NFTs Explained

NFTs Explained

• NFT stands for Non-Fungible Token

 

• NFTs are digital tokens that represent ownership of unique items like images, music, video, and tickets

 

• NFTs differ from traditional cryptocurrency assets due to the fact that they are fully unique and not mutually interchangeable

 

• NFTs were originally launched on the Ethereum blockchain as ERC-721 tokens; there are now numerous blockchains that have NFTs 

 

• NFTs initially raised in popularity due to their collective nature, being digital works of art

 

• Over time, NFTs have been utilized for several things aside from collectibles; specifically in the sectors of decentralized finance (DeFi), real estate, insurance, music, and tickets among others.

 

NFTs have been considered a gold mine in eyes of many cryptocurrency collectors. This is mainly due to the fact that we’ve seen so many collections, and even single items sell for millions of dollars, such as Beeple’s NFT for $69 million.

 

Also, CryptoPunk #7523 sold for $11.8 million at Sotheby’s. We even saw clip art of a rock sell for 400 ETH or about $1.3 million, based on the value of ETH at the time it was sold. Even celebrity musician NAS launched an NFT collection, offering his fans an opportunity to earn royalties from his two hit singles – “Rare” and “Ultra Black” on Royal.io. 

 

From unique art pieces to songs, or even event tickets, NFTs are truly reshaping the way we see and purchase and place value on products and items.

 

So, what exactly are NFTs and how do they work? We will be diving deep into the world of Non-Fungible Tokens to teach you everything you need to know about them.

 

 

 

What Are NFTs?

NFT stands for Non-Fungible Token. This term is used to define a unit of data stored on the blockchain, which certifies a property as unique, making it interchangeable. These properties are typically digital assets that can be bought, sold, or traded in a peer-to-peer market; sometimes having unique perks and tangible and/or intangible items associated with them. 

 

Non-Fungible Tokens (NFTs) are cryptographic tokens or assets stored on the blockchain network. However, they differ from traditional cryptocurrency assets because they are “non-fungible”; meaning that each is unique and irreplaceable. These tokens are used to identify the authenticity of an item and prove that a particular individual or entity owns them. In addition, NFTs can easily be transferred from the owner’s crypto wallet to another wallet. In most cases, they can be transferred directly from the owner’s wallet or their account within a peer-to-peer marketplace, in just a few steps:

 

1. Go to your account (crypto wallet or peer-to-peer marketplace) and select your desired NFT, click Send

 

2. Enter the recipient’s public wallet address (or ENS, where applicable)

 

3. Pay the transaction fee

 

4. You can then verify your transfer on a block explorer, such as Etherscan.io (which only applies to ERC-720 tokens)

 

As a point of comparison, fungible coins or tokens are digital assets that can be exchanged because their value defines them rather than their unique properties. For example, if you have one Bitcoin, it can always be traded or exchanged with another Bitcoin for equal value. If you have one Bored Ape NFT, it cannot always be exchanged for another asset within the same collection for equal value, because their intangible and/or tangible properties vary.

The ERC-721 was the first standard to represent non-fungible digital assets on the Ethereum blockchain. Due to the standard’s vast increase in popularity, over time, NFTs managed to find their way to other blockchains. This opened the door to a wide range of use cases for Non Fungible Tokens.

 

To summarize, Non-Fungible tokens (NFTs) are designed to be:

 

• Cryptographically verifiable

 

• Unique, interchangeable, and  scarce

 

• Easily transferable

 

 

 

How Do NFTs Work?

The creation of an NFT begins with a process called minting. These NFTs are minted through smart contracts. Smart contracts govern business transactions that occur on a blockchain, automating the execution of an agreement between multiple parties so that all participants can be immediately sure of the outcome. This eliminates the need for any intermediary or third-party involvement and ensures that there’s no time lost. They can also automate a workflow, triggering the next action when preset conditions are met.

 

Smart contracts assign ownership and manage the transferability of NFTs. When someone creates or mints an NFT, they execute code stored in smart contracts that conform to different standards. This information is added to the blockchain where the NFT is managed. This minting process includes several steps, including the process of creating a new block, validating the information in question, and recording the information to the blockchain.

 

A smart contract is a code executed deterministically based on the context of a blockchain network. This means that each participant within the network then verifies the operations that a smart contract’s code needs to make. Smart contracts are the primary way through which developers create and manage tokens on a blockchain, as they can store small amounts of data in data structures.

 

That being said, NFTs have special properties which are associated with them. Each token minted has a unique identifier that is directly linked to its block address.  

 

NFTs contain information that is fully recorded within their smart contract. This information is what makes each NFT unique. With the use of smart contracts, nearly anything can be tokenized via NFTs. 

 

When you purchase an NFT using FIAT currency or cryptocurrency, you are essentially purchasing the unique token and the properties connected to it, whether those properties are tangible or intangible. For example, these properties can include royalties, merchandise, or even access to an exclusive club. This information is then registered on the blockchain and provides a record that indicates that you are indeed the new owner of the NFT. This is your proof of ownership certificate.

 

Keep in mind that an NFT can have only one owner at a time. This ownership is fully managed through a unique ID as well as metadata that no other token can replicate.

 

Each token also has a unique owner, and this is information that can easily be verified, and each token lives on the blockchain it is minted on and can be bought or sold at any NFT marketplace which supports the blockchain in question.

 

This essentially gives each NFT owner proof of ownership and proof that their version of the NFT is the original one. 

 

 

 

Why Are NFTs Valuable?

NFTs are non-interoperable, indivisible, indestructible, and verifiable tokens. All the data is stored on the blockchain, meaning no one can destroy them or remove your ownership log from the blockchain itself. Additionally, this also means that no single NFT can be replicated. Their ownership is immutable as well, where the original creator of an NFT and every owner thereafter can always be traced. 

 

The value afforded to NFT creators is truly unparalleled. Some of the benefits include: 

 

• A means to raise capital 

 

• Opportunities to earn royalties on the secondary sales 

 

• Increased brand exposure

 

• Unique community development opportunities

 

• More value provided to consumers 

 

• Transparent transactions 

 

• Peer-to-peer transactions 

 

NFT creators aren’t the only ones that receive value. Collectors also obtain plenty of benefits from buying, selling, and trading NFTs. Some benefits include: 

 

• Potential to be a very lucrative investment opportunity 

 

• Prevention of fraud

 

• Peer-to-peer transactions 

 

• Become a part of a global community and build valuable connections

 

• Opportunity to obtain something truly unique 

 

• Exclusive to tangible and intangible perks 

 

• The benefits are truly endless and they can vary per collection 

 

 

 

How Minting NFTs Works

When you mint an NFT, a few things need to occur. The NFT needs to be confirmed as an asset on the blockchain, and the owner’s account balance has to be updated to include the asset. This makes it possible for the token to be traded or verifiably owned by the purchaser.

 

Furthermore, the transactions that confirm the previous step need to be added to a block, which adds them to the blockchain. The block then needs to be confirmed by everyone in the network as the correct one. This consensus then removes the requirement for intermediaries because the network agrees that your NFT exists and only belongs to you. It’s on-chain, which means that anyone can check this and verify it. 

 

All of these tasks are done by the miners on the blockchain in question. They let the rest of the network know about the NFT and who owns it. That being said, fear not, as there are numerous incentives in place to ensure that the miners are always honest.

 

However, another thing that must be considered is that mining difficulty occurs because it takes a bit of computing power to create new blocks on the chain. Blocks are created on a consistent basis, not just when they become a requirement. Their creation times depend on the blockchain in question. 

 

The more blocks are added to a blockchain, the more secure it becomes. If a hacker would try to steal your NFT by modifying its data, the digital proof of all of the subsequent blocks would need to be changed, which is nearly impossible to do with current computing power. If this were to happen anyone that runs the blockchain’s software would be immediately able to detect and prevent this from occurring. 

 

 

 

The Challenges and Risks For NFT Mass Adoption

There are various challenges as well as risks that can affect the adoption of non-fungible tokens.

 

First, the technology behind NFTs, as well as decentralized applications (dApps) which underpin them tend to make it difficult for most people and large organizations to grasp, despite the increased adoption. You also have regulatory and legal implications that tend to burden the advancement of the tech. Additionally, there are always concerns regarding the ecological impact. This is because there are many blockchain networks that utilize the Proof-of-Work (PoW) consensus mechanism, which is known to be resource-intensive. In most cases, the blockchains that NFTs are hosted on tend not to have any implications on the environment, as they are Proof-of-Stake (PoS). 

 

 

 

The Bottom Line

Non-Fungible Tokens (NFTs) have proven to be the future of digital items and an authoritative method through which people can prove ownership of tangible and intangible assets. That being said, NFTs are still in their infancy, and we will see a lot of development and real-world implementations for them in the future. Keep in mind that, if you are a collector, some NFTs sell for thousands or millions of dollars, while others hold the same value or become worthless, so always conduct research to inform your purchasing decision.

 

NFTs are here to stay, and we can expect to see them implemented in a lot of different ways going forward; being most excited for what we have in store!