Non-fungible tokens, or NFTs, as described by the Wall Street Journal, operate on the same fundamental technology as cryptocurrencies like Bitcoin – the blockchain. However, unlike Bitcoin, which is fungible and can be divided into smaller units, each NFT is unique and indivisible, thus representing a distinct item or asset.
NFTs act as a kind of digital certificate of ownership, living on the blockchain. For instance, a piece of digital art can be turned into an NFT, effectively transforming it into a one-of-a-kind digital asset. A perfect example is the digital artwork linked above, which holds the record as the most expensive NFT, having been sold for 100 million dollars.
You might question the uniqueness of such assets by pointing out that it is possible to duplicate the digital file of the artwork – in effect, to ‘copy and paste’ it. While it’s true that the digital representation of the artwork can be copied, the ownership of the original asset, conferred by the NFT, cannot be duplicated.
Every NFT possesses unique hash keys that are stored permanently on the blockchain. A hash key is a specific type of function that takes an input and returns a fixed-size string of bytes. This information makes each NFT unique, as the hash key for each one is different. Thus, even if the digital representation of the artwork is copied, the unique hash key – and thus the certified ownership of the original artwork – remains solely with the holder of the NFT.
This unique and non-duplicable nature of NFTs is what sets them apart from other blockchain-based technologies. Unlike Bitcoin, which can be divided into smaller denominations, NFTs represent one whole piece and cannot be divided. This uniqueness and indivisibility ensure that each NFT has a distinct value and can prove ownership for a particular digital asset.
