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Home Guides What are Non-Fungible Tokens (NFT)? A Comprehensive Guide

What are Non-Fungible Tokens (NFT)? A Comprehensive Guide

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non-fungible tokens NFT

If you’ve been closely following cryptocurrency news, you might have already heard about non-fungible tokens (NFT). And quite recently, they have been making rounds in social media, with popular celebrities like Paris Hilton, Lindsay Lohan, Kings of Leon, and many more minting their own NFTs.

Just this month, NFTs have already been covered by mainstream media, especially Mike Winkelmann’s “Everydays: The First 5000 days,” which was a purely digital artwork that was auctioned online for as much as $69 million dollars.

But more than auctioning off artworks, what more can NFTs do? And what are they, exactly?

What is an NFT?

Non-fungible tokens (NFT) are blockchain-based, digital assets that are designed to function as a counterpart of any asset. Today, NFTs have been used to represent many things apart from artworks including items like digital collectibles, in-game assets, and music materials, among others.

Everydays: The First 5000 Days,” the digital artwork that sold for $69.3 million

A distinguishing feature of NFTs from other digital assets is their uniqueness. NFTs have their own identifying information which can be programmable via smart contracts. Basically, they cannot be swapped for another NFT because no two NFTs can ever be similar.

Furthermore, they are indivisible. If you look at other cryptocurrencies that are considered “fungible,” you’ll notice that they can be fractionalized, or bought in smaller units. For example, you can buy only a few satoshis of a Bitcoin if you want to. NFTs do not have this feature, in the same way, that a collector cannot own 1/4 of a Picasso painting.

When you look at NFTs, they cannot be fractionalized. An artwork NFT, for example, cannot be sold in parts. You’ll have to get the whole unit of an NFT or you can be able to redeem what it represents.

Think of NFTs as your cryptocurrency’s private key. The NFT you own represents your ownership over its underlying asset.

Just this March 15, Tesla CEO and SpaceX Founder Elon Musk dabbled his hands with NFTs too. According to Musk’s tweet, he is selling a song about NFTs as an NFT. It has not been auctioned yet and there are no reports so far as to where he is going to launch it. But it has definitely stirred some discussion as to the growing popularity of NFTs.

Brief History on NFTs

Colored Coins

Colored Coins came around during 2012 as the first blockchain asset that had the same goal as the NFTs we have today. It was named bitcoin 2.x, or Colored Bitcoin. Its objective was to utilize the blockchain in creating a digital version of collectibles, properties, shares, and others.

Cryptopunks

Cryptopunks were introduced back in 2017, where developers John Watkinson and Matt Hall built 10,000 NFT characters on Ethereum which were all unique. The design of Cryptopunks could be considered as one of the projects that had spearheaded the NFT ecosystem today.

CryptoKitties

Also in 2017, CryptoKitties is an NFT project that featured digital kittens that had their own distinguishing features. When it was first launched on Ethereum, people traded kitties so much that it had congested the blockchain. Reports back then said that it caused a sixfold increase in pending transactions upon its release.

Token Standards

Just like any other digital asset on the blockchain, NFTs follow a token standard that governs how they can be traded and used in the network.

The first NFTs were built on top of Ethereum, one of the biggest blockchain networks in the space in terms of market cap. As of now, Ethereum implements the ERC-20 standard, making it compatible and usable in transactions performed within the same blockchain.

However, when the ecosystem grew, the ERC-721 standard was implemented for many NFTs. This ensured that they can represent any other certificate or asset which can’t be fractionalized further. ERC-721 also introduced smart contracts in NFTs.

Enter ERC-1155. This is the standard that Enjin has been developing. Dubbed as the “next-generation multi-token standard,” it can support both fungible and non-fungible tokens.

Smart Contracts and NFTs

Smart contracts are self-executing agreements that are utilized by blockchain platforms to avoid the need for third-parties in facilitating transactions. However, it has since been used for other purposes now, such as storing and securing information. This has found its way in NFTs too.

Every information about an NFT, including the asset it represents, its characteristics, and other features, is stored in the blockchain. Again, this is to ensure that there are no two NFTs that are the identical with each other.

Smart contracts play a very integral role in NFTs. In-game assets and collectibles, for example, can have changing attributes that have to be represented in their tokens too. Smart contracts automate the processes behind these to ensure that any potential change is recorded in NFTs as well.

Use Cases for NFTs

Digital Collectibles

Perhaps one of the first NFTs you’ve come across if you’ve been with blockchain for quite a while is CryptoKitties. It was first introduced in 2017, and they were just simply digital kittens that people can breed to make more kitties. These kittens can have different characteristics, but mainly, these were just digital collectibles that brought NFTs to the space.

NFTs can be used to purchase digital collectibles like CryptoKitties. Today, there are a lot of digital collectibles that you can buy from NFT exchanges. And like cryptocurrencies, you can get one as an investment if you think its value will likely change in the future.

NBA Top Shot

Digital collectibles can be redeemed for their value or the asset that they represent. And because NFTs are unique, you can tokenize collectibles to the blockchain and auction them in exchanges that can support it.

Artworks

Artists have now found NFTs as a new way to auction off their work. Artworks can be tokenized too and sold on NFT exchanges. This way, anyone who wishes to buy an NFT artwork can purchase it even from across the world. Tokenizing artwork has opened up new possibilities for artists to expand their market reach and their potential audience.

Moreover, the use of NFTs can also add more value to an artwork. Since it records the journey of an NFT, from transactions like a transfer from an owner to another, or maybe the timeline of the change in its price, prospective buyers can see an artwork’s entire history.

Music and Entertainment

Music files can be tokenized as well. By linking a music file with an NFT, the owner can restrict the access to a file according to how they want to. With the uncontrollable growth of music piracy, NFTs can save artists, producers, and other industry stakeholders a lot of money that they can potentially lose if their content is just publicly available.

Moreover, NFTs help musicians create content, market them without the need for a middleman, and reach exactly the kind of audience that they want to.

Fashion Items

Fashion items can be tokenized through NFTs to eliminate the risks of counterfeiting and theft. If you want to tokenize an accessory, you can simply attach a QR code on it which can later be used by others if they want to verify its authenticity.

NFTs can also record the details behind an accessory or any fashion item. It can give users and buyers access to any information they’d need to know about the NFT, such as where the accessory was created, who owned it before, and its composition, among many others.

Certifications and Licenses

Online education platforms can also benefit from using NFTs too. Completion certificates, or any other type of license, can be minted in an NFT to store important information on the blockchain. Because of this, NFTs can be used as a digital reference for certificate and license holders.

In addition to that, issuers of certificates will not have to worry about the safekeeping of certificate information anymore since they can utilize the blockchain through NFTs. Certificate holders can also be at peace knowing that no other authority can amend or delete their records once they are already in the blockchain.

Staking

Perhaps one of the most popular decentralized finance (DeFi) products today is staking. This is where asset holders deposit a certain amount of their tokens in a smart contract, lock them, and earn proportional rewards in return.

There are in-game assets that implement NFTs already. Users can stake their tokens there if they want to, and earn a token designated as its incentives. This can be seen with NFT platforms that feature an NFT exchange as well.

There are several other use cases for NFTs. They can also be used to tokenize other real world assets such as real estate properties. But in general, the use cases we mentioned compose the majority of today’s NFT landscape.

Where can you buy NFTs?

There are many exchanges today that have begun offering NFT listings for interested buyers. But here are the popular NFT marketplaces.

OpenSea

OpenSea is an Ethereum-based NFT exchange where users can trade NFTs with their cryptocurrencies. In OpenSea, you can purchase NFTs that represent digital collectibles, in-game assets, and digital artworks, among others. What you only need to begin trading is a Web3-based digital wallet like Metamask.

Nifty Gateway

Nifty Gateway is an NFT exchange owned by Gemini, one of the biggest cryptocurrency exchanges in the market today. You can purchase artworks on the platform from its primary marketplace, and resell them to others in a secondary marketplace. You just have to deposit ETH on your Nifty account or link your card with the website to start trading.

SuperRare

SuperRare is a social network platform for NFTs based on Ethereum. Here, you can interact with other NFT collectors and buyers to either purchase or sell your own tokenized pieces. You’ll only need to deposit ETH in order to perform your transactions on the platform.

Binance

There are some NFTs that are listed on Binance as well. One of the most recent that they launched on the platform is ALICE, an NFT from the game “Introducing My Neighbor Alice.” Purchasing tokens on Binance is easy, you only need to fund your account and select the token pair that you can trade an NFT with.

Top NFTs and Collectibles in the Market

THETA

THETA is an NFT platform that aims to create a decentralized video delivery network. Its product, THETA.tv, allows content creators to mint their output and distribute it to their followers. Through this avenue, creators can increase their earnings because they can connect with their audience directly without the need for a middleman.

Chiliz

Chiliz is a sports tokenization platform that allows sports teams and partners to mint NFTs for their fans. In partnership with Enjin Coin, they have begun supporting collectibles that are compatible with Ethereum-based platforms as well. Information on sporting events that affect the value of collectibles are supplied by Chainlink.

Enjin Coin

Enjin is an Ethereum-based NFT platform that allows developers to mint and manage virtual assets on the network. Enjin is also leading the development of the ERC-1115 standard that aims to make NFTs interoperable.

Decentraland

Decentraland is an Ethereum-based NFT platform where users can purchase, create, and monetize their virtual reality software. It also features a 3D world that gives users rights to purchase a virtual land which they can have control over, implement applications to, and receive rewards for.

Conclusion

NFTs have been created to supply a new use case for the blockchain, and it was pretty successful at that. Now that the NFT market is booming, it is now being seen as a more viable alternative for content creators, artists, gamers, collectors, and other stakeholders, to digitize their assets. It has benefits for every participant in any industry’s supply chain, be it in music, entertainment, arts, or games.

Most artists are starting to find NFTs as a way to reach a wider market. Gamers are being introduced to the blockchain through NFTs. Collectors can resell digitized assets easily on NFT platforms. The fact that any supply chain supported by NFT is free from the interference of a middleman is already a valuable contribution.

But of course, we all have to keep in mind that while the industry is constantly developing, regulations are only about to keep up. Securitized tokens were following the same framework in order to create blockchain representations for real world securities and they faced enormous legal controversies. We have yet to see how the increasing awareness on NFTs are going to alert regulatory purview. Furthermore, this technology has more than its own fair share of naysayers. But all in all, the bustling market of NFTs have shown a very interesting application of blockchain in real world use cases.

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