Non Fungible Tokens: A Quick Guide

Updated on: April 12th, 2021
This content has been Fact-Checked.
NFT guide

Non fungible tokens or NFTs have created a real buzz in the cryptocurrency space and the market for crypto art. Everyone wants to learn blockchain and get in on the action. To give you an idea, a digital art created by the artist Beeple was auctioned for $69 million. No, that isn’t a typo; it was auctioned for $69 million.

NFTs have surged in popularity, thanks to billionaires like Elon Musk giving it their seal of approval. But of course, that isn’t the only reason for their surge in popularity. NFTs started gaining traction even before endorsements from billionaires, with the market capitalization in 2017 being $30 million and rising to $180 million in 2018 despite a bear market.

With the growth in market capitalization and interest, one clear signal that we can get is that NFTs are here to stay. Since they’re here to stay, we must understand their use-cases and how they work?

What Does “Non-Fungible” Mean?

Before we dive into understanding NFTs, let’s clear out some potential confusion. What does non-fungible mean? Fungible goods – like fiat dollars or Bitcoin – have a common valuation across units, and can be exchanged for one another. Non-fungible goods – like a Picasso painting, and a Warhol painting, are unique, have unique valuations, and cannot be exchanged for one another.

What Is An NFT?

NFTs are digital tokens that are based on the Ethereum blockchain. NFTs can be bought, sold, or traded on the Ethereum blockchain. They are unique digital assets, with their identifying information stored in smart contracts. This is the information that makes each NFT unique.

One NFT cannot be exchanged for another NFT as they are unique. They are different from fungible goods like bitcoins. Fungible items are also divisible, which means you can exchange fractions of bitcoin, or .50 cents out of a dollar. Non-fungible tokens are not divisible, so you cannot send a part of an NFT. To give you an analogy, you cannot give someone half a ticket or half a collectible item. Each ticket is a unique item containing information about the individual who purchased the ticket. Such a unique dataset means that the ticket cannot be traded.

NFTs use two types of Ethereum token standards, as they are based almost exclusively on the Ethereum blockchain. The tokens are the ERC-721 token and the ERC-1155 token. These tokens give developers a guarantee that the asset will act in a certain way. Developers can easily deploy NFTs, ensuring their compatibility with the cryptocurrency ecosystem and other services.

Several other blockchains like Tron and EOS have released their own token standards by now, hoping to attract some developers to build NFTs on their blockchain. However, for most developers, Ethereum is the preferred platform.

Characteristics of NFTs

NFTs have several characteristics that make them unique. Some of these are

  • NFTs are non-interoperable: This means that one NFT cannot be used in place of another NFT. This is because each NFT is unique, with its own set of characteristics and information. An example of this would be the game CryptoKitties. A user would not be able to use an asset from the game in another game.
  • Verifiable: All data related to NFTs are stored on the blockchain, making them easy to trace back to the original owner. This allows NFTs to be authenticated easily.
  • Indestructible: NFTs are indestructible because they run on blockchain technology and utilizing smart contracts. The blockchain’s inherent transparency and immutability ensures that NFTs cannot be destroyed or duplicated.

How Do They Work?

NFTs are a part of the Ethereum ecosystem. While other blockchains can implement NFTs on their blockchain, most are part of the Ethereum blockchain.

Let’s understand how NFTs work; a collectible item or a work of art is one of a kind. No two are the same, and that is what gives those items value. Digital assets, on the other hand, can be copied endlessly. This is where NFTs come in.

NFTs create a digital certificate of ownership for digital assets, which can then be bought or sold. The blockchain makes a record of the creator or the owner of the NFT, ensuring that the information of who owns the NFT cannot be altered in any way, giving complete ownership of the digital asset to the individual.

Smart contracts allow details of the owner of the NFT to be added, proving the digital ownership of an asset. Blockchain technology ensures that ownership of the NFT is assigned, and smart contracts ensure that the owner gets a cut out of every future sale of the token.

Benefits Of NFTs

Okay, so we’ve discussed what an NFT is, their characteristics, and how they work. Now let’s look at some of the benefits of NFTs that make them stand out.

  • NFTs are transferable. Owners of NFTs can directly interact with a buyer interested in buying the NFT and transfer ownership rights without depending on a third-party.
  • The ownership rights defined by an NFT cannot be duplicated. As such, it is extremely simple and straightforward to provide the “proof-of-ownership” required to stake your claim on your own work.
  • Because NFTs are based on blockchain technology, there is no question of them being counterfeited. NFTs have solved an age-old issue of provenance that’s been plaguing the digital art and collectible industry.

Why Do NFTs Have So Much Value?

If you like something, you attach a significant amount of value to it. The same scenario applies when it comes to NFTs. NFTs have value because we want them to have value. Let’s take an example. Suppose you are a wrestling fan, and you want an NFT that represents your favorite wrestler. You can be a football fan, and you may want an NFT that represents your favorite club. The value of an NFT is speculative and depends entirely on what you or anyone else is willing to pay for it.

What Are Some Use Cases Of NFTs?

NFTs are experiencing a surge in popularity in several industries besides the digital art space. Here are some use cases of NFTs

  • Gaming: Popular games like PUBG and popular game companies have seen the potential of NFTs and incorporated them. Formula 1 has tied up with Animica Brands, allowing individuals to collect NFTs in an Ethereum based game. Ubisoft, one of the biggest names in the gaming space, has launched its Rabbid tokens.
  • Fashion: Several fashion houses like Gucci and Louis Vuitton, have started applying NFTs to their products, making it easier to verify the products’ authenticity.
  • Sports: Nike is patenting its NFT-based footwear. Owners of Nike NFTs can turn them into shoes in the real world. NBA and NFL now have leading players represented by NFT cards.
  • Identity: NFTs are an excellent way of verifying identity. Records that can be digitized to represent someone’s identity include medical reports, educational qualifications, etc.
  • Digital assets: NFTs have found an excellent use case as digital assets. An example of this would be Ethereum Name Service (ENS). All ”.ETH” names on ENS are ERC721-compliant NFTs, giving users the direct right to own unique domain names.


Why Have NFTs Become So Popular?

NFTs are changing the way ownership works. More specifically, NFTs are changing the way digital ownership works, allowing people to purchase animations, digital images, and digital art. Individuals can convert pretty much anything into an NFT.

The digital art space is one area where the impact of NFTs has been felt. Sports fans collect and trade NFTs of their favorite players or teams. The NBA also allows fans to collect video highlights of NFTs of all crucial moments from important games.

What more could fuel the NFT fire? The news that musician Claire “Grimes” Boucher sold $6 million worth of digital artwork, and digital artist Mike Winkelmann sold a ten-second video for $67,000.

What Are Some Popular NFT Projects?

With NFTs gaining popularity, several projects are gaining significant traction. Some of the projects are

  • Ethereum Name Service (ENS): ENS is a domain name service that uses NFTs to represent .ETH domain names.
  • CryptoKitties: The game that started it all, CryptoKitties, brought NFTs into focus and is responsible for getting the world’s attention on them.
  • Async.Art: This is a marketplace that allows individuals to buy or sell NFTs or create them. Individuals can also buy certain parts or layers of digital artwork and modify them.
  • OpenSea: This is one of the most popular marketplaces for NFT art and other collectibles.

What are the different standards that are used for NFTs?

Token standards play an essential role in the NFT space. The token used for NFTs are

  • ERC-721: First used in CryptoKitties, this is the most popular standard when it comes to NFTs. The ERC-721 token standard became the first standard to represent NFTs. The standard allows developers to create new ERC-721 compliant smart contracts easily.
  • ERC-1155: The ERC-1155 token brings semi-fungibility to the NFT world. This token represents a class of assets rather than one asset, increasing efficiency and reducing smart contracts’ complexity, allowing developers to make extensive changes in smart contracts.

NFTs Seem Popular, What Is Their Future?

As NFTs become more mainstream, we will see more and more brands and industries license their content to NFTs. Currently, they are mainly confined to the digital artwork, gaming, and crypto-collectible space.

In gaming, NFTs represent in-game artifacts and collectibles. Players can trade these items with players. NFTs also have significant potential to be used in copyright, intellectual property rights, and ticketing.

In the property market, NFTs can be used to tokenize properties, introducing the concept of shared ownership. Since the tokens are non-fungible and reside on the blockchain, the ownership is completely transparent and traceable. NFTs can also be used in software licensing, warranty, and keeping track of birth and death certificates.

Some Prominent NFT Sales

Most people who buy NFTs are individuals who understand the value of digital assets. That said, NFTs still have a huge market, with the target audience being cryptocurrency enthusiasts. NFTs in digital arts and gaming are a significant business.

  • One of the most expensive CryptoKitties, Dragon, is currently valued at 600 ETH ($1,260,000).
  • F1 Delta’s 1-1-1 car sold for 415.5 ETH ($872,550) in 2019.
  • A character from the NFT-based game, Axie Infinity, sold for 319 ETH ($670,000).
  • A LeBron James digital collectible card sold for $100,000.
  • An art piece by Beeple sold for $69.3 million.

Conclusion

NFTs are slowly but surely making their way into the mainstream, with adoption rates growing steadily, with recent developments and endorsements from Elon Musk bringing even more focus on them. NFTs can’t be compared with physical assets thanks to NFTs being digital assets. However, NFTs can be just as valuable as rare physical collectibles and can potentially sustain their value for even longer.

NFTs have enabled digital artists, musicians, and digital content creators to get more value out of their creations and give them the recognition they deserve. The blockchain technology used with NFTs ensures that artists and digital creators get their cut from their future sale.

FAQ


What is an NFT stock?

NFT Stock is a term used to describe the companies getting involved in non-fungible token projects. Examples include Takung Art (TKAT), Jiayin Group (JFIN), and Oriental Culture Group (OCG).

What is the point of NFT?

The point of NFT is to leverage blockchain technology to create unique assets. This is why the digital art world has benefited immensely from it since it adds an element of “scarcity.” After all, scarcity and authenticity are what makes a particular item a “collectible.”

Is NFT a Bitcoin?

Bitcoins are fungible by design since they are supposed to be used for payment and storage. This is why, by its very definition, Bitcoins aren’t NFTs.

How do you make money with an NFT?

As a creator (artist, musician), you may earn money by selling off the ownership rights of your NFT. Like any collectible, NFTs may increase in valuation over time, so one could potentially use a “buy-and-hold” strategy to use them as a store-of-value and sell them off later when necessary.

How can I buy an NFT?

One can use NFT marketplaces like OpenSea and Rarible to buy NFTs. The marketplaces hold regular auctions, which you can participate in. You simply need to register an account and connect your crypto wallet.

Andrew Zapotochny
CEO at BlockGeeks

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