A Complete Guide on NFT (Non-Fungible Token)
The emergence of Bitcoin introduced the idea of trustless digital scarcity. With the advent of blockchain technology, digital scarcity has become possible and is being used for linking the digital world with the real world. Non-fungible tokens (NFTs) are based on a similar concept. It is a type of cryptographic token that depicts or represents a unique asset. Those assets can be either complete digital assets or tokenized versions of real-world assets. The value of an NFT depends on the quality, scarcity and mainly rarity of the digital asset it is representing.
NFTs are called non-fungible because they can’t be duplicated. Every NFT is unique and since they are not interchangeable, so they serve as prove of ownership. Owners of NFTs are recorded on blockchain, so the data is immutable and trustworthy. This allows NFT to be traded as a stand-in for the digital asset it is tagged in.
NFTs have become one of the critical building blocks of Blockchain-enabled digital economy. Its increasing popularity is surging to new highs every quarter. It was $13.7 million in the first half of 2020, and now in 2021 it has hit $2.5 billion. On February, 8th, 2021, a buyer had purchased an NFT that included nine plots of Genesis land in Axie Infinity virtual world. Its worth was $1.5 million at the time of purchase. The deal was recorded as the most prominent digital land sale. Therefore, in the coming years, virtual economies will be the new normal for an advanced digital world.
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. This insight will explain NFTs in detail, covering the following topics:
What are Non-Fungible Tokens?
- What it is: A non-fungible token is a crypto asset that is indivisible and unique. It represents an intangible digital item such as an video, image, or in-game item.
- What it is 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 desirable property of currencies that allows free exchange. While for collectible items, fungibility isn’t a beneficial property. It doesn’t provide any way to trace back the history of the product.
Bitcoins are fungible tokens. A user can exchange one bitcoin for another; it will still be one bitcoin. However, the value of Bitcoin might differ based on the time of exchange. Moreover, a part of Bitcoin measured in Satoshi can also be exchanged, as fungible tokens are divisible.
The non-fungible tokens consist of identifying information 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 as the inability to share or send a part of your concert ticket. 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. Sending someone a CryptoKitty and receiving one in return are two completely different CryptoKitties.
What are the characteristics of an NFT?
- Unique: Uniqueness is the most significant characteristic of NFTs. Smart Contracts associated with every individual unit records 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 the developers could create any amount of NFTs, yet they are often limited to increase rarity.
What are NFT Standards?
Specific token standards created to support NFTs include:
- ERC-721 Standard
It was the first standard developed for representing non-fungible digital assets. It is an inheritable Solidity Smart Contract standard. Developers can create new compliant contracts from the Open Zeppelin library.
- ERC-1155 Standard
With the ERC-1155 standard, the concept of semi-fungibility is 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.
How does NFT work?
Smart contracts allow NFTs to add detailed attributes like owner’s identity, secure file link or rich metadata. Blockchain, along with NFT, promises 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 NFT is prone to fluctuations in response to market supply and demand.
Owning an NFT
When a user buys an NFT-based digital art using cryptocurrency, they get the work of art associated with a unique token. The transaction gets registered on the Blockchain, providing a transparent permanent record of purchase and proof of ownership. The owner of NFT of digital art can use it to display on a computer, or a TV or even a digital frame. The owner can also sell it whenever required.
Now, the question may arise: Couldn’t anyone screenshot 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 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 NFT
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 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.
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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 safely transfer in-game assets and provide proof of authenticity. NFTs provide the solution for 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 NFT in sports. Every game provides similar tickets to the audience, but each holds unique information of its registered owner on the Blockchain.
For digital artists, it is challenging to maintain the copyright of their work. Thorugh NFTs, it is easily possible to resolve this issue. A user can buy a creation and proudly display that 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 copying the content, copyright theft, etc. The entertainment industry has been battling such scams for a long time. The advent of Blockchain and NFTs has made it possible to append each piece of film or media to 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 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.
The Rising popularity of NFT Market Place
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 becomes highly popular among digital artists, game publishers, Luxury brands, or other digital content creators. They are using NFT as a mean to outreach the global market for maximizing the monetization of their art works. As NFTs are getting popular worldwide, so has increased the demand for the NFT marketplace, as the medium for the trading of NFTs.
What is the business model of the NFT marketplace?
It is a commission-driven business model. In an NFT marketplace, NFT owners ( mostly digital artists, game publishers, crypto enthusiasts) sell their NFTs. NFTs are blockchain-based tokens representing digital assets like artwork, music, video, Gifs, gaming or other similar collectibles. NFTs validate the ownership of these assets, and then NFTS owners can sell their NFTs in exchange for a cryptocurrency in an NFT marketplace.
There are two to engage 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 involve in trading NFTs. Then, startups, entrepreneurs or interested businesses can also become NFT marketplace owners by launching their own NFT marketplace. By creating their own marketplace, businesses can directly sell NFTs to marketplace users. Also, as marketplace owners, they earn handsome revenue as commission whenever some NFT owner sells an NFT over their patronized NFT marketplace.
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Cross-chain swaps enable the exchange of tokens across different blockchain ecosystems without any central authority or intermediaries.
NFTs are popularly being used to tokenize digital artworks, and then these NFTs are traded in NFT marketplaces to earn a profit.