What are NFTs and how do they work?
Non-fungible tokens record unique items on a blockchain. What you actually own when you hold one, and the common pitfalls.
An NFT (non-fungible token) is a token that is unique. One bitcoin is equal to any other bitcoin, but each NFT has its own identifier and history.
How an NFT works
On Ethereum, NFTs usually follow the ERC-721 standard (one token per item) or ERC-1155 (a contract that can hold many item types). The contract records:
- the token's identifier;
- the address that owns it;
- a link to its metadata — a small file with the name, description and image link.
Transferring an NFT is a blockchain transaction, like sending any other token.
On-chain and off-chain data
Images and videos are usually too large to store on a blockchain. Most NFTs store only a link. If the link points to an ordinary web server and the server goes offline, the image can disappear even though the token remains. Projects often use decentralised storage (such as IPFS) to reduce this risk; a few store everything on-chain.
What you own
Owning an NFT means controlling the token in the contract. It does not automatically give you copyright or any other legal right to the artwork — that depends on the licence the creator provides.
What NFTs are used for
- Digital art and collectibles.
- Items and characters in blockchain games.
- Tickets and memberships.
- Domain names on some networks.
Risks
- Fakes: anyone can mint a copy of an artwork under a familiar name. Check the contract address and the official collection.
- Malicious approvals: signing a request from a fake marketplace can give a scammer permission to move your NFTs.
- Liquidity: many NFTs are hard to sell, and prices can fall to zero.
XFasil does not offer NFTs. This article is general education.
Blog posts are for education and information only and are not investment, legal or tax advice.