NFT (Non-Fungible Token)

Definition: A blockchain-recorded token representing ownership of a unique, non-interchangeable asset, unlike a cryptocurrency where every unit is identical and interchangeable.

How It Works

Each NFT has a unique token ID recorded on-chain, tied to metadata describing what it represents, often an image, but it can be anything: a ticket, a deed, an in-game item, a license
Ownership and transfers are recorded via Smart Contract logic, most commonly following the ERC-721 or ERC-1155 standards on Ethereum, or equivalent standards on other chains
The token itself typically just points to the asset (a URI), it doesn’t necessarily contain the asset directly, the actual image or file is often stored off-chain
Minting creates a new token instance by calling a contract function, which assigns a token ID to the minter’s address and, if applicable, sets its metadata pointer
Some collections generate metadata algorithmically at mint time from a set of traits, others assign metadata from a pre-generated, fixed list
Royalties can be encoded so a percentage of every resale automatically goes to the original creator, though enforcement depends on the marketplace actually honoring that logic, it isn’t enforced by the token standard itself
A single contract can issue many different NFTs, e.g. one collection contract with token IDs 1 through 10,000, each a distinct item
Burning an NFT permanently destroys it by sending it to an unrecoverable address or calling a dedicated burn function, removing it from circulating supply
The Transfer event emitted on mint and every subsequent sale is what indexers and marketplaces use to reconstruct an item’s full ownership history without querying the contract directly each time
Marketplaces read the same on-chain ownership and metadata directly, they don’t hold a separate private database of who owns what

NFT Marketplaces and Trading

Listings are typically off-chain signed orders, a seller signs intent to sell at a price without paying gas, gas is only spent when a buyer actually fills the order
Auctions can be English (ascending bids) or Dutch (descending price until someone buys), both implemented in the marketplace or minting contract
Wash trading, buying and selling an NFT between wallets you control, can artificially inflate a collection’s reported volume and floor price, sometimes to farm a marketplace’s trading rewards
Aggregators (e.g. Blur) pull listings from multiple marketplaces so buyers can compare and buy the cheapest available listing in one transaction
Fractionalization protocols let a single high-value NFT be split into fungible shares, so multiple buyers can own a percentage instead of needing the full price

NFT Standards

Standard	Fungibility	Typical use
ERC-721	Fully non-fungible, one token ID per unique item	Art, PFP collections, deeds
ERC-1155	Semi-fungible, one contract can hold many token types, each with its own supply	Game items, editions, tickets
ERC-6551	Gives an NFT its own smart contract wallet, letting it own other assets	NFTs that hold inventories or sub-assets

On-Chain vs Off-Chain Metadata

Fully on-chain: the image/data is generated and stored directly in contract storage or as inline SVG, expensive in gas but immune to a broken external link
IPFS-hosted: metadata and media are stored on a content-addressed, distributed file system, more durable than a plain web URL but still depends on someone pinning the data
Centralized server: metadata points to a normal web URL, cheapest to set up, but the NFT stops resolving to real content if that server goes offline

Under the Hood

Worked example: royalty payout on resale

Given: an NFT originally minted by an artist is resold on a marketplace for 5 ETH, the contract encodes a 7.5% creator royalty
Step: royalty amount = 5 x 0.075 = 0.375 ETH
Step: marketplace fee, say 2.5%, is also deducted, 5 x 0.025 = 0.125 ETH
Answer: the seller receives 5 - 0.375 - 0.125 = 4.5 ETH, the artist receives 0.375 ETH automatically, if and only if the marketplace enforces the royalty, some marketplaces don’t

Worked example: gas cost of minting

Given: minting one ERC-721 token costs roughly 90,000 gas, base fee is 35 gwei, tip 2 gwei
Step: total fee per gas = 37 gwei, total gas cost = 90,000 x 37 = 3,330,000 gwei = 0.00333 ETH
Answer: at $3,000/ETH, that's about$ 9.99 just for the mint transaction, before any mint price the project itself charges, which is why large collections often use cheaper L2s or batch-minting patterns to reduce per-item cost

Worked example: gas war during a popular mint

Given: a hyped collection opens minting to everyone at once, normal base fee is 30 gwei
Step: thousands of wallets (many bots) submit mint transactions simultaneously, competing for limited block space drives the base fee up to 500 gwei within minutes
Step: at 90,000 gas and 500 gwei, one mint now costs 90,000 x 500 = 45,000,000 gwei = 0.045 ETH, about $135 at$ 3,000/ETH
Answer: the mint price itself might only be 0.05 ETH, but gas alone nearly doubles the effective cost during the rush, and transactions with too-low a bid can fail and still burn gas

Why It Matters

Introduced a standard way to represent verifiable, transferable ownership of unique digital or digitally-referenced items on a blockchain
Lets creators sell directly to collectors and, when honored, receive ongoing royalties on secondary sales without a gallery or platform intermediary
Gives digital items provable scarcity and provenance, the full ownership history is publicly auditable from mint to the current holder
Enables new mechanics like token-gated access, membership, and in-game asset ownership that persist independently of any single company’s servers
Lets ownership move between wallets and marketplaces freely, an item bought on one platform is still yours and tradable on any other platform that reads the same contract

Common Pitfalls

Assuming owning an NFT grants copyright or exclusive usage rights to the underlying artwork, in most cases it doesn’t unless explicitly granted in the project’s terms
Confusing the permanence of the blockchain record with the permanence of the actual asset, if the linked image is hosted off-chain and that host disappears, the NFT can end up pointing at nothing
Approving a marketplace contract for unlimited access to a whole collection and forgetting to revoke it, a compromised approval can be used to drain every NFT it covers
Assuming a “floor price” listed on a marketplace reflects real liquidity, thin trading volume means the actual sale price for a specific piece can be far below the last listed floor
Interacting with a phishing site that mimics a real mint page, connecting a wallet and signing a malicious transaction can transfer NFTs out without an explicit “send” action being obvious
Treating royalty enforcement as guaranteed, several major marketplaces have made royalties optional, undermining the “built-in creator revenue” pitch for existing collections
Mistaking a fake collection using stolen artwork and a similar name for the real one, always verify the contract address matches the project’s official one before buying

Comparison

	NFT (ERC-721)	Semi-fungible (ERC-1155)	Fungible token (ERC-20)	Physical deed/title
Interchangeable	No, each token unique	Partially, per type	Yes, fully	No
Divisible	No	Depends on type	Yes	No
Ownership record	On-chain	On-chain	On-chain	Government registry
Typical use	Art, collectibles, unique items	Game items, event tickets	Currency, governance tokens	Real estate, vehicles
Transfer mechanism	Single `transferFrom` call	Batch transfer supported	Single `transfer` call	Notarized paperwork

Example

An artist mints a 1-of-1 digital artwork as an ERC-721 token on Ethereum through a marketplace like OpenSea, collectors bid and the winning buyer’s wallet becomes the new recorded owner, verifiable by anyone inspecting the contract.

FAQ

If I buy an NFT, do I own the image file? You own the token, which typically just references the image. Usage rights depend entirely on what the project’s terms actually grant.

Can two NFTs have the same token ID? Not within the same contract, but two different contracts can each independently mint a token ID 1, they’re unrelated assets.

Are NFTs only for art? No, tickets, domain names, game items, and real-world asset records are common non-art use cases.

What happens to an NFT if the project’s website disappears? The on-chain ownership record and token still exist, but the metadata or image can break if it depended on that project’s server rather than durable storage like IPFS.

Does minting an NFT always cost gas? On most chains yes, though some projects use “lazy minting,” where the token is only actually written on-chain at the moment of first sale, shifting the gas cost to the buyer.

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