NFTs Explained: Ownership, Uses and Risks
NFTs once made headlines for sales worth tens of billions of won. The original guide describes the subsequent loss of value across much of the market. Here is a balanced explanation of their meaning, operation and risks.
What is a non-fungible token?
NFT stands for Non-Fungible Token. The key is non-fungibility: one bitcoin is interchangeable in value with another bitcoin, making it fungible. Each NFT instead has a unique identifier and is not interchangeable on identical terms with every other NFT.
Most NFTs are issued using token standards such as ERC-721 on blockchains such as Ethereum. Issuance and trading incur gas fees, and custody differs according to the wallet type or exchange used.
How ownership is demonstrated
A key NFT feature is that ownership records remain publicly visible on the blockchain. Issuance, transfers and recorded sale amounts can be traced, and records are difficult to forge or arbitrarily remove.
However, buying an NFT does not automatically give you copyright to its image. Most NFTs demonstrate ownership of a particular token, while anyone may still copy or save the image. If the actual image is hosted on an external server rather than the blockchain, a vanished server can leave the NFT pointing to a broken link.
Applications in art and games
- Digital art and collectibles: Beeple's NFT artwork sold at Christie's for about $69 million in 2021, fueling a market boom. Profile-picture, or PFP, collections also once traded for tens of millions of won.
- Game items: Projects have explored representing characters and items as NFTs so they can be traded outside a game. The idea of players truly owning items was a major attraction.
- Tickets and certificates: NFTs have also been tested for concert tickets, memberships, diplomas and other certificates intended to resist forgery.
Bubble, liquidity and scam risks
Beginners should understand the risks before entering the NFT market.
| Risk | Description |
|---|---|
| Price bubbles | The original guide reports that trading volume fell more than 90% from its peak in 2022–2023, and cites a 2023 analysis assessing about 95% of NFT collections as effectively worthless. |
| Low liquidity | An NFT cannot be sold without a willing buyer. A displayed asking price often does not mean trades actually occur at that price. |
| Scams | Risks include rug pulls, fake minting sites, counterfeit collections and wash trading that inflates apparent prices. |
Check the following for safety:
- Verify the issuer and collection through official channels.
- Inspect actual trading activity and the distribution of holders. Concentration among a few holders increases risk.
- Do not approve wallet connections or signatures carelessly. Learn the basics of avoiding scams and exchange security first.
NFTs are an interesting technology but offer no guaranteed return, and many assets can lose their value. Limit exposure to amounts you can afford to lose and learn thoroughly before investing.
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