NFTs, or Non-Fungible Tokens, are digital assets that store ownership information and can be transferred from one person to another. NFTs differ from fungible tokens because they have individualized characteristics. For example, an NFT might represent a rare collectible where each token is different due to the unique markings on its surface.
The rarity of this type of asset means it cannot be exchanged for other goods at face value. One way non-fungibility has been used recently is to create virtual artworks through blockchain technology. Then, offer them up for sale on markets such as OpenSea or Rarebits.
NFTs are tradable tokens that can represent ownership over digital or physical assets. This is opposed to the more common utility token, which simply gives you access to a product or service. Instead, think of NFT as representing a house – each token represents one part of the house’s value, but no two houses will have identical values.
In real life, we have many different things whose individual value varies: land and buildings, rare works of art, a vintage car collection or a vast stamp collection. If we wanted to sell these assets entirely, it would be impossible to find a buyer for every item because what buyers wish to varies significantly.
For example, if you have 10 acres of land that someone else wants but doesn’t have a building on, they can’t use it, but they still want the rest of your property. So instead, we sell land and buildings as separate things that make up the asset’s value.
Let’s understand what is NFT in detail,
What are Non-Fungible Tokens?
Non-fungible tokens are a new type of digital asset that is not divisible, can be used as an identifier or to represent ownership. These assets were first introduced with the launch of CryptoKitties in December 2017. Non-fungible tokens have many use cases and are being developed by various companies for different purposes, including art, virtual reality, gaming, the automotive industry and more!
Tokens such as CryptoKitties, however, are non-fungible because they represent unique digital items or assets on the blockchain. Each kitty is different, and it’s up to their respective owners to establish value for them. Like you can’t swap out a $1 bill for another, you cannot swap your kitty for someone else’s; they’re unique.
One of the most common uses cases NFTs are being used for today is collectibles. This is because blockchain technology, which enables, scarcity, is an attribute that provides value by limiting supply. By definition, all crypto-collectibles are non-fungible tokens.
What are some examples of NFT items?
The NFT abbreviation has been used for two different types of tokens:
- Those minted by companies like CryptoKitties, Decraland, and Cryptopunks
- Those created with non-fungibility in mind from day one, such as ERC721.
For simplicity’s sake, we’ll call all these first types “NFT1” and the second type “NFT2.”
1. Non-Fungible tokens 1 (NFT1)
NFT1 is the result of projects that began with non-fungibility in mind, to start with. These projects tend to use or build on individual standards like ERC721 for distinguishing these tokens. NFTs created by projects like CryptoKitties, Decentraland, and Cryptopunks are examples of NFT1. We call them “NFT” because they act as digital objects where each is unique; you can’t break up one piece of it without losing its value.
Think about something like a rare comic book – there’s only one original first edition Superman #1, and if you cut it into pieces, each piece would be worth much less than an unbroken one.
CryptoPunks are digital collectibles featuring images of 10,000 unique punk heads. Each CryptoPunk has a different name and description, with some having the ability to “sire” by other punks, which creates a new Punk that is a copy of the parent. While each punk is unique, there is also an element of rarity to these items. Collecting all ten thousand punks requires significant time and effort, with the rarest being valued at over $100k.
CryptoKitties are one of the most well-known NFTs on the market. Each cat is unique, with its genetics being determined by multiple attributes. As a result, each cat is born with a special appearance, stats, and personality traits that can be passed on to its offspring when “sired”. CryptoKitties have been in the news numerous times for generating more transaction volume than some of the exchanges that trade them.
Decentraland is a virtual reality world powered by the Ethereum blockchain. Users can create land parcels and content, buy and sell LAND, and interact with other users without an intermediary. Decentraland is a highly immersive experience built on the Ethereum blockchain where you can purchase virtual real estate. You can explore some of the worlds here.
2. Non-Fungible tokens 2 (NFT2)
NFTs are created through ERC-721 tokens, where each non-fungible token corresponds to a unique asset. These include Cryptopunks, Crypto bots, Decentraland’s MANA token, CryptoKitties’ artwork, and more. Cryptopunks and Crypto bots are both examples of non-fungible tokens, while Crypto bots are ERC20 tokens that have been hand-painted by artist Guilherme Twardowski. Users can buy, sell, and trade Crypto bots with other users using cryptographic hashes as an identifier for each token.
Cryptokitties is a blockchain-based virtual game that involves digital collectibles. NFTs determine the crypto kitties, such as ERC721 tokens, and have similar properties to traditional items because they can be unique and fungible. This means that each item has different attributes compared to the others.
For example, a Cryptokitty can have different DNA sets and come in a unique color, pattern, and background. But since the ERC721 tokens are non-fungible, their attributes cannot be divided into smaller pieces.
Cryptopunks are another type of non-fungible token. These are ERC721 tokens that are hand-painted by artist Guilherme Twardowski. Users can buy, sell, and trade Cryptopunks with other users using cryptographic hashes to identify each token.
Decentraland’s MANA token
Decentraland’s MANA token is what fuels the virtual world of Decentraland. It allows users to buy virtual real estate, create or rent out content on their land, and trade/sell assets with other users of Decentraland. Thus, Decentraland is said to offer users the ability to experience and monetize their creations.
How do you distinguish between the two types of NFTs?
Central authority mint and manage both types of tokens (as is the case now with CryptoKitties, Decentraland, Cryptopunks, etc.) or can create as part of an open standard as ERC20 for fungible tokens. This latter type would allow anyone to create tokens representing anything they want to tokenized, such as land deeds, art pieces, commodities, etc. At the protocol level, these types would look identical – it will be up to Dapps to decide whether certain NFTs should follow a non-fungibility standard or not.
Why would a project choose to use an NFT?
There are three main reasons that projects creating digital assets – or parts of their products – would turn to NFTs. The first is
Scarcity: the idea is that having a limited number of something will make each one inherently more valuable. This is true in the real world with tickets for big sporting matches, paintings by famous artists, and vintage baseball cards.
The second reason is
User experience: rather than forcing users to keep track of all the different tokens they own, blockchain companies can simply create a token for each thing they want to represent, whether it’s a shirt, a house, or even every blade of grass on your lawn. With fewer tokens floating around, there’s less opportunity for confusion, making it easier for users to keep track of their assets.
Finally, there are existing business models that rely on this “collectible” model. But these tokens aren’t just valuable because they’re rare – but also because they allow you to authenticate your ownership or even give you access to premium features or content.
So, in short, NFTs are valuable because they’re valuable. Some projects choose to mint their token for their product and retaine the value of what they’ve created so it can place the limitations at the time of creation. In contrast, others simply choose NFTs because it is easier for users and doesn’t require any additional software beyond existing standards for ERC20 tokens.
How does a project choose to use NFTs?
The first type of NFT is simply a rarity-based standard for minting tokens with digital scarcity. Projects like Cryptokitties, Decentraland, and Cryptopunks create unique assets from day one, allowing them to limit the supply of their product quickly – but they don’t have to do it this way.
Many protocols only support fungible tokens. e.g. ERC20) at the protocol level, which means projects can choose whether or not their token should be non-fungible at the app level. So CryptoKitties could have created their ERC20s instead of making their limited supply ERC721s and then mint only a certain number of digital cats.
Why should I care about NFTs, and how do they work in the blockchain world today?
Non Fungible Tokens (NFTs) are simply unique tokens, an individual can own and manage through smart contracts. The main issue people have with NFTs is the difficulty of managing them across blockchains. Right now, there are two ways to do this: 1. Create your own blockchain 2. Use an ERC20 alternative like ERC841 or OpenSea’s protocol which would allow you to mint your token on top of existing blockchains such as Ethereum, Bitcoin, Stellar, etc.
Finally, projects will need extra care when writing smart contracts that manage these items because NFTs have a value associated with them – whether due to rarity, access rights, or scarcity itself. Although it has fixed some most common issues – such as the infamous Parity wallet failure, which destroyed $150M of NFTs – it’s still up to Dapp developers to ensure they’re following best practices when verifying user transactions.
How can you buy or trade for a specific token on the blockchain?
Suppose you want to identify the token someone is selling or trading; they need to tell you where it’s located in their smart contract balance.
Unfortunately, most smart contracts will allow users to look up any token by its address. But only if they own the private key associated with that public key. So when you’re dealing with tokens like CryptoKitties – where anyone can see what the blockchain explorer calls your cat. It can be challenging for sellers to prove authenticity.
Fortunately, third-party services like 0xcert make it easy for Dapps to integrate digital certificates (or “coloring”) into their platform. So buyers know exactly what they’re buying.
The key players in this space – what is their value proposition, and why should I care about them?
0xcert is an open protocol that allows any project to create, manage and verify their non-fungible tokens directly from a smart contract. This allows a project to use third-party services or custom integrations to show buyers that they’re buying exactly what’s the promise they got on the blockchain.
Ethereum NFTs that are created in the Ethereum ecosystem, compatible with ERC-721. Dapps built on top of the Ethereum network mint these assets and trade between users inside of these Dapps. For example, CryptoKitties, Cryptopunks.
A standard for ERC-721 tokens proposed by OpenSea is a marketplace for game items and collectibles. Now they are working on another project called the ERC841 to solve some problems with non-fungible tokens in the Ethereum ecosystem.
Dapps built on the Ethereum platform is known as CryptoKitties, which became viral in December 2017. Users can buy or sell their limited supply cartoon cats through smart contracts. Owning a CryptoKitty means you own both the code (the DNA) and the artwork (a picture of your cat). Of course, the price depends on how rare your cat is, but it can be anything from $1 to $100k+.
Interesting facts about NFTs that may not be common knowledge (yet)…
Game developers make more use of NFT; there are many use cases in blockchain ecosystems NFT can benefit. For example, 0xcert is building a protocol where any project can create their non-fungible tokens. Also, can manage them quickly without going through complex processes. This will bring significant benefits to users because they don’t have to go through the hassle of transferring specific assets. Instead, they’ll be able to use one set of standards across all blockchains.
In addition, NFTs allow for digital scarcity – something that’s been impossible until now. This means that many items could hold value simply by not existing in great numbers. For example, limited edition collectibles like art or luxury goods.
Another example is digital advertising. In the future, advertisers could purchase specific NFTs to send targeted ads inside a Dapp, which you have purchased from the creator. So, for example, if an author of a book wants to sell their writing, they can set up a smart contract between them. The reader that would allow them both to profit from adverts appearing on the pages of that book.
The possibilities are endless. IP or copyright protection becomes easier because if a user creates any asset it can track that back to its source. This becomes possible with ease through blockchain technology. This makes it cost-effective to track down copyright infringements. It allows artists and photographers complete control over their work how to use it rather than becoming victims of piracy themselves!
Non-fungible tokens are a new way to approach the design and distribution of digital items. This becomes possible with the use of blockchain technology. We can create personalized goods that engage players in more meaningful ways than trading skins for coins or experience points with this emerging concept.
Non-fungible tokens are a new cryptocurrency that is changing the way we think about digital assets. With non-fungible tokens, we can now tokenize art and collectibles to make them tradeable on an open market like any other asset class. In addition, these crypto-assets will serve as collateral for loans. Even provide security for insurance policies in case of damage or theft. It’s exciting to see new ways our world could change with this new technology!