A non-fungible token (NFT) is a digital asset that represents a real-world asset. A non-fungible asset is an asset that is unique or one-of-a-kind. Because it’s one-of-a-kind, it can’t be exchanged for an asset of equal value, and it has no recognized market price.
Your house, car, or laptop are non-fungible assets. Your house exists in one place and cannot be exchanged for equal value. While you might be able to trade your car in for another car, you have to give up ownership of one car and accept ownership of the next. This involves trading titles (or pink slips), as well. An NFT is, in the digital realm, the title or pink slip.
Generally, digital creations are unlimited in supply because they can be copied and shared (which would make them a fungible asset). NFTs attempt to fix this by creating scarcity and designating a digital creation as the “original.” If you own an NFT of a digital asset, then you own the original asset — and, in some cases, all of its copies.
The value of an NFT is in the real-world asset it represents. Meaning, you're not investing in NFTs — you're investing in their real-world assets. You don't buy titles to property — you buy the property and get the title as proof of ownership.
A ticket to a concert or movie is a physical, real-world NFT. It grants the bearer access to a specific concert or movie. An airline ticket is also a physical NFT that says the bearer has purchased a seat on a specific flight to a specific location on a certain day and time. There's no reason why either of these examples cannot be digital NFTs, as well.
NFTs can be smart contracts, in which they can provide or restrict ownership rights, transfer rights and costs, date limitations, and so on.
NFTs are excellent for intellectual properties (IP) — such as music, software, and some types of artwork — where we pay for the rights to use it in accordance to an end-user license agreement (or EULA). In other words, we don't own the asset. But, instead, we own certain rights to a specific copy of an asset. For example, the EULA for music CDs, or movie videos, allows us to listen and/or view the IP for our own personal enjoyment. But we cannot play the music or video for profit without purchasing additional rights.
Because NFTs are also smart contracts, they are perfect for representing the "rights" to these assets. When dealing with IP, the rights can be extremely complex. Music, for example, has rights for printing, copying, performing, recording, and synchronization (e.g., background music in a video). These rights can be limited to specific entities, a range of time, specific locations, transfers, and use.
For example, the contract can be valid for the next five years, or in perpetuity, within the United States or the world, and can be limited to recording rights only (let's make a cover song of "Hotel California").
Because the rights are defined in contracts — usually written by lawyers — they can include clauses that could change the agreement based on certain events. For example, the recipient of the rights might request a clause called the "most favored nations" clause. What this means is if the asset owner grants certain rights to you for one price and, then, grants that same exact rights to someone else for a lower price, the owner of the asset is bound by the contract to pay you the difference.
With music, the songwriters get a royalty with each sale and each public play. NFTs now provide something that most graphic artists have never been able to enjoy until now — a royalty payment each time their art changes hands. And, songwriters can also receive a royalty each time their music is re-sold.
These kinds of rights can be programmed directly into the NFT, as a smart contract.
But, can rights be considered "non-fungible" if the asset owner can sell the same rights to more than one person? In this case, the real-world asset is the contract. And, the NFT is both the contract details AND the representation of the contract.