What Is an NFT? A Guide to Digital Ownership

You may have seen headlines about images selling for hundreds of thousands of euros, or brands launching so‑called digital collectibles. It can be hard to understand how a computer file might have value, or how anyone can prove they own it.

To make sense of this, it helps to ignore the hype and focus on how the technology works.

Defining "Non‑Fungible"

To understand NFTs, you first need to understand fungibility.

Money is a fungible asset. If you lend someone a €10 note, you do not expect that exact same note back. Any other €10 note, or two €5 notes, is fine because they have the same value and are freely interchangeable. In the crypto markets, one Bitcoin is treated as equivalent to any other Bitcoin.

Non‑fungible assets are different. They are unique, so you cannot simply swap them like for like.

• Physical example: A signed first‑edition book. A normal copy of the same book might exist, but the signed first edition is unique and usually has a different value.
• Digital example: An NFT. Even if two images look identical, each NFT has its own record on a blockchain, which makes it technically distinct from any other.

So an NFT is a type of digital certificate of authenticity. It is a unique record stored on a blockchain that can be used to show that a particular wallet controls a specific digital or physical item.

This does not automatically mean the NFT owner holds copyright or legal ownership of the underlying asset. That depends on the terms set by the issuer, which buyers should always check.

How do NFTs work?

Most NFTs use smart contracts, which are small computer programs that run on a blockchain. Ethereum is the best‑known network for NFTs, but similar tokens exist on other networks such as Solana, and some Bitcoin users experiment with NFT‑like systems through protocols such as Ordinals.

When an NFT is created, known as "minting", the smart contract generates a unique token. That token includes metadata, which is information that describes the asset, such as the creator’s name, a link to a file, or specific traits.

Because NFTs sit on a distributed ledger, they are usually:

1. Verifiable: Anyone who can access the relevant blockchain can see which wallet currently controls a specific NFT, along with its transaction history.
2. Indivisible: In the common standards, you normally buy and sell whole NFTs, not fractions. Some newer solutions allow fractional exposure, but these involve extra technical and legal complexity.
3. Portable: Within the same network, you can usually move an NFT between compatible wallets and marketplaces, subject to any restrictions set by the issuer or platform.

It is important to remember that an NFT is a record on a blockchain, not the file itself. The token typically points to a file stored elsewhere.

Real‑life examples

NFTs began as a way for digital artists to sell their work more directly. Since then, people have tested a wide range of uses. Many are still experimental and may not succeed in the long term.

• Digital art and collectibles: Artists can mint their work as NFTs and sell it to collectors on online marketplaces. Smart contracts can be set up so that the creator receives a royalty every time the NFT is resold, if the marketplace supports this and local law permits it. Secondary-market demand, however, is very uncertain.
• Gaming items: In many video games, you can buy cosmetic items or weapons, but the game company controls them. NFT‑based games aim to let players hold game items in their own wallets, and sometimes trade them for money. Adoption depends on both game popularity and publisher policies, and items can quickly lose value if a game changes or shuts down.
• Digital identity: Some organisations are testing non‑transferable NFTs, sometimes called "soulbound" tokens, to represent degrees, training certificates or membership credentials. These systems are still evolving and usually exist alongside traditional records, not instead of them.
• Real‑world assets (RWA): Some projects try to link NFTs to physical items such as watches, wine or property documents. In theory this can make it easier to transfer ownership or prove that an item is genuine. In practice, legal recognition varies by country, and holding an NFT does not always give you a clear legal right to the real‑world asset. You should always check the terms and local regulations carefully.

Risks and red flags

NFTs combine new technology with speculative markets, so the risks are high. You should only use money that you can afford to lose completely.

• Market volatility: NFT prices can move sharply and are often driven by speculation, social media and hype. A digital collectible that is popular today could fall in value quickly, and there may never be a chance to recover your initial outlay.
• Storage risks: While the token is recorded on a blockchain, the media file it refers to is often stored on an external server or on decentralised storage such as IPFS. If that storage is not maintained properly, the link can break. This is sometimes called "link rot" and may leave you with a token that no longer points to a working file.
• Scams and imitations: Anyone can mint an NFT. Scammers frequently copy well‑known artworks or brands and list them as if they were official. Before buying, check the collection’s contract address using trusted sources, verify the creator’s identity where possible, and be cautious of offers that seem unusually cheap or promise guaranteed returns.
• Liquidity issues: NFTs usually need a specific buyer who wants that particular token. It may take a long time to find a buyer, or you may need to accept a much lower price than expected. In some cases, you might not be able to sell at all.
• Legal and regulatory uncertainty: Rules around NFTs, intellectual property, taxation and consumer protection are still developing, including under the EU’s Markets in Crypto‑Assets (MiCA) framework and other local laws. Some NFTs may be treated as financial instruments or as other regulated products, depending on their structure and rights.
• Technical and operational risks: Lost passwords, compromised wallets, phishing attacks or platform failures can all result in permanent loss of access to NFTs. Blockchain transactions are usually irreversible, so mistakes can be costly.

Before buying or using NFTs, consider whether you understand the project, the issuer, the legal terms and the potential downside.

The future of NFTs

The early NFT market was dominated by highly speculative projects, particularly profile pictures and simple collectibles. Activity has since fluctuated, and many early collections have lost most of their market value.

Developers are now exploring more functional uses. For example:

• Dynamic NFTs: These are NFTs whose metadata can change based on predefined rules. A digital sports card might automatically update with a player’s latest statistics. This relies on trusted data sources and careful contract design.
• Token‑bound accounts: In some experimental systems, an NFT can act as a kind of container that can hold other tokens or items. This could, for instance, link a game character to all of its equipment and achievements.

Over time, the term "NFT" might become less visible to end users. The technology could operate in the background of services such as ticketing, loyalty programmes or records management, if regulators, businesses and users agree that it adds real value and complies with relevant laws.

There is no guarantee that any specific NFT project will keep its value or even continue to function. For most people, the priority should be understanding the practical purpose of a token rather than assuming it will be a good investment.