What is NFT (non-fungible token)?

A token that represents a unique item rather than an interchangeable unit, used for digital art, collectibles, and in-game assets.

Fungibility is the whole distinction. One dollar is interchangeable with any other dollar, and one unit of a token is interchangeable with any other unit of the same token. A non-fungible token is individually identified, so token number 4,102 in a collection is a different object from token number 4,103 even though the contract issued both.

NFTs trade on dedicated marketplaces rather than on the exchanges that list fungible assets. That is a structural difference, not a temporary one: an order book needs interchangeable units to match, and unique items need a listings-and-offers model instead.

How it works

The token is a contract entry mapping a token identifier to an owner address. On Ethereum the standard is ERC-721, with ERC-1155 covering collections that mix unique and semi-fungible items (source: the Ethereum Improvement Proposals for ERC-721 and ERC-1155).

The contract usually does not store the artwork. It stores a token URI, a pointer to metadata that in turn points at an image or file. Where that pointer leads decides how durable the thing is. A pointer to a company's web server fails when the company stops paying for hosting. A pointer to content-addressed storage such as IPFS resolves by the file's own hash, so the reference cannot silently change, though someone still has to keep hosting the bytes.

Buying happens on a marketplace where sellers list items and buyers make offers, with the trade settled by a contract that swaps payment for the token atomically. Marketplaces charge a fee, and many collections encode a creator royalty, though whether marketplaces enforce royalties has changed repeatedly and varies by venue.

Ownership of the token is not ownership of copyright. What rights come with an item are whatever the creator granted in writing, which is often nothing beyond the token itself.

Example

Illustrative cost of a purchase. An item is listed at 0.5 of a native coin. The marketplace charges a 2% fee and the collection specifies a 5% creator royalty. You also pay gas to execute the trade.

Your outlay is the 0.5 plus gas. The seller receives 0.5 minus 2% minus 5%, which is 0.465. That 7% wedge is the round-trip cost before any price movement, which is why flipping requires a substantially higher sale price just to break even.

Why it matters when you buy

For someone buying cryptocurrency, the practical link is that most NFT purchases require the chain's native coin in a self-custody wallet, so the sequence is buy on an exchange, withdraw to a wallet, then transact on a marketplace. That means paying an exchange fee and a withdrawal fee before you start. Compare those at the fee comparison, and see First crypto wallet for the wallet step.

Related terms

• erc 721 — the standard for unique tokens
• erc 1155 — the mixed-fungibility standard
• ipfs — content-addressed storage for metadata
• token approval — the permission that gets abused
• wallet drainer — the malicious approval in practice
• ordinals — the Bitcoin equivalent approach

Questions

Do I own the image when I buy an NFT?

You own the token. Rights to the underlying work are whatever the creator explicitly granted, and in many collections that is nothing. The licence terms, where they exist, are published by the project.

Can I buy an NFT on a normal crypto exchange?

Generally no. A few venues have run marketplaces, but the standard route is buying the chain's native coin on an exchange, withdrawing to a wallet, and using a dedicated marketplace.

What happens if the metadata host disappears?

The token still exists and you still own it, but the image may no longer resolve. Collections storing metadata on content-addressed systems are more resilient than those pointing at a single server.