An NFT, or non-fungible token, is a unique digital certificate stored on a blockchain that proves ownership of a specific digital or physical asset. Unlike cryptocurrencies such as Bitcoin, where each unit is interchangeable with another, NFTs are one-of-a-kind tokens that cannot be replicated or exchanged on a one-to-one basis. When digital artist Beeple sold an NFT of his artwork “Everydays: The First 5000 Days” for $69 million at Christie’s auction house in March 2021, it demonstrated how these tokens could assign verifiable ownership and scarcity to digital creations that were previously infinitely copyable.
The technology works by recording ownership information on a decentralized ledger, typically the Ethereum blockchain, though alternatives like Solana and Polygon have gained traction. This record cannot be altered or deleted, creating a permanent chain of custody for the asset. The NFT itself does not usually contain the actual image, video, or file””instead, it contains metadata pointing to where the asset is stored, along with information about the creator, ownership history, and any royalty arrangements. This article examines how NFTs function technically, their legitimate business applications beyond digital art speculation, the substantial risks and limitations entrepreneurs should understand, and practical considerations for anyone considering NFTs as part of a business strategy.
Table of Contents
- How Does NFT Technology Actually Work?
- The Difference Between Fungible and Non-Fungible Assets
- Legitimate Business Applications for NFTs
- Evaluating Whether NFTs Make Sense for Your Startup
- Risks and Limitations Entrepreneurs Must Understand
- Smart Contract Security and Technical Vulnerabilities
- The Future of NFTs Beyond Speculation
- Conclusion
How Does NFT Technology Actually Work?
NFTs rely on smart contracts, which are self-executing programs stored on a blockchain that automatically enforce the terms of an agreement. When someone creates, or “mints,” an NFT, the smart contract generates a unique token ID and records it on the blockchain along with metadata about the asset. This process costs a transaction fee called “gas,” which fluctuates based on network congestion””Ethereum gas fees have ranged from under $1 to over $200 for a single mint during peak demand periods. The blockchain serves as a public ledger that anyone can verify.
If you want to confirm whether someone legitimately owns a particular NFT, you can trace the token’s history from its creation through every subsequent sale. This transparency is both a feature and a limitation: while it prevents forgery of ownership records, it also means all transaction histories are permanently public, which raises privacy considerations for some buyers. A critical technical distinction often misunderstood: the NFT typically does not store the actual digital file on the blockchain. Storing large files directly on-chain would be prohibitively expensive, so most NFTs contain a URL or pointer to the file hosted elsewhere””often on centralized servers or decentralized storage systems like IPFS. This means if the hosting service goes offline, the NFT could point to nothing, leaving the owner with a token representing an inaccessible asset.
The Difference Between Fungible and Non-Fungible Assets
Fungibility refers to whether individual units of something are interchangeable. One dollar bill holds the same value as any other dollar bill; one Bitcoin equals any other Bitcoin. These assets are fungible because swapping one for another of the same type results in no loss or change in value. Non-fungible assets, by contrast, have unique characteristics that make each unit distinct””a house, a vintage car, or an original painting cannot be directly swapped for another without considering their individual qualities. NFTs brought this concept to digital goods, which previously had no native mechanism for scarcity.
A JPEG file can be copied perfectly an infinite number of times, with each copy identical to the original. The NFT does not prevent copying””anyone can still right-click and save the image””but it creates a verified record of who owns the “official” version according to the blockchain. Whether that ownership carries meaningful value depends entirely on whether buyers collectively agree it does. However, if your business case relies on actual exclusivity rather than symbolic ownership, NFTs alone may not solve your problem. The Bored Ape Yacht Club NFTs, for example, grant holders commercial rights to use their specific ape image, but the images themselves remain freely viewable and copyable by anyone. The value lies in the rights and community access the NFT represents, not in controlling who can see the picture.
Legitimate Business Applications for NFTs
Beyond speculative art collecting, NFTs have found practical applications in ticketing, where companies like Ticketmaster have experimented with NFT-based tickets that can reduce counterfeiting and provide artists with royalties on secondary market sales. When a concert ticket exists as an NFT, the original seller can program the smart contract to automatically receive a percentage whenever that ticket is resold, addressing the long-standing problem of scalpers capturing value that could go to performers. Supply chain verification represents another use case. Luxury goods manufacturers have explored issuing NFTs as digital certificates of authenticity that travel with physical products.
LVMH, Prada, and Cartier formed the Aura Blockchain Consortium to create NFT-based provenance tracking for luxury items, allowing buyers to verify a handbag or watch is genuine by checking its associated token. Gaming has perhaps shown the strongest product-market fit. In games like Axie Infinity, players own their in-game characters and items as NFTs, allowing them to sell these assets on secondary markets. This model created real economic opportunity in countries like the Philippines, where some players earned more from Axie than from traditional employment””though the game’s economy later collapsed when token values crashed, highlighting how dependent such models are on sustained demand.
Evaluating Whether NFTs Make Sense for Your Startup
Before building an NFT component into your business, consider whether blockchain-based ownership actually solves a problem your customers have, or whether you’re adding complexity without corresponding value. A database can track ownership just as effectively for most purposes, without gas fees or the technical friction of requiring users to set up cryptocurrency wallets. The strongest NFT use cases share common traits: they involve assets that benefit from transferability between parties, situations where trust in a central authority is low or absent, and communities where ownership carries social or functional significance. If your customers trust your company to maintain ownership records, a centralized database is simpler and cheaper.
If your asset is not meant to be resold””say, a software license tied to a specific user””NFT transferability might actually work against your business model. Compare the tradeoffs directly. NFTs provide decentralization, transparency, and programmable royalties, but they require users to understand wallets and transaction fees, create permanent public records of purchases, and depend on blockchain infrastructure you don’t control. Traditional databases offer familiar user experiences, lower costs, and full control over your system, but require customers to trust your company and provide no built-in secondary market mechanisms.
Risks and Limitations Entrepreneurs Must Understand
The regulatory landscape for NFTs remains unsettled and varies significantly by jurisdiction. The SEC has suggested that some NFTs may qualify as securities, which would subject them to registration requirements and seller restrictions. In 2023, the SEC charged Impact Theory, a media company, with conducting an unregistered securities offering through its NFT sale, resulting in a $6.1 million settlement. Entrepreneurs launching NFTs should consult legal counsel familiar with both securities law and the specific regulations in their target markets. Environmental concerns, while somewhat reduced since Ethereum’s transition to proof-of-stake in 2022, continue to affect brand perception.
Prior to the merge, minting a single NFT on Ethereum consumed energy equivalent to a month of electricity use for an average household. The proof-of-stake transition reduced energy consumption by approximately 99.95%, but the association persists in public perception, and some blockchains still use energy-intensive proof-of-work consensus. Market volatility presents perhaps the most immediate business risk. NFT trading volume crashed by over 90% from its January 2022 peak to late 2023, and many collections that sold for thousands of dollars became nearly worthless. Building a business model dependent on sustained NFT demand means exposing yourself to a highly speculative market where consumer interest can evaporate rapidly.
Smart Contract Security and Technical Vulnerabilities
Smart contracts, once deployed, generally cannot be modified, which means bugs or vulnerabilities become permanent unless the contract was specifically designed with upgrade mechanisms. In 2022, attackers exploited a smart contract vulnerability in the Wormhole bridge to steal over $320 million in cryptocurrency. While this example involves broader DeFi infrastructure rather than NFTs specifically, it illustrates how smart contract code errors can have catastrophic and irreversible consequences.
For startups building NFT projects, this means investing significantly in security audits before launch. Reputable audit firms charge $10,000 to $100,000+ depending on contract complexity, but this cost pales compared to the potential losses and reputational damage from an exploit. Even audited contracts carry risk, as audits reduce but do not eliminate the possibility of undiscovered vulnerabilities.
The Future of NFTs Beyond Speculation
The long-term value of NFT technology likely lies not in collectible JPEGs but in infrastructure applications that may become invisible to end users. A concert ticket that happens to be an NFT, a car title recorded on a blockchain, or a diploma that can be cryptographically verified””these applications use the same underlying technology without requiring users to think about blockchain at all. Starbucks launched a loyalty program using NFT “stamps” that members earn and collect, integrating blockchain technology into an experience that feels like a traditional rewards program.
Interoperability between platforms represents an ongoing challenge and opportunity. The promise that NFT items could travel between different games or virtual worlds remains largely unrealized, as each platform would need to agree on standards and have economic incentives to honor external assets. Progress here will likely come gradually, if at all, through industry consortiums and standard-setting bodies rather than organic adoption.
Conclusion
NFTs provide a technical mechanism for establishing verifiable ownership of digital assets, with legitimate applications in ticketing, supply chain verification, gaming, and loyalty programs. For entrepreneurs, the technology offers tools that can solve real problems around authenticity, transferability, and creator compensation””but only when these capabilities align with actual customer needs rather than hype-driven speculation.
The practical path forward involves honest assessment of whether blockchain-based ownership adds value your customers will pay for, careful attention to legal and regulatory requirements, and realistic expectations about market conditions. NFTs are neither a guaranteed revenue stream nor a worthless gimmick; they are a tool whose value depends entirely on how thoughtfully it’s applied to genuine business problems.