Non fungible tokens (NFTs) are cryptographic assets on a blockchain that are different from each other because they have unique identification codes and metadata.
Unlike cryptocurrencies, they cannot be traded or exchanged for equivalence. This is different from fungible tokens, such as cryptocurrencies, which are all the same and can be used to buy and sell things.
In a Nutshell
- Non fungible tokens (NFTs) are cryptographic assets on a blockchain that can be distinguished from one another by their distinctive identifying codes and metadata.
- NFTs, which grew out of the ERC 721 standard, could be used in many ways. For example, they could be used to digitally represent real assets, get rid of middlemen, and create new markets.
- Through a process known as minting, in which the NFT information is posted on a blockchain, NFTs are produced.
- NFTs, which are a development of the relatively straightforward concept of cryptocurrencies, have the ability to economize on labor, do away with middlemen, and open up new markets.
- Cryptokitties, the Bored Ape yacht club, private equity deals, real estate deals, and digital artwork are a few examples of NFTs.
Non Fungible Tokens (NFT)
NFTs evolved from the ERC 721 standard. Developed by some of the same people responsible for the ERC 20 smart contract, ERC 721 defines the minimum interface ownership, security, and metadata details required for the exchange and distribution of gaming tokens. The ERC 1155 standard builds on this idea by lowering the costs of transactions and storage for non fungible tokens and putting together multiple types of non fungible tokens into a single contract.
Non fungible tokens have potential for a number of use cases. For example, they are an ideal vehicle for digitally representing physical assets such as real estate and works of art. Being blockchain based, NFTs can also serve to eliminate intermediaries and connect artists with the public or for identity management. NFTs can eliminate intermediaries, simplify transactions and create new markets.Much of the current NFT market is focused on collectibles, such as digital artwork, sports cards and rarities.
NFT’s are birth certificates for the offspring of creators.
Dane Scarborough
Perhaps the most publicized space is NBA Top Shot, a place to collect non fungible NBA moments in the form of digital cards. Some of these cards have sold for millions of dollars. Recently, Twitter’s (TWTR) Jack Dorsey tweeted a link to a tokenized version of the first ever tweet, in which he wrote, “just setting up my twttr.” The non fungible tokens version of the first ever tweet sold for more than $2.9 million.
69 million
In early March 2021, a group of NFTs by digital artist Beeple sold for more than $69 million. The sale set a precedent and a record for the most expensive digital artwork sold to date. The work was a collage composed of Beeple’s first 5,000 days of work.
How NFTs Work
NFTs are created through a process called minting, in which the NFT information is published on a blockchain. At a high level, the minting process involves the creation of a new block, validation of the non fungible tokens information by a validator, and registration of the information. During this minting process, smart contracts are often used to decide who owns the non fungible tokens and how it can be transferred.
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When tokens are minted, they are assigned a unique identifier linked directly to an address on the blockchain. Each token has an owner, and ownership information (i.e., the address at which the minted token resides) is publicly available. Even if 5,000 NFTs of the exact same item are minted (e.g., general admission tickets to a music festival), each ticket has a unique identifier and can be distinguished from one another.
Blockchain and Fungibility
Like physical money, cryptocurrencies are often fungible from a financial perspective, meaning that they can be traded for each other. For example, one bitcoin always has the same value as another bitcoin on a given exchange, just as each U.S. dollar bill has an implicit exchange value of $1. Because cryptocurrencies can be used for different things, they can be used as a safe way to make transactions in the digital economy.
However, because of blockchain’s ability to store and publicly communicate transaction history, not all tokens or coins of a given cryptocurrency are equal. For instance, people might pay more to own a bitcoin that Elon Musk previously owned or a coin that has never traded before. Just like a 1944 U.S. steel wheat penny from 1944 is only worth $0.01, collectors are willing to pay much more for something unique.
For this reason, non fungible tokens change the paradigm of cryptocurrencies by making each token unique and irreplaceable, thus making it impossible for one non fungible token to be the same as another.
People have compared them to digital passports because each token has a unique, non transferable identity that makes it different from other tokens. They are also extensible, meaning that one NFT can be combined with another to “spawn” a third unique NFT.
Like Bitcoin, non fungible tokens also contain ownership details to facilitate identification and transfer between token holders. Owners can also add metadata or attributes relating to the asset in NFTs. For example, tokens representing coffee beans can be classified as fair trade. Or artists can sign their digital artwork with their own signature in the metadata.
Examples of NFT
Perhaps the most famous use case for non fungible tokens is cryptokitties. Launched in November 2017, cryptokitties are digital representations of cats with unique IDs on the Ethereum blockchain. Each kitty is unique and priced in ether. They mate and have babies, which are different from their parents in how they look and how much they are worth. Within weeks of their launch, the cryptokitties amassed a fan base that spent $20 million in ether to buy, feed, and care for them.
Some enthusiasts went as far as spending more than $100,000. More recently, the Bored Ape Yacht Club has stirred controversy over its high prices, celebrity followers, and the theft of some of its 10,000 NFT.
While the use cases for cryptokitties and Bored Monkey Yacht Club may seem trivial, others have more serious business implications. For example, non fungible tokens have been used in private equity transactions and real estate deals. One of the implications of allowing multiple types of tokens in a contract is the ability to provide custody for different types of NFTs from artwork to real estate in a single financial transaction.
Why NFTs are Important
Non fungible tokens are an evolution of the relatively simple concept of cryptocurrencies. Modern financial systems are made up of complex ways to buy, sell, and lend different kinds of assets, such as real estate, loan contracts, and works of art. Non fungible tokens are a step toward reinventing this infrastructure because they make it possible to make digital copies of physical assets.
To be sure, the idea of digital representations of physical assets is not new, nor is the use of unique identification. However, when these concepts are combined with the advantages of a tamper proof blockchain of smart contracts, they become a powerful force for change.
Perhaps the most obvious benefit of NFTs is market efficiency. Converting a physical asset into a digital one streamlines processes and eliminates middlemen. NFTs that represent digital or physical works of art on a blockchain eliminate the need for agents and allow artists to connect directly with their audience.
They can also improve business processes. For example, an NFT for a bottle of wine will make it easier for different agents in a supply chain to interact with it and help track its provenance, production, and sale throughout the process. The consulting firm Ernst & Young has already developed such a solution for one of its clients. Non fungible tokens are also excellent for identity management. C
onsider the case of physical passports that need to be produced at each point of entry and exit. By converting individual passports into NFTs, each with its own identifying characteristics, it is possible to streamline the processes of entry and exit across jurisdictions. Extending this use case, non fungible tokens can also serve to manage identity in the digital realm.
NFT in the Real and Virtual World
NFTs can also democratize investment by fractionalizing physical assets such as real estate. It is much easier to divide a digital real estate asset among multiple owners than a physical one. This ethic of tokenization need not be limited to real estate, but can be extended to other assets, such as works of art. Thus, a painting need not always have a single owner. Its digital equivalent can be owned by more than one person, and each owner is responsible for a different part of the painting. These arrangements could increase its value and income.
The most interesting possibility for NFTs lies in the creation of new markets and forms of investment. Consider a piece of land parceled into several divisions, each with different characteristics and types of property. One of the divisions may be next to a beach, another in a leisure complex and another in a residential neighborhood.
Depending on its characteristics, each piece of land is unique, has a different price and is represented with an NFT. Real estate trading, a complex and bureaucratic affair, can be simplified by incorporating the relevant metadata into each unique TFN.
Decentraland, a virtual reality platform on the Ethereum blockchain, has already implemented such a concept. As NFTs become more sophisticated and integrated into the financial infrastructure, it could be possible to apply the same concept of tokenized land (differing in value and location) in the physical world.
What are Some Examples of Non Expendable Tokens?
Non fungible tokens can digitally represent any asset, including Internet only assets, such as digital artwork, and real assets, such as real estate. Other examples of assets that NFTs can represent are gaming objects such as avatars, digital and non digital collectibles, domain names and event tickets.
How can I buy NFT?
Many NFT can only be purchased with Ether, so owning some of this cryptocurrency and storing it in a digital wallet is usually the first step. Next, you can buy NFT through any of the NFT online marketplaces, such as OpenSea, Rarible and SuperRare.
Are NFTs Safe?
Non fungible tokens, which use blockchain technology just like cryptocurrencies, are generally secure. The distributed nature of blockchain makes NFTs difficult (though not impossible) to hack. One security risk of NFTs is that you could lose access to your non fungible token if the platform hosting the NFT goes bankrupt.
What does Non Expendable Mean?
Fungibility is an economic term that describes the interchangeability of certain goods. For example, a barrel of oil is fungible (interchangeable/indistinguishable) from any other barrel of oil. A dollar bill, likewise, is the same as any other dollar bill (or 4 quarters, etc.). Non fungible is making those items unique or distinguishable. For example, if a famous artist were to draw and sign a dollar bill, it would become a unique item, distinct from all others, and perhaps worth more than its face value.
Wrap Up
In conclusion, non fungible tokens (NFTs) represent both digital and physical assets in a completely unique way on a blockchain. They can change everything about how we trade and manage assets because they are unique, can’t be replaced, and can be scaled. On online marketplaces, NFTs can be used to represent digital artwork, real estate, gambling items, domain names, and event tickets.
They can be used to expedite procedures and get rid of middlemen because they are safe and tamper proof. As more people learn about what blockchain technology can do, NFTs will become more important to the digital economy.
FAQs
Non fungible tokens (NFTs) are cryptographic assets on a blockchain that can be distinguished from one another by their distinctive identifying codes and metadata. They cannot be traded or exchanged for equivalents like cryptocurrencies can.
Non fungible tokens can be used to digitally represent any asset, including ones that are exclusively available online, like digital art, and physical ones, like real estate. Other types of assets that NFTs can represent include domain names, event tickets, digital and analog collectibles, gaming items like avatars, and more.
Since many NFTs can only be bought using Ether, the initial step is often to acquire some of this cryptocurrency and store it in a digital wallet. After that, you can purchase NFTs from any of the online NFT marketplaces, including OpenSea, Rarible, and SuperRare.
Non fungible tokens, like cryptocurrencies, utilise blockchain technology and are typically secure. NFTs are challenging to hack because to the distributed nature of blockchain, yet not impossible. If the platform hosting the NFT goes out of business, you could lose access to your non fungible token, which is one security concern associated with NFTs.
The interchangeability of specific items is referred to in economics as fungibility. For instance, a barrel of oil is interchangeable with any other barrel of oil and is fungible. A dollar bill is identical to all other dollar bills in a similar manner (or 4 quarters, etc.).
Those items are distinct or identifiable because they are non fungible. A $1 note, for instance, would become a one of a kind item, different from all others, and maybe worth more than its face value if a well known artist drew and signed it.
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- Ethereum – Non Fungible Tokens – ERC-1155:Multi-Token Standard
- Coin Telegraph – Fungible vs nonfungible tokens: What is the difference?
- Medium – Cryptokitties Official Blog – Understanding the Cryptokitties Marketplace
- CNET – Non Fungible Tokens – Bored Ape Yacht Club NFTs: Everything you need to know
- Forbes – Non Fungible Tokens – Real Estate NFTs: How it Began
- Financial Times – NFTs: Identity in the metaverse
- Decentraland – Non Fungible Tokens – Marketplace
