How do NFTs work?

An NFT, or non-fungible token, works by recording a unique token, and the address that owns it, on a blockchain. A program called a smart contract creates the token, keeps the list of owners and handles transfers. The artwork or other item the token stands for is usually stored somewhere else and linked to it.

How is an NFT created?

Creating an NFT is called minting. A creator first publishes a smart contract for the collection on a blockchain such as Ethereum or Solana. Each time someone mints, the contract issues a new token and writes down the owner's address. The person minting pays the network's gas fee, and often a price set by the creator.

On Ethereum, most NFTs follow a shared technical standard called ERC-721, which was formally proposed in January 2018. A standard means every wallet and marketplace can read any collection in the same way.

What makes each NFT unique?

Every token in a contract has its own number, the token ID. The combination of the contract's address and the token ID is unique across the whole blockchain.

The contract keeps a table of token IDs and owners' addresses, and a sale or transfer changes the address. The NFT is held in the owner's crypto wallet, and only the wallet's private key can approve moving it.

Where does the image live?

Storing large files on a blockchain is expensive, so most NFTs do not contain the picture. The token holds a link to its metadata, a small file that gives the item's name, description and traits and points to the image.

That file can sit in one of three places:

• On the blockchain itself. This is the most durable option and the least common, because of cost.
• On a distributed storage network. Systems such as IPFS spread files across many computers and identify them by their contents, which makes them harder to alter or lose.
• On an ordinary web server. If the company running the server shuts down or changes the file, the token may point to a missing or different image.

Critics see this as a basic weakness, since the permanent part of an NFT is often only the pointer.

How are NFTs bought and sold?

Most trading happens on marketplaces, which are websites such as OpenSea and Magic Eden that list NFTs and match buyers with sellers. When a buyer pays, a marketplace contract swaps the token and the payment in one step and takes a fee.

Creators often set a royalty, a percentage of each resale that is meant to go back to them. On most blockchains the royalty is applied by the marketplace and is not locked into the token itself. During 2022 and 2023, several large marketplaces made these payments optional for buyers.