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NFT And Its Working Explained For Dummies

by Actual Simple 2 months ago in nft
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NFT and its working can be complex. Here we try to understand the basics of NFTs, certain use cases, and criticisms faced by them.

NFT And Its Working Explained For Dummies

If you go through the headlines in the year 2021, you can see most of them referring to NFTs. This NFT has taken the entire space of art and gaming to a whole new interesting level. Moreover, as we are in 2022, we can see the rise of NFTs and a promising future right from the initial days. Let us understand NFT and its working in a simple and lucid manner.


  • What is an NFT?
  • What do you mean by non-fungible?
  • How is NFT different from a cryptocurrency?
  • NFT Helps to Identify the Ownership For Any Asset
  • History of NFTs
  • The Current Use Cases of NFTs
  • Criticism Faced by NFTs
  • Related Articles

What Is An NFT?

It stands for Non-Fungible Token. It is a unit of data that we store on a digital ledger like a blockchain. This unit of data represents any digital or physical asset such as real estate, photos, videos, artwork, and much more.

So, an NFT is a unit of data representing any digital or physical asset. It contains a unique identification code and metadata about the asset it represents.

What Do You Mean By Non-Fungible?

One major property of this unit of data is that is non-interchangeable and unique. An NFT representing any asset will be unique and different from some other NFT representing some other asset.

How Is NFT Different From A Cryptocurrency?

Every cryptocurrency token/coin is similar to each other. We can trade one cryptocurrency coin with another. For example, The value of one bitcoin will be equal to another bitcoin. There is no difference. However, an NFT is a unique unit of data that makes it different from cryptocurrencies. One NFT will always be different from every other NFT. This is what makes NFT and its working different from that of a cryptocurrency.

NFT Helps To Identify The Ownership For Any Asset

As NFTs represent any digital asset or a physical asset, it helps us provide ownership of the asset. If you own any physical asset, you may have some paperwork to prove your ownership over that asset. Similarly, an NFT as a unit of data helps you to have the ownership of the asset the NFT represents. However, owning any NFT will not provide you copyright or intellectual property rights over that asset.

For example, if I am an artist and I have prepared digital artwork. I can create an NFT that represents this artwork. It will contain one unique identification code and metadata. The metadata can contain my digital signature or some more information about the artwork. Now, this entire unit of data, as NFT can be transferred to you if you purchase my artwork. So, in a nutshell, it is nothing but proof of ownership. It does not mean you have the copyright over that asset unless the creator mentions it explicitly.



Kevin McCoy and Anil Dash created the first NFT in 2014 by the name of “Quantum”. It was a unit of data representing a video clip made by Kevin’s wife. Kevin sold this unit of data (NFT) as proof of ownership to Anil for $4.


The first Ethereum developer conference was DEVCON 1 in London. The first NFT project was initiated by the name Etheria.


The crypto game CryptoKitties monetized itself by selling cat NFTs. This became a game-changer in the rise of NFTs.

2020 Onwards

In the year 2020, the NFT market exploded from various points. The value went up to $250 million.

The Current Use Cases Of NFTs

We now know that NFT is a unit of data representing any digital asset. If you purchase any NFT of a particular asset, you are allowed to use that asset for a specified purpose.

Let us take a look at some assets that are using NFTs to sell and purchase ownership.

Digital Arts

People are buying NFTs linked to digital artworks. They are currently the most popular use case of NFTs. The most expensive NFT is valued at $91.8 million dollars by an artist “Pak”. The artwork is named “Merge”. The second expensive digital art is “Everydays: the first 5000 days”, by artist Mike Winkelmann. He is professionally known as Beeple. The value of his artwork is $69.3 million as of 2021.

A different form of digital art is also present wherein you can combine different pictures to form an entirely new art. It is called generative art. Some popular NFT projects for this are EtherRocks and CryptoPunks.


Some NFT projects allow us to trade and acquire in-game assets such as game avatars, costumes, plots of land, and much more. Players can buy these in-game assets in the form of NFTs and even trade them on different marketplaces. Recently companies like GameStop and Ubisoft have launched their NFT marketplaces too.


Since Feb 2021, the music NFTs generated around $25 million in revenue. Many artists like 3LAU, Kings of Leon, Eminem are associated with NFT projects for the promotion of their albums and their selling proposition.

Criticism Faced By NFTs

Environmental Issues

The biggest concern that is raised is the issue of environmental degradation, greenhouse emissions, and high energy use from NFTs and blockchain transactions. As NFTs do use proof-of-work, it uses a high amount of electricity for every transaction. The carbon footprint is quite high for such scenarios. However, many alternative NFT projects are finding solutions such as implementing proof-of-stake which results in more environmentally friendly.

Pyramid Scheme Claims By Analysts

Some experts believe that the NFT market resembles the pyramid or ponzi scheme in which early buyers will benefit from those who joined the NFT chain later.

Plagiarism Along With Buying And Selling Fraud

Many fraudsters did sell a few digital assets owned by other artists in the form of NFTs. A recent case is of Qing Han who died in 2020. A fraudster assumed his identity and made her works available for buying as NFTs. Moreover, this not only stops here. The biggest concern is that the minting of NFTs is anonymous. This makes it tough to legally approach such situations. One more process of “sleepminting” is used by some hackers. The process allows them to mint an NFT in the wallet of the artist and then transfer it back to their own wallet without letting the artist know.

NFT Does Not Store The Data On The Blockchain

One major concern is that NFTs do not store digital assets on the blockchain. It only stores data that helps us point to the digital asset stored somewhere else. It only functions as ownership proof and points to the web address where the asset is stored. This raises a concern of link rot. Link rot means that over due course of time the original file may get relocated or deleted but the link in the NFT will still point to the original address where the file may not be present anymore. Above all, as NFTs do not store the digital asset and are separate from the asset, anyone can save the NFTs image through a right-click.

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About the author

Actual Simple

We write about digital marketing, business models, and startups in a simple and lucid manner. - Everything Is Better When It's Actually Simple!

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