1. What Are They?

The best way to understand non-fungible tokens is to break down the terminology. They are tokens, which should sound familiar, given Bitcoin’s popularity. Like cryptocurrencies, NFTs operate on blockchain technology in a decentralized market and are stored in secure digital wallets. Fungibility describes something that’s easily interchangeable: You can trade a $5 bill for five $1 bills. Unlike cryptocurrencies, however, NFTs are unique and can’t be simply swapped. They can be just about anything you can convert to digital form, but the craze right now is around artwork. Think of them as digital collectibles like trading cards and stamps, where even items that look the same are differentiated by issue date and condition. Instead of a physical certificate of authentication, NFTs use blockchain technology, typically Ethereum, as a verifiable digital ledger.

2. Why Are They So Valuable?

Collectors are going to collect. And aside from the appeal of owning a verified piece of art no one else has — even if they can download a copy — NFTs are turning into a mode of investing, as their market quadrupled to $250 million last year. That’s why you’re seeing day traders and gamblers leap into the space along with die-hard collectors. Creatives with iconic and nostalgic intellectual property drop new collectibles all the time. Think of a freshly made Michael Jordan rookie card hitting the streets. (or rare Beanie Babies). An NFT video of LeBron James blocking a shot sold for $208,000 in January to a group of investors who expect its value to rise because it’s an original, verified and rare piece, even though anyone can rewatch the dunk on the internet. An artist named Beeple recently sold a 10-second video clip for $6.6 million, while the bidding keeps rising for another Beeple that is the first completely digital work to be sold at the famed Christie’s auction house.

3. Where Did They Come From?

Versions of NFTs have been around since 2012, but the concept took off in 2017, like so many things on the internet, thanks to cats. CryptoKitties were being bought and sold on the Ethereum blockchain at such volume that they slowed down the network. From there, the concept evolved so that major sums were being paid for an X-ray of William Shatner’s teeth.

4. Why Are They Blowing Up Now?

Blockchain-driven decentralized finance, or DeFi, surged in 2020 as people moved away from the traditional financial system amid widespread distrust of institutions, common during recessions. But last year a recession coincided with the arrival of digital commerce like never before. That appetite was behind not only the Bitcoin boom but also other new blockchain-based financial ideas like NFTs, which took off after floating around for a few years.

5. Tokenizing Your Content

Digital content is tokenized — or becomes an NFT — through a process called “minting,” which assigns a coin on a blockchain to any given work, authenticating as many copies the creators see fit. Anything can be made into an NFT, from a recipe to a song. However, to do so you need a crypto wallet and to have purchased some cryptocurrency as it costs to create an NFT, typically anywhere from $2 to $32 depending on the day’s “gas price.” Afterward, pairing your wallet to a marketplace listing an NFT is as simple as an upload.

6. Pitfalls

We’ve seen the boom-and-bust cycle before in the crypto market, such as initial coin offerings (when startups, many of which failed, issued digital tokens to raise money) that were scorching hot around 2017. So NFTs are no safe bet. Whether you want to look at Mark Cuban selling one of his tweets for $952, Lindsay Lohan selling an image of her face for more than $2,000 or actor/boxer/social media tycoon Logan Paul selling NFTs of himself unpackaging Pokémon cards for millions of dollars, the market is running amok in ways that don’t always make sense.

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NFTs are revolutionary for artists and creators as they give them complete authority over their content, how to distribute it and who gets a cut. The smart contracts governing NFTs allow artists to retain a copyright and to earn a percentage of every sale, so they benefit as the value of their work rises. Digital artists are seeing a boom as their work finally has a chance to be collected in a way that previously was reserved for fine art. Next up? Musicians, who could leverage the platform to make far more than the per-stream pittance they get from the Spotifys of the world.

2. New Way to Invest

At a time when investors are looking beyond Bitcoin for the next big thing, NFTs have arrived. Entrepreneur guru Gary Vaynerchuk says he’s been waiting for this moment since 2010 and that the “next 36 months will be incredible,” as he uses his platforms to evangelize for NFTs. During a single day in February, NFTs generated more total sales than they did in all of 2020. But investing is not as simple as hopping onto a brokerage site. To purchase an NFT, you typically have to buy Ethereum cryptocurrency, then store it in a digital wallet like MetaMask — which comes with fees, so it can cost as much as $100 just to make a bid.

3. More Than an Investment

Given that NFTs are unique and publicly verifiable, they could one day be a standard form of digital ID. An NFT assigned to you at birth could be the basis for your international passport, or even allow you to vote online for president. But until the day when your Social Security card comes with a cat image, NFTs can be used to verify all sorts of things. Nike recently patented “CryptoKicks,” which attaches a token to its wildly popular (and collectible) sneakers to verify their authenticity and confirm ownership.

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1. NBA Top Shot

One of the biggest drivers of this year’s NFT craze is the NBA, which, in partnership with Dapper Labs, launched Top Shot — a company that offers digital basketball highlights called “moments” to buy and sell. Depending on how many digital copies were made, these moments can be quite rare. And these blocks and dunks are generating serious coin. The site CryptoSlam tracks more than 90,000 buyers and around $300 million in sales for Top Shot, making it by far the biggest crypto collectible. And yes, the players will get a cut, as a portion of the proceeds is added to the NBA’s revenue pie.

Not bad for a day’s work. The 32-year-old musician and artist sold nearly $6 million worth of NFTs on Sunday. The haul came from 10 pieces that mostly feature winged cherubs called “war nymphs,” some of which sold thousands of copies. Like her partner, Elon Musk, who has gone from electric cars to moonshots, Grimes is continuing to defy expectations.

3. Ben Mauro

There may be no better example of how NFTs can change an artist’s career than this senior concept designer and art director. With more than 12 years in the gaming and film industry, he’s created realistic universes for The Hobbit, Amazing Spider-Man 2, Halo Infinite and Call of Duty. Now Mauro is teaming up with crypto trading platform VIV3 for a limited-edition trading card series called Evolution, showcasing his creatures. The money he’s making funds his future projects, something he said would have eaten into his savings.

4. Roy Zou

While the market is frothing in the U.S., NFTs haven’t really caught on in China. Zou is trying to change that, via the blockchain version of Second Life, the Ethereum-powered Decentraland. Zou built the largest space on the game, a virtual piece of land called Dragon City, which is rooted in Chinese mythology. It can also be a moneymaker, as property transactions in Decentraland are monetized via special tokens. Zou is hoping the concept attracts a crowd of Chinese crypto enthusiasts — particularly since there’s no private land ownership in China — and draw them into the world of NFTs.

Right now, NFTs are the Wild West, and the whole idea of crypto wallets is designed to avoid prying government eyes, but there are legal concerns around copyrights and fake accounts at auctions. Don’t be surprised to see law enforcement busts in the NFT marketplace in the coming months, especially as it becomes more global. The Chinese-centric blockchain Tron introduced a new NFT framework in December, while Japanese regulators are grappling with how to police this growing marketplace.

2. Music Distribution

Artists looking for a fairer shake from notoriously stingy streamers might be able to turn to blockchain. Audius, a San Francisco–based company that has raised nearly $10 million from Silicon Valley investors, offers direct connections between fans and artists, including exclusive new releases, by verifying transactions on the blockchain and allowing artists to directly negotiate their fees. Consider it the utopian version of Spotify.

3. Patriotism

Given how murky global supply chains can be, you often don’t know where your shirt really comes from. The blockchain is here to help. With usastrong, Krissy Mashinsky, a former Urban Outfitters executive and her tech entrepreneur husband, Alex, have launched a platform for verifiably American-made gear. The inspiration came last year when local businesses were suffering amid COVID-19. By creating a list of factors that goods must check off to be better tracked by the blockchain, the Mashinskys can guarantee that everything bought in their store — from a “Made in the USA” label on a ceramic mug to a fleece hoodie or fragrant candle — was in fact manufactured in the States. The hope is to ignite a spark for sustainable domestic manufacturers.

4. Urban Planning

While Elon Musk and Jeff Bezos are trying to rule new planets, one tech titan is aiming to run his own city in the middle of the Nevada desert. Jeffrey Berns, of Blockchains LLC, is pitching a “smart city” near Reno where you buy goods in digital currency, and your life, down to your medical records, is verified on the blockchain. The kicker: He wants Blockchains LLC to control the government in this special “Innovation Zone,” and he has the backing of Gov. Steve Sisolak, a Democrat. While county leaders where the city would be are pushing back against this kind of “separatist government control,” they remain interested in the possibilities the futuristic city represents.