Non-fungible tokens (NFTs) are digital assets that have been recorded on a blockchain. Each token has its own unique identification code and associated data, making it different from other tokens.
NFTs can be swapped for money, digital currencies, or other NFTs based on their worth as perceived by the market and owners. As an example, a token could be made for a picture of a banana. The NFT might be considered priceless to some while others may deem it valueless.
Cryptocurrencies and tokens are similar, but the main distinction is that two cryptocurrencies on the same blockchain can be swapped – they are interchangeable. On the other hand, two NFTs from a single blockchain can appear to be identical but they cannot be exchanged.
- NFTs (non-fungible tokens) are unique cryptographic tokens that exist on a blockchain and cannot be replicated.
- NFTs can represent digital or real-world items like artwork and real estate.
- “Tokenizing” these real-world tangible assets makes buying, selling, and trading them more efficient while reducing the probability of fraud.
- NFTs can represent individuals’ identities, property rights, and more.
- Collectors and investors initially sought NFTs after the public became more aware of them, but their popularity has since waned.
History of Non-Fungible Tokens (NFTs)
NFTs existed prior to their widespread acceptance. It is said that the initial NFT sale was ‘Quantum’, which was made by Kevin McKoy in 2014 on Namecoin, later being created and sold on Ethereum in 2021.
NFTs are based on the ERC-721 (Ethereum Request for Comment #721) standard, which explains how ownership is transferred, how transactions are verified, and how safe transfers can be managed by applications. The recently approved ERC-1155 standard, which was endorsed six months after ERC-721, improves it by allowing several non-fungible tokens to be incorporated into one contract, therefore decreasing transaction costs.
In early March 2021, a group of NFTs by digital artist Beeple sold for over $69 million. The sale set a precedent and record for the most expensive digital art sold at the time. The artwork was a collage comprised of Beeple’s first 5,000 days of work.
How does NFTs Work?
The making of NFTs involves a system known as minting, where the details of an NFT are documented on a blockchain. In brief, it is the procedure of crafting a new block, verifying the NFT information by an approved source, and shutting off the block. The minting process commonly includes employing smart contracts that allocate possession and regulate the transferability of the NFT.
When tokens are created, they are given a special identifier associated with a blockchain address. The information about who owns the token (i.e., what address it resides in) is visible to anyone. Even if five thousand copies of the same item are minted (like movie tickets), each token has its own unique identifier and can be distinguished from others.
Blockchain and Fungibility
Cryptocurrencies share many of the same traits as physical money in that they can be interchanged and exchanged for something else of equal value. For instance, one bitcoin is worth the same amount as any other bitcoin on a specific trading platform, much like each U.S. dollar bill has an implicit trade-in value of $1. This fungibility makes cryptocurrencies ideal for use in digital transactions since they are reliable and interchangeable.
NFTs are distinctive in the crypto world because each token is singular and cannot be substituted with another. They can be likened to digital passports, since each one is distinct and non-transferrable. Additionally, they are extensible, allowing for two NFTs to be combined and form a completely new token.
Examples of NFTs
NFTs are perhaps most famously demonstrated in the form of cryptokitties. Introduced in November 2017, these digital cats have individualized IDs and exist on Ethereum’s blockchain. Each kitty is one-of-a-kind and has its own value; they also ‘mate’ with other cryptokitties to create new offspring with their own attributes and monetary worth that differ from their ‘parents’.
Within a few weeks of its launch, cryptokitties had amassed a large following who spent an estimated $20 million worth of ether buying, caring for, and playing with them. Some people even invested over $100,000 in the game. More recently, the Bored Ape Yacht Club has caused debate due to its expensive cost, famous patrons and numerous reports of thefts involving their 10,000 non-fungible tokens (NFTs).
The market for NFTs has greatly expanded since its initial focus on digital art and collectibles. For example, OpenSea – a widely used NFT platform – offers several different types of tokens, including:
- Photography: Photographers can tokenize their work and offer total or partial ownership. For example, OpenSea user erubes1 has an “Ocean Intersection” collection of beautiful ocean and surfing photos with several sales and owners.
- Sports: Collections of digital art based on celebrities and sports personalities.
- Trading cards: Tokenized digital trading cards. Some are collectibles, while others can be traded in video games.
- Utility: NFTs that can represent membership or unlock benefits.
- Virtual worlds: VIrtual world NFTs grant you ownership of anything from avatar wearables to digital property.
- Art: A generalized category of NFTs that includes everything from pixel to abstract art
- Collectibles: Bored Ape Yacht Club, Crypto Punks, and Pudgy Panda are some examples of NFTs in this category
- Domain names: NFTs that represent ownership of domain names for your website(s)
- Music: Artists can tokenize their music, granting buyers the rights the artist wants them to have
Benefits of Non-Fungible Tokens
The most noticeable advantage of NFTs is their capacity to make the market more effective. Tokenizing a physical asset can simplify sales procedures and do away with middlemen. NFTs for either digital or physical artwork stored on a blockchain can take out the need for agents, allowing vendors to interact directly with their desired customers (provided that the artists know how to protect their NFTs properly).
Investing
Ernst & Young has already employed NFTs to simplify investing, specifically for one of its fine wine investors. This was done by storing the wine in a safe environment and using NFTs to document its origin.
Real estate can also be “tokenized” – meaning that a property can be divided into distinct portions, each with its own characteristics. For instance, one part of the land may be located near a lake while another section is closer to the forest. As each area may have its own features, they could all be valued differently and represented by an NFT (non-fungible token). This would make trading real estate – which can sometimes involve complicated paperwork and bureaucracy – easier as the relevant information could be stored in the individual NFT associated with each portion of the property.
NFTs can take the place of stocks to show ownership in a business, similarly to how ledgers record information like the stockholder’s name, date of issuance, certificate number, and number of shares. By using blockchain technology and NFTs instead of a stock ledger system, smart contracts can be leveraged for automating ownership transferral – if an NFT share is sold, the blockchain takes care of all other processes.
Security
Non-fungible tokens can be beneficial for protecting identity information, as the data stored on an immutable blockchain is unable to be accessed or exploited without the proper keys. Moreover, NFTs can make investing more accessible by breaking down physical assets such as real estate into smaller parts. This same tokenization process is not limited to real estate; it can also apply to artwork, allowing multiple people to own a share of the physical piece instead of having one single owner.
Making these kinds of arrangements could enhance its value and profits as more people can purchase components of costly artworks than those who are able to buy complete pieces.
How to Buy NFTs?
In order to acquire NFTs, it is necessary to have Ether (ETH) since it is the only accepted payment. Therefore, acquiring ETH and putting it in a digital wallet is typically the first step. NFTs can be procured through any of the various online marketplaces such as OpenSea, Rarible and SuperRare.
Are NFTs Safe?
Non-fungible tokens, which use blockchain technology similar to cryptocurrency, can typically not be hacked. The vulnerability in all blockchains is the key to your NFT; the software that holds the keys may be compromised and any device where you store them can be misplaced or destroyed, so it is essential to remember ‘not your keys, not your coin’ when dealing with both NFTs and crypto. As long as you take proper measures to safeguard your keys, your NFTs should remain secure.
What Does Non-Fungible Mean?
Fungibility refers to the interchangeable quality of goods. For example, let’s say you have three notes that all have a smiley face on them. If one of those notes were tokenized, it would become distinct from the other two, thus making it non-fungible. The remaining two notes though would be indistinguishable from each other and could be used interchangeably.
Summary
Non-fungible tokens represent an advanced form of the fundamental notion of cryptocurrencies. Current financial systems involve intricate trading and loan mechanisms for a variety of asset types, such as real estate, lending agreements, and artwork. By facilitating digital representations of assets, NFTs constitute a progression in the transformation of this infrastructure.
The combination of digital representations of physical assets and unique identification, along with the advantages of an unalterable blockchain including smart contracts and automation, is a powerful means of bringing about change.
