What Is an NFT?
NFTs, or non-fungible tokens, are a type of cryptographic token that is unique and cannot be exchanged like for like. Unlike other crypto tokens, NFTs are entirely distinguishable from one another and limited in quantity.
While NFTs can be used to represent real-world items on the Blockchain, they also have applications in the digital realm, including as collectibles or for digital identity and as part of the Metaverse.
NFTs have gained popularity in mainstream culture as a new form of digital art, but also have potential applications in fields such as video games, licensing, certificates and fine art. Moreover, they even allow for fractional ownership of items, enabling broader access to valuable assets.
To grasp the exceptional nature of NFTs, it is crucial to understand the concept of fungibility. For instance, Bitcoin and dollar bills are fungible, implying that every unit of Bitcoin or every hundred-dollar bill has the same value and characteristics as others. Fungibility pertains to the feature of an asset, units of which are interchangeable and identical to one another; this property applies to both fiat currencies and cryptocurrencies.
In contrast, a non-fungible token offers various potential use cases within Blockchain technology. These tokens can be one-of-a-kind or have a limited supply. They can be bought, sold and traded on specific NFT marketplaces and accrue value. Additionally, they can represent unique attributes and become sought after as collectibles.
NFTs have gained immense popularity in crypto and mainstream circles alike, with high-profile celebrities joining in. In this article, we will delve into what NFTs are, how they can be utilized and why they have become a mainstream phenomenon.
What Is An NFT?
An NFT, or non-fungible token, is a cryptographic token on a blockchain that represents a unique asset, whether it is entirely digital or a tokenized version of a real-world asset. NFTs cannot be exchanged for one another and therefore can function as proof of authenticity and ownership in the digital realm.
Fungibility refers to the characteristic of an asset, individual units of which are interchangeable and essentially identical to each other. While this property is essential for currencies as it enables free exchange, it is not desirable for collectibles.
However, what if we could create digital assets like Bitcoin but with a unique identifier for each unit? This would make each unit different from the others, thus non-fungible and opening up various new use cases. That is precisely what an NFT is.
How Do NFTs Work?
NFTs are distinct from ERC-20 tokens, such as DAI and LINK, because each token is singular and indivisible. Ethereum's blockchain serves as a public ledger to track the assignment or ownership claim of any piece of one-of-a-kind digital data. NFTs are created from digital items and can represent anything from real-world objects like legal documents and signatures to digital artwork such as music and videos. NFT digital art is an Ethereum-based asset that certifies the artwork's authenticity and ownership.
Each NFT can only have one owner at any given time, and ownership is managed through a unique identifier (UID) and metadata that no other token can replicate. Smart contracts are utilized to create the UID and metadata and to assign ownership and regulate NFT transferability. When an NFT is generated or minted, smart contracts are executed according to various standards like ERC-721, and the resulting data is stored on the blockchain, where the NFT is maintained.
Unique Properties of NFTs
- Unique Identity: NFTs have a unique cryptographic identity, ensuring that no two are exactly alike, even if they represent the same asset.
- Immutability: NFTs are stored on an immutable blockchain ledger, ensuring the authenticity and ownership of the asset represented as they cannot be altered once created.
- Ownership: NFTs provide verifiable proof of ownership, allowing collectors to prove ownership and authenticity of a digital asset. This allows for the creation of digital scarcity, where the value of an asset is based on its uniqueness and rarity.
- Interoperability: NFTs offer cross-blockchain compatibility, enabling them to represent diverse digital assets and be utilized in various contexts like gaming, art, and music.
- Programmability: NFTs can be programmed with smart contracts, which can automate certain functions, such as royalty payments or distribution of revenue. This allows creators to maintain control over their digital assets and ensures that they receive a fair share of the revenue generated by their assets.
- Fractional Ownership: NFTs can be divided into smaller units, allowing for fractional ownership of digital assets. This means that multiple investors can own a stake in an asset, which can increase liquidity and accessibility for investors.
NFT Use Cases
NFTs have the capability to represent real-world assets like artwork and real estate. By "tokenizing" these tangible goods, they become more convenient to buy, sell and trade, with reduced risk of fraudulent activity.
Programmable art is currently one of the most common applications of NFTs, which combines creativity and technology in a unique way. Limited edition artworks are now being circulated as NFTs, which can be programmed to react to different situations using smart contracts and oracles. This means that artists can create visuals that respond to price fluctuations in blockchain-based digital assets, providing an interactive and dynamic experience for collectors.
Counterfeit tickets and merchandise are some of the biggest challenges facing the sports industry. However, these issues can be easily addressed with Blockchain technology, which provides a secure and immutable solution. By leveraging the blockchain's features, such as immutability, it becomes possible to prevent the creation and distribution of counterfeit collectibles and tickets in the sports industry.
The gaming industry has been significantly impacted by NFTs, with CryptoKitties leading the way in 2017 by issuing digital cats on the blockchain and allowing users to trade and interact with them. The success of CryptoKitties resulted in the Ethereum network experiencing congestion due to a high volume of transactions.
Since then, gaming has become a significant use case for NFTs, as they are a natural fit for in-game sales of products such as skins, which are already popular in the traditional gaming market. As a result, there has been a convergence between traditional gaming companies and decentralized startups in the NFT space. Both sides are capitalizing on the blockchain's potential to offer digital cards, artwork and fashion.
NFTs and gaming are an ideal pairing, and this trend is expected to continue as gamers seek to not only win as competitors but also to invest in the industry. The combination of NFTs and gaming is poised to disrupt the industry even further.
The fashion industry has readily integrated blockchain technology, offering benefits to all participants in the supply chain. By utilizing blockchain, consumers can easily access ownership information of their purchases and accessories, reducing the risk of counterfeit products. To achieve this, QR codes in the form of NFTs can be added to price tags of garments and accessories, allowing users to easily scan and verify the authenticity of their purchases online.
Licenses and certifications
NFTs have practical use cases for verifying licenses and certifications. When students successfully complete a course, they are typically issued a certificate in either digital or physical format. These certificates serve as proof of completion for potential employers or universities.
However, verifying these certificates can be time consuming for administrators. By using NFTs, the verification process can be streamlined and the burden of record checking and verification reduced. NFT-based certificates and licenses provide an efficient and reliable method for tracking proof of course completion or licensing.
NFTs Vs. Crypto And Fiat Currencies. What's The Difference?
NFTs are fundamentally different from both cryptocurrencies and fiat currencies due to their non-fungible nature. Unlike cryptocurrencies such as Bitcoin, where each unit is identical and interchangeable, each NFT is unique and possesses its own specific attributes, such as rarity, size and creator. This means that NFTs cannot be swapped or traded for another asset of equal value.
On the other hand, fungible assets such as fiat currencies, like the US dollar or the euro, as well as cryptocurrencies like Bitcoin, are interchangeable and can be exchanged for an equal amount of the same currency without any change in value or attributes. For example, if you trade one unit of BTC for another unit, you still own the same amount of BTC.
However, if you have a collector's item, such as a rare coin, it can be considered a non-fungible asset. Similarly, baseball cards are non-fungible assets, as each card is unique and cannot be exchanged for another card of equal value. This concept is not lost on sporting organizations such as the MLB and NBA, as they have begun to explore the use of NFTs for their athletes, teams and fans.
How To Buy And Sell NFTs
NFT marketplaces usually function like auction houses where users can bid on their desired NFT and await the results. Some platforms, like eBay, provide a "Buy Now" alternative where NFTs can be purchased at a fixed price. OpenSea.io, SuperRare, Foundation.app, Rarible and Mintable are a few examples of the NFT marketplaces available.
It's essential to note that each marketplace has its own crypto wallet requirements, and no single wallet can currently be used across all sites. Although MetaMask is the most commonly-used crypto wallet, other options include Formatic, Torus, Coinbase Wallet and Portis.
There are two ways to sell NFTs: trading a previously-obtained NFT and selling a minted one. Gas fees and final sale service fees, determined by the marketplace, will be charged for selling a non-fungible token, similar to minting an NFT.
Just like any other asset, previously-acquired NFTs can be resold on the secondary market. To do so, the NFT in question must be in your crypto wallet and listed for sale on your chosen marketplace. While the value of an NFT may rise over time, there is no guarantee of its long-term or even short-term worth.
You may establish the "Buy Now" price or specify auction rules, such as the reserve price, to sell a minted NFT, depending on the service. In some cases, royalties may be paid each time your NFT is resold in the future. Nonetheless, the long-term or even short-term worth of NFTs cannot be ensured.
The NFT market has achieved much of its impressive growth in just one year. In 2020, most of the popular NFT platforms weren’t even around yet, while the start of 2021 was met with an unprecedented surge in activity and trade volume. Even if this trend continues at a slower pace, the overall rate of adoption of NFTs (like crypto art) will still likely be unprecedented in the years to come.
While non-fungible tokens can be difficult to value, features such as uniqueness, tradeability, talent and whether the original artist is behind the sale all play into the price. The next wave of NFT markets could see tokens make their way into yet another craze that has taken the cryptocurrency market by storm: decentralized finance (DeFi).