NFTs are all the rage but many people have no idea what they are. Here we go over NFTs and address the ins and outs of non-fungible tokens.
NFTs are skyrocketing through the stratosphere in terms of popularity with reports of some selling for millions of dollars. So you might be wondering what the craze is all about or why anyone would care enough to spend millions on an NFT.
Well, NFTs are non-fungible tokens that operate similar to cryptocurrencies but with a twist. While you can exchange one Bitcoin for another without losing value just as you can exchange one dollar for another as all dollars are similar, a non-fungible token is unique. This means that you cannot exchange one NFT for another one of its kind.
The concept of non-fungibility might be hard to wrap your mind around and while NFTs are currently a hot topic even outshining topics such as Bitcoin in popularity right now, this article will walk you through why they matter.
Let’s kick off by discussing the concept of a fungible asset.
Fungibility implies that two assets have the same value. If these two assets have the same design with individual units that can be replaced one to another, then it doesn’t matter what asset you have as they are all the same.
An example of fungibility that is closer to home is money. The notes or coins you have in your pocket are not unique as they can be exchanged with any other equivalent amount of their kind. Bitcoin and cryptocurrencies are also fungible assets as one Bitcoin is similar to any other Bitcoin out there.
Therefore, if you loan out one Bitcoin or a dollar to your friend, you won’t mind if they don’t give back the same Bitcoin or dollar you loaned out as all Bitcoins or dollars have the same value.
Non-fungible tokens on the other hand are unique assets in that if you gave your friend a limited edition watch with a sentimental value and a story behind it and they returned to you a new watch, albeit the same brand, you would be livid right? That is because the original watch was one of a kind and non-fungible
Therefore, your limited edition watch can be made into an NFT as it is unique and cannot be exchanged for any other of its kind.
To best understand how NFTs work, let’s first take a primer on blockchain technology. Even though several blockchain platforms support NFTs, Ethereum’s blockchain is by far the biggest platform for NFT at the moment.
The fact that Blockchain technology is built as a system of records and information that is difficult to change, manipulate or duplicate makes it possible for NFTs to exist. At its core, a blockchain is a digital ledger that stores transactions and uses a proof of work consensus protocol among its nodes to keep that transactional data immutable. A proof of work consensus protocol means that all the computers that make up a blockchain network agree that the only way for any one of them to change the data published on the blockchain is to produce the same amount of work it took to publish that data.
Since it’s technically impossible for anyone on the network to solely produce all the power the network spent to produce the block, the act of hacking the blockchain remains practically impossible. This is the same principle that keeps Bitcoin and other cryptocurrencies from being hacked by malicious actors.
Therefore, similar to cryptocurrencies, NFTs are created as pieces of data that live on the blockchain where they can inherit blockchain’s immutability. However, unlike cryptocurrencies, the NFT on the blockchain is made such that there is only one indivisible asset of its kind and no other.
The great thing about blockchain is that you can use it to make an NFT out of anything ranging from your favorite T-shirt to the world’s most expensive art collections. All you need is a blockchain such as Ethereum that supports the minting of NFTs and you are ready to go.
You are probably wondering why anyone would want to create an NFT in the first place. Well, the idea is to have digital proof of ownership on the blockchain. If you lost possession of your rare collectible and wanted to prove that you own the collectible once it is found, the blockchain can serve as a certificate of ownership. Furthermore, the blockchain can prove that your collectible piece of art or asset is authentic.
While most NFTs are made out of digital files such as Beeple’s art collage that sold for over $69 million, real-world physical assets can also be tokenized and registered on the blockchain as NFTs. The process for making NFTs whether for digital assets or physical assets is the same.
Apart from Ethereum, multiple Blockchains have come up to support the creation of NFTs. The blockchain you pick for the creation of your NFT becomes the home of your NFT such that you cannot transfer an Ethereum NFT onto a BSC (Binance Smart Chain) or Tron network.
Different Blockchains support different processes of creating NFT. We will discuss the process of Ethereum as it is the most popular platform for NFT.
On Ethereum’s blockchain, you will need to get your MetaMask wallet ready as it will store your NFT. The Ethereum blockchain is designed to allow developers to create several assets ranging from cryptocurrencies to tokens and now non-fungible tokens. Before creating an NFT on Ethereum’s blockchain beware of the standard you want to use on the network as it will determine the functionality of your NFT. Ethereum has 3 standards or criteria for token creation.
First, we have the ERC-20 token which is the standard used for over 300,000 coins in the cryptocurrency market. The ERC-20 standard contains rules and regulations that developers have to follow to ensure the token they create is compatible with exchanges and wallets operating on the Ethereum network.
The second standard is the ERC-721 token standard. This is the standard that supports the creation of NFTs. ERC-721 tokens are designed to represent distinct assets such as certifications and collectibles that are indivisible. All ERC-721 tokens can be personalized with smart contracts that allow those tokens to have unique characteristics distinguishable from other tokens. By programing these characteristics into the token itself, the developer can create an immutable token with rare characteristics or capabilities.
For instance, that token could be created in a gaming environment where anyone who owns that token can unlock certain levels in the virtual game.
In the early days, all NFTs were created and stored on the blockchain. However, the number of assets that can be tokenized into an NFT stretch beyond the blockchain. Since blockchain’s storage capacity is limited, only a digital signature of the digital file you want to tokenize into an NFT is stored on the blockchain and not the entire file.
This digital signature is called a hash and any fraudulent copies of your original NFT file can easily be identified by cross-checking the hashes as each hash has a unique identity that is difficult to duplicate. In addition to a uniquely identifiable digital signature linked to the digital asset, smart contracts can also be added to an NFT to further help in programing unique and exclusive data that differentiates the NFT from others of its kind.
The entire process of minting NFTs on Ethereum is costly as proof of work is involved. This means that you will need about $100 worth of Ethereum to go into the fees charged by the network for publishing and time stamping the NFT onto the blockchain.
Once the transaction is complete, you will have your NFT sent to your MetaMask wallet. Now you can sell ownership of that NFT to any willing buyer or keep it in your wallet forever. What’s more, you can track ownership of the NFTs you buy on the blockchain with ease.
What makes NFTs special is the fact that they can ensure exclusivity and ownership for any asset. While the NFT space is still in its nascent stage, pundits believe that the technology has endless application in the future. The fact that scarcity and originality can be programmed into an NFT enables its use in art, real estate, sports, and fashion to mention a few.
Let’s take a look at some of the industries where NFTs are applicable.
Blockchain technology is already disrupting the world of fashion thanks to its capacity to improve supply chain efficiency. However, NFTs are taking fashion to a whole new level as they can be used to help consumers of high-end fashion accessories determine counterfeit items from the original. With a simple QR scan, a user can determine whether the watch or jacket they bought is an original or a fake. What’s more, with rising concerns about climate change, conscious consumers will have a clear and detailed impression of where and how the fashion item was created.
The real estate industry is ripe for an NFT takeover. NFTs can be used as proof of property ownership whereby an NFT for the sale of a property is created through legal means. Then, the NFT can be minted to have unique descriptive features similar to the property not to mention the inclusion of images and other paperwork time-stamped to the blockchain. Once the NFT is published to the blockchain. Ownership of the NFT will serve as proof of legal ownership of the property. Upon the sale of the property, the NFT will be transparently transferred to the new owners as all the information is on a public blockchain. Therefore, NFTs can eliminate cases of fraud in the real estate industry.
Digital artists and musicians are making tons of money thanks to the current wave of NFT as most NFTs at the moment comprise digital artworks, music files, and videos. Some of the stories that stand out include that of an artist called Beeple who sold a collection of digital art files for $69 million at Christie’s. Grimes, a singer, also auctioned off a collection of artwork that sold for millions while an electronic music producer called 3LAU sold the world’s first digitized album for over $11 million. In a nutshell, NFTs make it possible for artists and musicians to monetize their work directly to the fans. NFTs are also automating the royalty collection process as the NFT can be programmed such that the artist gets a cut of the profits when the art or music album is sold on a secondary market. In addition, as digital art or music video ages, it gains even more value from its rarity and symbolic importance from the fans.
Digital collectibles and game assets were the first to jump on the NFT bandwagon. Examples such as Cryptokitties and CryptoPunks had a moment back in 2017 and continue in popularity to date with some CryptoPunk NFTs selling for over $16.9 million at Christie’s recently. Digital collectibles are rare digital assets that users in a game can collect to earn points in a gaming environment. Cryptokitties for instance features digital kittens that could breed to make even more unique kittens. The scarcity of the kittens was the source of their value.
There are several NFT marketplaces where users can sell original NFTs or buy the work of various artists. Some of these marketplaces are also designed to help you create your own NFTs without the skills of Ethereum blockchain developers.
Rarible is designed to serve as a marketplace for NFTs as well as a decentralized distribution channel for NFTs. This means that digital artists can create and sell their art directly to the consumer without a middleman. Most of the NFTs found on Rarible include digital artwork, memes, famous tweets, and even virtual land. The platform comes with its cryptocurrency called RARI that can be used for voting and moderating creators in the Rarible ecosystem.
OpenSea is one of the biggest marketplaces for selling digital goods. Founded at the start of 2018, the platform supports the buying and selling of digital collectibles, game items, and even digital representation of physical items. Similar to Rarible, the OpenSean platform is designed as a decentralized marketplace where trading of NFTs is done on a trustless network of smart contracts. Artists can submit their artwork with a few clicks and create NFTs without any coding knowledge.
This is an automated market maker and a decentralized exchange that features an NFT marketplace. Built on the Binance Smart Chain (BSC) blockchain, Bakery Swap is an upcoming NFT marketplace that supports buying and selling of memes, game items, and digital art. You can also mint an NFT on the platform.
SuperRare focuses on absolutely rare digital artworks with a collection of digital art NFTs certified on the Ethereum blockchain. Artists on SuperRare get to share their portfolios for sale from buyers around the world. Compared to other marketplaces, SuperRare only works with a small number of artists as the platform is yet to fully launch.
The Foundation marketplace operates as a social network for creative artists. For an artist to have access and post their artwork for sale, they need upvotes from fellow artists, and joining the platform requires a direct invitation from a member artist. This makes the platform difficult to access while also raising the quality of digital artwork on the platform. Foundation is a decent option for established artists looking for a good price for their work.
At the moment, everything seems to be up for grabs as an NFT and celebrities are fuelling the craze with the sale of NFTs of all kinds. There is growing interest in NFT and according to a survey, over 50 percent of people in the US and another 39% in the UK believe that NFTs will become the next big thing. While current applications of NFTs are focused on artwork, the application of NFTs spreads across different industries.
The future seems bright for NFTs as recognizable brands begin to license their content for NFTs. Undeniably, the current hype around NFTs will drive awareness and ramp up the utility of NFTs as well as their popularity. However, it remains to be seen whether blockchain development will catch up to sustain the growth and use of NFTs at scale.