short

• "Non-fungible" means not interchangeable: each token is one of a kind and can't be swapped like for like.
• An NFT records ownership of a token, which usually points to a file; it doesn't give you the file's copyright or stop anyone copying the file.
• NFTs boomed in 2021 and slumped in 2022; the uses that remain are mostly tickets, names, game items and proof of membership.

What does "non-fungible" mean?

Something is fungible when any one unit can replace another. A $10 bill is fungible: if you lend one and get back a different $10 bill, nothing is lost. A bitcoin or a share of a company works the same way. Something is non-fungible when each one is distinct: a concert ticket for seat 14C, a house, a signed first edition. Swapping one for another changes what you have.

An NFT brings that second kind of ownership to a blockchain. Each token has a unique number inside a smart contract, a program running on a blockchain such as Ethereum, and the contract records which account owns each number. Most NFTs follow a standard called ERC-721, finalized in 2018, which sets out the basic functions every such contract has: who owns token number so-and-so, transfer it to someone else, and where to find its description.

What does an NFT actually contain?

Less than most people assume. A blockchain is expensive to store data on, so the token usually holds a short web address, not the artwork. Following one NFT from the token to the picture shows where each piece lives:

Step	What is there	Where it lives	Who controls it
1. The token	A contract address, a token ID such as #4217, and the owner's account	On the blockchain	No one can change it but the owner, by transferring it
2. The metadata	A small file with a name, a description and a link to the image	Usually a web server or a file network such as IPFS	Whoever runs that server, unless the file is pinned or on-chain
3. The image	The picture itself	Wherever the metadata's link points	Whoever runs that server

Only the first step is on the blockchain. If the server at step 2 or 3 goes down, the token still exists, but it may point to nothing. In a January 2022 essay, Moxie Marlinspike, the cryptographer who created the Signal messaging app, described an NFT he had made that looked one way on one marketplace and another way on a second, and showed as a poop emoji in the wallet of anyone who bought it, to show that the token doesn't check what its link returns. Some projects avoid this by storing the image on-chain or on IPFS, where a file's address is derived from its contents, so the file can't be quietly swapped.

What do you own when you buy an NFT?

You own the token: the right to hold it, sell it or give it away, recorded publicly. Whether you own anything more depends on the license the seller attaches, which is a legal promise outside the blockchain.

Owning an NFT usually gives you	It usually doesn't give you
A public record that your account holds this token	The copyright in the image
The ability to sell or transfer the token	The right to stop others copying or viewing the image
Whatever extra rights the project's license grants, such as display or limited commercial use	A guarantee the file will stay online
Access to anything the token is a pass to, such as an event or a group	Any claim if the project shuts down

The U.S. Copyright Office and Patent and Trademark Office studied NFTs at the request of two U.S. senators and reported in March 2024 that current uses of NFTs did not require changes to intellectual property law, while noting widespread concern that buyers and sellers don't know which rights are involved. Holding the token, like any crypto asset, depends on controlling the key in a crypto wallet.

What happened in the NFT boom and bust?

NFTs started small. In 2017, CryptoPunks offered 10,000 free pixel-art characters, and a game called CryptoKitties, where players bred and traded cartoon cats, became popular enough to slow the Ethereum network. The ERC-721 standard grew out of that period.

The boom came in 2021. On 11 March 2021, the auction house Christie's sold a digital collage by the artist known as Beeple, Everydays: The First 5000 Days, for $69.3 million, and celebrities, brands and sports leagues launched collections. Marketplaces handled billions of dollars of trades a month at the peak.

The bust followed in 2022, alongside the wider fall in crypto prices. Monthly trading dropped by most measures to a small fraction of its peak, and many collections that had sold for thousands of dollars became nearly impossible to sell at all. Trackers disagree on the exact figures, partly because some trading was between accounts controlled by the same person, inflating volumes.

What are NFTs used for now?

The uses that outlasted the hype treat the token as a record, not an investment:

• Names. The Ethereum Name Service issues names like alice.eth as tokens, which point to a wallet address and can be transferred.
• Tickets and passes. A token can prove you bought entry, and can be checked at the door or resold under set rules.
• Game items. Items that a player owns as tokens can be traded outside the game's own store.
• Membership. Holding a token can grant entry to a group chat, a newsletter or early access.
• Art. Some digital artists still sell work this way, because the token gives a public record of who made and sold it first.

NFTs are a central example in the idea of Web3, an internet where users hold their own assets on public blockchains. They grew out of the same design as Bitcoin, applied to unique items rather than money.

Still argued

Whether NFTs are useful or mainly a speculative fad is argued. Supporters say they give digital creators a direct way to sell work and give buyers verifiable ownership of digital goods. Critics say the token proves little when the file sits on someone else's server and the copyright stays with the seller. This note explains how NFTs work; it isn't financial advice.

Check yourself

• Without looking back: what makes something fungible, and why is an NFT not?
• What part of an NFT is on the blockchain, and what usually isn't?
• What would you need besides the token to have the right to print and sell the image?

Sources

• ERC-721: Non-Fungible Token Standard — Ethereum Improvement Proposals, 2018
• Non-fungible tokens (NFT) — ethereum.org
• My first impressions of web3 — Moxie Marlinspike, 2022
• Non-Fungible Tokens and Intellectual Property: A Report — U.S. Copyright Office and U.S. Patent and Trademark Office, 2024
• Non-fungible token — Wikipedia