A Complete Guide on NFT (Non-Fungible Token)
With the advent of blockchains, we are witnessing the emergence of numerous innovative technologies that have the power and potential to transform the tech space. NFTs are one such product of the evolution brought about by blockchain technology. As we see the paradigm shift from a traditional to an increasingly digital world, the demand for digital assets is also rising exponentially. Non-fungible tokens have proved to be an important stepping stone in this direction.
However, the role of these tokens is not just confined to helping represent physical assets digitally; they also address many pressing concerns, such as duplication of digital products, fraud, and artists receiving lesser compensation than they actually deserve due to the involvement of third parties. With blockchain-based NFTs, establishing proof-of-ownership for digital assets has also become easy.
An important thing to take note of is that they are called “non-fungible” tokens because they are immutable and cannot be duplicated after they are produced. Smart contracts help identify each NFT as unique, with all pertinent information stored on a distributed ledger called the blockchain. The distributed ledger on which the information is stored is publicly visible and can be accessed by anyone. Thus, making NFTs transparent, trustworthy, and highly secure.
Buying NFTs not only profits its creators but buyers too. While creators have started to gain true profit value for their efforts and hard work, buyers can use the purchased NFTs as a long-term investment. This is because they can be re-sold at a standard price even after years of their creation.
This potential of NFTs has caught the attention of many. As a result, numerous use cases of NFTs in different domains are being developed and tested, such as crypto art, gaming, finance, digital identity, insurance, certificates, and licensing. With this insight, take a deep dive into the world of NFTs and all of its major aspects.
- What are non-fungible tokens?
- Characteristics of NFTs
- What are NFT standards?
- History of NFTs
- How do NFTs work?
- What are the use cases of NFTs?
- Why are NFTs important?
- The rising popularity of NFT marketplaces
- The business model behind an NFT marketplace
What are non-fungible tokens?
Before we discuss NFTs in detail, let us understand what they are and what they are not.
- What NFTs are: Non-fungible tokens are crypto assets that are indivisible and unique. They usually represent intangible digital items such as videos, images and in-game items. However, they can also be used to represent tangible items such as real estate.
- What NFTs are not: NFTs are not interchangeable. Each NFT is a unique digital asset that can be bought and sold in an open marketplace.
The difference between fungibility and non-fungibility lies in the intrinsic property of being interchangeable. Fungibility is the property of a commodity or an asset whose individual units are interchangeable and essentially indistinguishable. Gold and fiat currencies are the perfect example of fungible products, as each unit is interchangeable with every other equivalent unit. For example, a five-dollar bill is exchangeable with another genuine five-dollar note. It is the property of currencies to allow a free exchange. For collectible items, fungibility isn’t a beneficial property. It doesn’t provide any way to trace back the history of the product.
Bitcoins, for instance, are fungible tokens. A user can exchange one bitcoin for another, and it will still be one bitcoin. However, the value of Bitcoin might differ based on the time of exchange.
Non-fungible tokens are unique because their information is stored in smart contracts. This information makes NFTs different from each other and irreplaceable by any other token. The indivisibility of NFTs can be understood with this simple example: You can not share or send a part of your concert ticket to another person. The fractional part of that ticket is worthless and non-redeemable.
One of the first few NFTs was CryptoKitties. Every Blockchain-based CryptoKitty is different.
Characteristics of NFTs
- Unique: Uniqueness is the most significant characteristic of NFTs. Smart contracts associated with every individual unit record permanent identification information. It is like a certificate of authenticity.
- Indivisible: NFTs cannot be divided into smaller parts. For example, a digital art piece or a football match ticket cannot be divided into smaller units. Either purchase the whole of it or nothing at all.
- Rare: NFTs are scarce assets. The scarcity and rarity of an NFT define its value. Though developers could create any amount of NFTs, they are often limited to ensure rarity.
- Authenticity: NFTs, as we know, are backed by blockchain technology. This particular characteristic of NFT helps increase their authenticity. A distributed ledger called blockchain comprising details of NFTs, such as creation date and time is made visible to the public. As a result, anybody buying that NFT can easily check its history, which increases transparency.
- Scarcity: NFTs are deployed using smart contracts, which provide each NFT with a unique digital identity and special features. This separates each NFT from the others and allows them to exist independently. Scarcity is a factor that drives more value to those digitally owned assets.
What are NFT standards?
NFT standards are the underlying principles that allow non-fungible tokens to be built on a particular blockchain protocol. All these years, Ethereum has been the dominant force in NFT creation. In fact, it was the first blockchain protocol where NFTs were created and launched.
As blockchain technology grew in demand, the need for different types of blockchain protocols also grew. Many blockchain protocols other than Ethereum and Bitcoin have already started to gain prominence. Currently, Flow and Tezos are two blockchain platforms being widely used for NFTs. Now, let us look at the top NFT standards used for creating NFTs.
ERC-721 is the first standard developed for representing non-fungible digital assets. It is an open token standard that describes how NFTs are built on the Ethereum platform. This NFT token helped standardize NFTs. Every NFT released under the ERC-721 standard is unique.
With the ERC-1155 standard, the concept of semi-fungibility has been brought into the NFT world. It also provides a superset of the ERC-721 standard, i.e., ERC-721 assets could be built using the ERC-1155 standard.
ERC-998 tokens are non-fungible as well as composable. They act as a portfolio of digital assets in which we can hold non-fungible tokens like ERC-721 and fungible tokens like ERC-20 – all under one entity.
FA2 is an NFT standard for the Tezos blockchain and can support various types of tokens, such as non-fungible and multi-asset contracts. Anyone can use this standard to create their own token and support complex token interactions.
History of NFTs
Non-fungible tokens may look new to many, but the concept got introduced many years back. The journey of it becoming one of the most promising tech trends involved numerous tech enthusiasts, artists, and technologies.
Colored coins (2012-2013)
The idea of NFTs first emerged in 2012-2013 after “colored coins” were issued on the Bitcoin blockchain. Colored coins are the tokens representing real-world assets on the blockchain and prove ownership of assets like metals, cars, real estate, etc.
In 2014, Robert Dermody, Adam Krellenstein, and Evan Wagner founded Counterparty. It is a peer-to-peer financial platform built on the Bitcoin blockchain that allows users to create their own tradable currencies. It had numerous opportunities like asset creation and decentralized exchange.
Spells of Genesis on Counterparty (2015)
In 2015, Counterparty partnered with the creators of the game called Spells of Genesis. The game creators utilized a Counterparty to issue in-game assets onto a blockchain and launch an ICO. They also introduced their own in-game currency called BitCrystals with the help of Counterparty.
Trading Cards on Counterparty (2016)
After the collaboration of Spell of Genesis and Counterparty, many new trends started to emerge. In 2016, a popular trading card game called “Force of Will” teamed up with Counterparty to launch their cards on the blockchain. This signaled the value of putting assets on a blockchain as they had no prior blockchain experience.
RarePepes on Counterparty (2016)
Later in the same year, memes also entered the blockchain space when Rare peeps got released on the Counterparty platform. RarePepe is a famous internet meme showcasing a popular frog character called “Pepe the Frog.”
As RarePepes rose in popularity, the founder of Larva Labs also entered the NFT market. They started creating unique characters under the name Cryptopunks on the Ethereum blockchain. No characters were made similar to the others and were limited to 10,000 in number.
Later in the same year, a very popular NFT game called Cryptokitties was also released on the Ethereum blockchain. Players could breed, sell, and trade digital cats in this game.
NFT explosion (2018-2021)
A lot happened in the NFT world between 2018 and 2021. NFT gaming began to gain momentum, followed by the huge success of the game Cryptokitties. Many other games based on the NFT concept were released, including Decentraland, Axie Infinity and more.
Another big driving force behind the popularity of NFTs among people was when auction house Christie’s and Sotheby’s hosted an art auction in the digital world. It was a unique unction of that time as it allowed the buying and selling of NFT-based art. This was followed by the record-breaking sale of Beeple’s NFT art called “Everyday: the First 5000 Days”. It got sold at a whopping $69 million. Such a huge sale caught everybody’s attention leading to the wide adoption of NFTs and NFT marketplaces. Since then, the NFT market has become more efficient, and numerous platforms to create, buy, sell and trade NFTs have surfaced online.
How do NFTs work?
ERC-721 is the most commonly used non-fungible token standard introduced by Ethereum. Other than Ethereum, NFTs can also be created on other smart contract-enabled blockchains having NFT tools and support. EOS, NEO and TRON now have NFT standards. The standardization of the issuance of NFTs ensures a high degree of interoperability. Smart contracts allow NFTs to add detailed attributes like owner’s identity, secure file link or rich metadata. Blockchain and NFT promise immutability to prove digital ownership of the assets.
Open marketplaces like OpenSea handle the trading of NFTs. Buyers and sellers can connect via such marketplaces. The value of NFTs is prone to fluctuations in response to market supply and demand.
Owning an NFT
When users buy NFT-based digital art using cryptocurrency, they get the work of art linked to a unique token. The transaction gets registered on the blockchain, providing a transparent, permanent record of purchase and proof of ownership. The owner of the NFT of the digital art can display it on a computer, TV or even a digital frame. The owner can also sell it whenever they want.
Now, the question may arise: Can’t anyone take a screenshot of the image or reproduce it on the internet? Yes, the answer to this question is yes; anybody can easily capture a screenshot or forge the image. But fortunately, blockchain would still prove you the owner of the original art, making the screenshots and the copied images worthless. The ownership of an NFT can only be transferred when the blockchain records an authorized transaction only by the NFT owner’s private key. Another analogy would be reprinting a photograph. Since the original picture has immutable proof of ownership, the number of reprints doesn’t matter.
Applying copyrights to NFTs
There might be two cases for owning the copyright of a piece of art: one where the buyer owns the copyright and the second where the artist keeps the copyright with themselves. Generally, the collector who buys the item gets the copyright unless explicitly mentioned by the artist to retain the copyright. In that case, where the copyright remains with the artist, the buyer cannot make copies or distribute those copies. For example, taking photos or screenshots of the item, making postcards of those copies, creating reprints, etc., is not allowed.
What are the use cases of NFTs?
The global gaming industry generates massive revenue across mainly three market subsets: PC, mobile and console. Altogether, the video games industry generated sales of 134.9 billion US dollars globally in 2018. Virtual economics has been thriving for many years. Games like Fortnite and World of Warcraft are the mainstay in the global gaming market. Marketplaces, currencies and in-game items remain the main focus of these games and are required by gamers to level up or progress in their gameplay. Blockchain gaming allows players to transfer in-game assets and provide proof of authenticity safely. NFTs provide the solution for the digital ownership of unique and rare in-game assets. Users also get the chance to participate in governance to decide future developments in the game.
Blockchain provides an effective solution for eliminating counterfeit tickets and merchandise in the sports industry. Blockchain implements immutability to prevent counterfeiting by leveraging NFTs. Tokenized sports game tickets issued on the blockchain make a perfect use case of NFTs in sports. Every game provides similar tickets to the audience, but each holds unique information about its registered owner on the blockchain.
It is challenging for digital artists to maintain their work’s copyright. Through NFTs, it is possible to resolve this issue. A user can buy a creation and proudly display the asset on any virtual space with its entire history. The copyright information can hold the details of the artist, date of origin, previous owners and asset value.
Media & entertainment
The internet has generated numerous frauds in the entertainment industry related to content copying, copyright theft, etc. The entertainment industry has been battling such issues for a long time. The advent of blockchain technology and NFTs has made it possible to link each film or piece of media to the blockchain as an NFT. In this way, NFTs could help prevent files from being copied or shared without permission. Moreover, NFTs are also used to eliminate fake news as they provide proof of origin.
With the help of NFTs, real-world assets like real estate are tokenized on the blockchain. It would ensure smooth transactions while buying/ selling houses without the involvement of any third party. With NFTs, there will be no possibility of having conflicts over ownership of lands or other assets.
Why are NFTs important?
Now that non-fungible tokens have gained extreme popularity, some factors make these tokens important to use. Besides solving long-standing issues with major industries, there is a lot that NFTs offer.
One of the most important benefits of having NFTs is their efficiency in removing intermediaries and streamlining processes. Buyers and creators are directly connected to one another, providing room for transparency and a stronger relationship.
Smart contracts ensure that each NFT produced has a unique identification. Further, converting a physical asset into a tokenized asset helps track all information related to the object while maintaining scarcity.
NFTs are best when it comes to democratizing the digital asset market. With the fractionalization of NFTs, various individuals can own non-fungible tokens, which is advantageous for creators as it increases revenue and also buyers who now have the power to re-sell those partially owned digital assets.
The rising popularity of NFT marketplaces
With the broad spectrum of use cases and benefits, non-fungible tokens help businesses save money on fraud detection, copyright issues, counterfeit products, and people managing their private and personal data. Also, as digital proof of ownership, NFTs have become highly popular among digital artists, game publishers, luxury brands, and other digital content creators. They are using NFTs as a means to reach the global market to maximize the monetization of their artworks. As NFTs are getting popular worldwide, the demand for NFT marketplaces as a medium for trading NFTs has also increased.
The business model behind an NFT marketplace
It is a commission-driven business model. In an NFT marketplace, NFT owners (mostly digital artists, game publishers, and crypto enthusiasts) sell their NFTs. NFTs are blockchain-based tokens representing digital assets like artwork, music, videos, gifs, in-game items and other similar collectibles. NFTs validate the ownership of these assets, and then NFT owners can sell them in exchange for a cryptocurrency in an NFT marketplace.
There are two ways to deal with NFTs. Suppose you are a digital artist or crypto enthusiast. In that case, you can build an NFT to represent your digital asset to copyright your ownership and be involved in trading NFTs. Then, startups, entrepreneurs or interested businesses can also become NFT marketplace owners by launching their own NFT marketplaces. Businesses can directly sell NFTs to marketplace users by creating their own marketplace. Also, marketplace owners earn handsome revenue as commission whenever some NFT owner sells an NFT over their patronized NFT marketplace.
Non-fungible tokens have taken the world by storm and made NFT marketplaces boom with rapid trading. They are proving to be advantageous for both art collectors and creators. Users are enjoying diverse benefits while earning massive profits. They also provide creators with new distribution channels and monetization opportunities. Artists can now get a larger share of the value earned by their efforts.
NFTs describe the true value of digital assets and bring like-minded people together, forming a strong community. In the future, NFTs will be a commonplace technology with a much wider fan base than it enjoys today.
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