Non-Fungible Tokens (NFTs)

The Non-Fungible Token (NFT) expression incorporates two specific terms: Token and Non-fungible.

A token is something that is on a blockchain, has a value, and can be received and sent, but is not the official currency of that blockchain.

In law, the term fungible is associated with goods which, having no specific individuality, can take the place of one another in legal effects; the typical fungible good is money.
For example, if I were to give Giuseppe 10 euros and he was to provide me with another 10 euros, there would be no difference in the composition of our assets. Each 10-euro banknote represents an identical value, so the money can be considered fungible.
One Bitcoin is fungible since it can be replaced with another. On the other hand, a piece of artwork is non-fungible because it cannot be exchanged for a generic good but is identical in value. NFTs, in the same way, are unique pieces that cannot be replicated or replaced.

Non-Fungible Tokens (NFT) are “digital certificates” based on blockchain technology that uniquely identifies the irreplaceable and non-replicable ownership of a digital product created on the Internet: such as a photo, video, text, article, audio, GIF, etc. When a digital object is certified with an NFT, it is as if there was the author’s signature on it, and no one can say that it is not original.

Buying an NFT does not involve obtaining ownership of the workpiece but the possibility of demonstrating a right onto that work through a smart contract that automatically executes an agreement that is forever registered on the blockchain.

  • Ownership: NFTs are connected to digital wallets; being unique and indivisible, they are associated with a single owner.
  • Limited supply: the supply of NFTs is kept limited by smart contracts that preserve its properties. The number of NFTs can be defined by the developers by also defining rarity levels that increase their value.
  • Origin: blockchain technology allows to trace the source of a given NFT through the decentralized register; this allows to prove the authenticity of the property and prevent fakes.
  • Interoperability: NFTs are characterized by free exchange on different open markets (marketplaces). This allows users to move assets outside the original creation spaces: in this way, they move from closed economic systems to a free market.
  • Liquidity: the digital nature of NFTs and their integration into major cryptocurrency networks such as Ethereum lead to high liquidity compared to physical assets; however, compared to tokens and fungible currencies, NFTs are less liquid.
  • Standardization: NFT protocols are based on software such as Ethereum, a feature that determines their standardization.

There are several use cases for Non-Fungible Tokens:

  • Art market: there are real digital works of art (such as an image, audio, a video file) that people buy as collectables or as a form of investment. In 2021, the crypto-art market generated a turnover of approximately 2.8 billion dollars, with over 774,000 sales between the primary and secondary markets (source The average price of a crypto work has increased nearly tenfold over the year, from around $ 300 to $ 3,000.
  • Collectables: real electronic cards. For example, the NBA used some clips of the highlights of the American basketball season and created NFTs. In this case, by purchasing the NFT, you are not purchasing the copyright on the image, but you are buying a digital picture, not a paper one, with the aim of collecting it.
  • Music: to collect songs by your favourite singers without purchasing the copyright. There are markets where you can also buy or sell copyright through NFTs to achieve investment; however, these markets are small and illiquid.
  • Gaming: some NFTs can be used within blockchain-based video games; NFTs become digital collectables or gadgets that can be used in virtual games.
  • Certificates: NFTs can be used to verify the authenticity of a person’s identity or birth certificates, academic credentials, licenses, or others.
  • Financial documents: invoices, bills, and orders can be transformed into NFTs.
  • Real estate: Real estate and other valuable properties can be tokenized to improve the property’s liquidity or speed up financing.

Initially, a digital version of the work of art is created, which, in computer language, is defined by a sequence of binary digits (0-1). Then, this sequence is compressed into another series called “hash” (fingerprint) which uniquely identifies that file: the hashing process makes it impossible to reconstruct the original digital document. This BIT sequence is unique and is transcribed on a decentralized ledger: the blockchain. Ethereum currently contains the majority of the NFT market, as it is the most tested and developed platform; Ethereum works with a protocol called Proof of Work.

Since most NFTs are built on the Ethereum blockchain, a digital wallet must be opened in which to deposit and keep the cryptocurrencies necessary for transactions.

Once you have created your wallet containing the cryptocurrencies, you need to choose the marketplace (the virtual shop) where you can buy or sell NFTs. If the NFT has a very cheap cost or is free, it is likely that a variable tax will be applied to be paid (gas fee). Since these are crypto tokens that are supported by a real blockchain, these tokens can be exchanged both through smart contracts and through a manual exchange. They are, in effect, assets that we can buy and sell. For this purpose, many markets have also been born that allow auctions or private agreements.

The available NFTs appear within the marketplaces. Interested buyers can:

  • purchase the NFT directly (fixed price);
  • make bids in the auction, at the end of which the seller receives a notice with the best bids from the buyers;
  • make a bid at the price that is considered the fairest.

Once the bid is accepted, the platform manages the transfer of funds for the digital asset, concluding the purchase and sale process.