What is a Non-Fungible Token (NFT)? The Meaning and How It Works

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Digitisation and artificial intelligence have touched life considerably, and they have also touched investments. Non-fungible tokens are digitised assets that have become tokenised through a blockchain. If you want to know what a non-fungible token (NFT) means and how it works, here’s the place to look.

Machine learning, artificial intelligence, and blockchain technology are all heard-of terms in the universe of technology and digital domains. The terms may seem Greek to most investors. NFTs or non-fungible tokens are unique digital tokens that cannot be exchanged for others as they have distinctive attributes. Let’s dive deep to understand what are NFTS and why it is emerging as one of the popular investing options among investors. 

Article Highlights

  • NFTs Explained
  • How NFTs Work
  • The Creation of NFTs

NFTs Explained

NFTs are the short form of non-fungible tokens. This is actually a term used in economics and finance that means something that cannot be exchanged. In terms of investment, non-fungible tokens are digital representations of objects in the real world. They may represent objects of art, collectibles, pieces of music, a written work, or in-game items that are attached to a blockchain. From an investment point of view, non-fungible tokens may be bought and sold. How do you do this? Is it done as you trade in stocks by opening a Demat account first? Well, the story may not be that simple. 

NFTs are bought in cryptocurrency or with US dollars. With transactions of NFTs, the blockchain monitors these and keeps track of what is bought and sold. NFTs permit people to own digital assets and since this is a novel way (in current times) to own an asset, it gives people the right to brag or boast about it too! You can sell anything in digital form, be it a poem or a song. Since a non-fungible token represents an actual object in digital form, it is sometimes confused with the digitally represented object itself. So, the assets that are in digital forms have been tokenised through a blockchain. The tokens are securely stored on the blockchain while the assets are stored in other locations. 

How NFTs Work

Now that you have an idea about NFT meaning, you can go ahead with your learning process. Coming back to the tokens we discussed. Tokens are, in effect, distinctive identification codes that represent digital objects or assets. They are created through metadata and an encryption mechanism. What makes an NFT unique is the connection between the asset and the token. 

NFTs can be traded as you trade any other assets, and can be exchanged for other NFTs, money, or cryptocurrencies. The value of any NFT is dependent on the value that the owner places on it, or the market determines. It is important to note that cryptocurrencies are tokens too, but you are able to exchange two cryptocurrencies from an identical blockchain. This means they are fungible. However, although two NFTs may appear identical, they cannot be interchanged - they are non-fungible. 

How NFTs are Created

Buying an NFT is easy if you know how they are created in the first place. NFTs are created by way of a process that, like the creation of money, is called minting. In this process, the information about the asset is encrypted and placed on a blockchain. NFT information is validated and then the block on which it is located is closed. The minting process deals with smart contracts that manage the transactions involving NFTs (and thereby assign ownership). It is important to note that NFTs can be created in the thousands but although they all represent the same item, they will each have a unique identifier. 

NFTs - Streamlining Investing

You can buy NFTs in a seamless process through the cryptocurrency platform known as Ethereum. Any buyer who wishes to buy an NFT will have to have a currency that is native to Eretheum to buy it. The most common currency is the Ether (Ethereum’s native token). You may not have Ether tokens but you can purchase them from a cryptocurrency exchange. Investors who are looking to invest in non-fungible tokens must also establish a crypto-wallet - this is a unique digital address for the storage of cryptocurrency the investor has purchased. Then an investor may buy Ether and store it in the crypto wallet created. 

Most financial marketplaces for buying and selling NFTs have a bidding system for investing in NFTs. While the process of investing may seem complex, with a bit of study and research, it can offer a novel way to trade and invest.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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