A non-fungible token (NFT) is a unique token on a blockchain where each unit has distinct properties, unlike fungible tokens (ETH, USDC) where every unit is interchangeable. NFTs are most commonly issued under the ERC-721 standard on Ethereum, with each token having a unique ID and associated metadata (image, traits, attributes) stored on IPFS, Arweave, or on-chain. Ownership is recorded on the blockchain and transferable without intermediaries. NFTs gained mainstream attention through the 2021 bull market when collections like BAYC and CryptoPunks reached floor prices above $300,000 per token; the same collections fell 90% to 95% in dollar terms by 2023.
How NFTs work technically
ERC-721 defines the standard interface: a contract tracks which address owns each token ID. When you buy an NFT on OpenSea, the marketplace calls the contract’s transfer function, which updates the owner mapping on-chain. The “media” (the actual image or file) is almost never stored on the blockchain itself due to size constraints. It is stored on IPFS (where anyone can host copies) or Arweave (paid permanent storage). If the original creator stops hosting the metadata, an IPFS-stored NFT’s image might become unavailable while the token itself remains on-chain.
ERC-1155 is a multi-token standard allowing both fungible and non-fungible tokens in a single contract. Gaming items (100 of a specific sword, each identical) are a natural ERC-1155 use case, while unique collectibles use ERC-721. Soulbound tokens (SBTs) are non-transferable NFTs used for credentials, reputation, or identity: a university degree as an SBT cannot be sold, only revoked by the issuer.
What this means for traders
NFT market liquidity is fundamentally different from fungible token liquidity. A collection’s floor price (the cheapest listed token in that collection) is liquid; any other trait-premium tokens above floor are much harder to sell. Selling a “rare” NFT at its estimated value often requires finding a specific buyer who values that rarity, which can take weeks or months. This illiquidity is structurally unlike selling ETH or any fungible token, and should be priced into any NFT position as an exit cost.
Wash trading has historically distorted NFT volume metrics: a seller creates two wallets, sells an NFT to themselves repeatedly to generate artificial trading volume and historical price data, then attracts genuine buyers who believe the volume signals real demand. Blur’s incentive structure (airdrop rewards for trading volume) explicitly encouraged wash trading in 2022 and 2023. Any NFT with suspiciously consistent sale prices or volume patterns warrants investigation of wallet overlap in the transaction history using Etherscan or NFT analytics tools like Nansen. For gas costs related to NFT trading, see Ethereum gas fees explained.
A concrete example
CryptoPunks: 10,000 unique pixel art characters issued in 2017 by Larva Labs. Floor price trajectory: below $100 in 2020, $1,000 in early 2021, $300,000 at peak in August 2021, $40,000 to $60,000 by 2023. An investor who paid 65 ETH ($200,000 at August 2021 ETH prices) for a Punk at floor peak held an asset worth 20 ETH ($40,000) at 2023 floor prices: a loss of $160,000 in dollar terms and 45 ETH in ETH terms. The same capital in ETH rather than NFTs would also have declined (ETH fell from $3,000 to $1,600 over the same period), but the NFT holder additionally bore the collection’s premium deflation on top of ETH’s price decline.
Frequently asked questions
How are NFT royalties enforced?
Creator royalties (typically 5% to 10% of secondary sale price) were originally optional and enforced by marketplace cooperation rather than smart contract logic. Blur and X2Y2 launched with optional royalty payment, allowing buyers and sellers to choose 0% royalties and cutting creator income. OpenSea’s attempt to enforce royalties by blocking non-compliant marketplaces failed and was eventually abandoned. On-chain royalty enforcement through operator filter registries has had mixed adoption. As of 2026, royalty payment in NFT secondary sales is largely voluntary and collection-dependent.
What is an NFT floor price and how is it determined?
Floor price is the lowest ask price for any listed token in a collection. It is set by whoever is most urgently willing to sell. Floor prices can be manipulated by buying up all cheap listings (floor sweeping) to create the appearance of higher demand, then selling higher-priced tokens into the artificially elevated floor. Collections with low total listed supply (fewer than 5% of tokens listed) are more susceptible to floor manipulation than collections with high listed supply.
What utility do NFTs have beyond speculation?
Use cases with genuine adoption: gaming assets that represent in-game items with provable scarcity (Axie Infinity characters, though the model has economic challenges), event tickets and memberships with on-chain access verification, proof-of-attendance tokens (POAPs), and domain names on ENS (Ethereum Name Service) that map wallet addresses to human-readable names. Domain NFTs like vltmarkets.eth have functional utility as payment addresses. Most profile picture (PFP) collections without additional utility have returned to near-zero value after their speculative peak.
