What is an NFT? Non-Fungible Tokens Explained


What cryptocurrency is doing to the fiat currency, is what NFT is doing to physical artwork. In hindsight, how various cryptocurrencies from Bitcoin to Ethereum have synthesized, decentralized, and revolutionized the idea of the modern currency system. Similarly, NFT will change the art world forever.

Non-Fungible Tokens (NFTs) seem to have emerged from the very thin air this year out of Ethereum. However, Beeple’s sale at Christie’s worth $69million added the much-needed fuel, spreading the fire around the world. But skeptics compare the NFT phenomenon with the dot-com craze or dutch tulips bubble and suggest that they are nothing but hype. Whatsoever, there is a huge NFT universe out there expanding exponentially on the blockchain fabric.

What is an NFT?

Non-fungible Tokens or NFTs are digital assets that can not be replaced or modified. NFTs are basically tokens that are used to represent the ownership of unique arts, graphics, or simply images. NFT assets are thus cryptographic assets on a specific blockchain with unique identification which helps them to be unique.

NFT helps digital artists and creators to create unique content and then tokenize it on the blockchain like Ethereum, etc.

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The most important concept of NFT is non-fungibility. Non-fungibility is an economic concept that suggests that an item is unique and cannot be traded. Unlike currencies or gold NFTs are items that cannot be traded or exchanged for one another. Just like any other non-consumable goods you need to buy the NFTs and can only sell them in exchange for cryptocurrencies.

One can compare NFTs to tangible canvas paintings like Leonardo da Vinci's Mona Lisa or Vincent Van Gogh's Starry Nights for a better understanding. These artworks are unquestionable masterpieces and one-of-a-kind.

Although these paintings can be reproduced or redrawn by professional artists. It will not, however, have the same value as the original piece. Similarly, an NFT formed on the blockchain can be duplicated or reproduced, but it will not be considered original and so have no actual value because it lacks a unique identifying number.

History of NFTs

The creation of NFTs can be traced back to the invention of ‘Colored Coins’ in 2013. These are made of Santoshi, a fundamental unit of bitcoin. Colored Coins are created to represent a mosaic of assets including access tokens, properties, coupons, etc.

Counterparty, a peer-to-peer financial platform and distributed, open-source Internet protocol built on top of the Bitcoin blockchain, was founded in 2014 by Robert Dermody, Adam Krellenstein, and Evan Wagner. Counterparty made it possible to create assets on the blockchain, which sparked the development of NFTs.

Counterparty also supported the launch of ‘RarePepes’ in 2016. A rare Pepe is nothing but a frog character. It has created a whole new exchange for rare Pepe called the Rare Pepe meme directory. It also consists of validators who validate the rareness of the Pepe memes. Thus, igniting the spark for the need for unique, non-fungible assets.

Nevertheless, NFT is considered a recent phenomenon. The most recent and famous Cryptopunks was created on the ethereum blockchain by John Watkinson and Matt Hall in 2017. They made only ten thousand characters with distinctive characteristics. CryptoPunk was sold for a whopping $530 million recently.

These similar-looking, yet distinctive digital art created a buzz for more similar NFTs, soaring the total market cap of NFT around $22 billion dollars according to the data published by DappRadar.

What is an Example of NFTs?

Cryptokitties has been one of the more prevalent examples of NFTs as decentralized applications, or dapps, have been built on top of their platform. One way that they've done this is through designing a system where users can create cat images on their website and then sell those assets on Ethereum's blockchain to other users who want to purchase them.

Another example of an NFT is Factbar, which represents evidence on a blockchain. Each factbar is unique and contains information about the data it represents such as links to sources and verification scores from third-party validators. The owner of a factbar may choose to sell or trade it to an interested party.

There has been a lot of discussion over the past few years about how blockchain technologies will affect digital media and whether there are potential problems that can be resolved with NFTs. In addition, there have been proposals for unique digital artworks that could live on blockchains as well as non-fungible tokens that represent ownership rights in music.

In 2014, a cryptographer named Michael Hearn wrote a post called "Mastercoin Hype" where he predicted payment channels and off-chain applications would soon allow people to sell virtual goods online securely without having the items reside on the blockchain itself.

More recently, games such as CryptoKitties have gained higher visibility which has led to a lot of debate over whether it's a positive or negative thing for Ethereum.

While some people believe that NFTs and the platforms they're built on could help usher in an era of digital asset trading, others are concerned that there isn't enough demand to support the creation of unique tokens which may end up being worth less than their original purchase price.

For example, this article by Gideon Greenspan explains why fungibility is important in digital media assets while also highlighting how CryptoKitties has thus far failed to live up to its promise as a decentralized marketplace for NFTs. The author argues that the market itself needs time to mature before potential buyers will start seeing common items like kitt as having long-term value rather than as items that are only worth their asking price.

As far as other examples of NFTs, some other common ones include anything from football cards to stamps and even gambling chips in casinos. However, the main point is that they're unique objects with their own distinct properties that don't necessarily have an equivalent elsewhere.

A use case of Non-Fungible Tokens (NFTs) is Cryptokitties. Cryptokitties has been one of the more prevalent examples of NFTs as decentralized applications, or dapps, have been built on top of their platform. One way that they've done this is through designing a system where users can create cat images on their website and then sell those assets on Ethereum's blockchain to other users who want to purchase them. Another example of an NFT is Factbar, which represents evidence on a blockchain.

Each factbar is unique and contains information about the data it represents such as links to sources and verification scores from third-party validators. The owner of a factbar may choose to sell or trade it to an interested party. There has been a lot of discussion over the past few years about how blockchain technologies will affect digital media and whether there are potential problems that can be resolved with NFTs.

In addition, there have been proposals for unique digital artworks that could live on blockchains as well as non-fungible tokens that represent ownership rights in music.

Is NFT a Good Investment?

Ever since the rise of Cryptokitties and Etheremon, Crypto Collectibles have become a phenomenon. It is bringing in gamers who loved games such as Pokemon and Magic: The Gathering or tabletop wargames like Warhammer/WarMachine and Warhammer 40K where players collect, customise and battle with their characters (units). But what about non-fungible tokens (NFTs)? How do you make NFTs good investments?

This article will explore that very question. First, we'll look at why these NFTs give you more than just unique artwork; then we'll see how to value them; then we'll look at some major factors which can affect both the price of an individual as well as the market in general.

A lot of people think that when they invest in cryptocurrencies, they're buying into blockchain technology companies like Ripple (XRP), Cardano (ADA) or Siacoin (SC). In some cases, this is absolutely true; however, there is another type of cryptocurrency where you are actually investing directly into the unique artwork.

Cryptokitties is probably the most popular game on Ethereum's blockchain, but there are other games such as Etheremon and CryptoFighters which also offer these unique tokens. These cryptocollectibles can be made into new models that give them value beyond just simple collectors' items; they can be modified to change their appearance or even turned into unique gaming units with different attributes. However, not all cryptocollectibles are used for gaming or digital art. Some are actual physical collectibles for example The Physical Bitcoin by Denarium.

So now we know what NFTs are but why should anyone invest in them? The answer lies in their characteristics. Since NFTs exist on the blockchain, they are governed by a set of rules that allow them to be easily verified and transferred, while also ensuring that there is no way for anyone to duplicate and spend the tokens more than once.

This means crypto-collectibles can't just be duplicated and spent like regular cryptocurrencies where you could make thousands of copies of any amount of coins or tokens.

Another aspect is scarcity. Crypto collectibles aren't minted in unlimited supply like most cryptocurrencies such as Ripple (XRP), Siacoin (SC) or Cardano (ADA). In the case of cryptokitties, only a certain number will ever exist; this number is unknown until all kitties have been mined or until it's reached a certain amount.

Also, many crypto collectibles have a fixed supply meaning the tokens can only be destroyed and not created again. In the case of RarePepe blockchain cards, there are even laws that regulate how new cards can be made as well as who is allowed to create them which makes their value even more protected from inflation.

Finally, let's consider that these NFTs can also bring interest from gamers who would want to collect and play with these unique assets either in-game or out-of-game. This means a lot of players buy them up because they enjoy collecting gaming items - no different from Pokemon cards or other similar games except for the that these tokens exist on a blockchain.

Now that we've seen some of the reasons why crypto collectibles have their place as good investments, let's look at how to actually value them.

The basics for valuing crypto collectibles

Since NFTs are unique in nature, there isn't any specific formula to calculate what they're worth when bought or sold on exchanges. Although you could still consider the current market prices for games like CryptoKitties or Etheremon in order to get an idea of how much these crypto collectible tokens are worth.

Also, try looking into the rarity and supply numbers behind each NFT artwork in order to see if it tries to mimic real-life scarcity which makes it generally more valuable than standard cryptocurrencies. For example, a single CryptoKitty currently sells for around 1100 USD, while a Fine Art CryptoKitty is going for over 10,000 USD.

So there you have it, NFTs can be very profitable investments especially considering most of these assets are unique digital items that will likely only gain in value as the years go on. You also have to consider that many crypto collectibles have been created by independent artists who see the potential of blockchain technology and its use beyond cryptocurrencies.

In fact, some artists even sell their unique tokens for hundreds or thousands of dollars - one such example being Louis D'Ascoyne who sold his RarePepe blockchain card at auction for more than 9500 USD.

How do NFTs work?

The NFT artworks were first launched on the Ethereum blockchain. The NFTs exist on a blockchain which is a distributed public ledger that records the transaction. An NFT is created or minted from real or digital assets. Any digital artists can now create their own unique art and mint their piece of art on blockchains like Ethereum, Polkadot, EOS, etc.

The NFT art piece can be in any format, from GIF to PNG to JPEG.  Then the creator needs to create the documentation for the art. The documentation will provide the creator with unique identification on a wallet address from which the artist can claim the right of work and ownership.

Moreover, the artist can sell NFT on the marketplace and even the subsequent sales won't hamper the identity of the initial creator and owner. However, for this process of minting, the creator will be charged a gas fee in the form of cryptocurrencies.

These gas fees fluctuate according to the demand for the creation of transactions on the blockchain. The gas fees are high on ethereum as compared to Polkadot or EOS.

Non-Fungible Tokens vs Fungible Tokens

The very first question to answer is what the difference is between fungible and non-fungible tokens?

Fungibility is a concept in economics that defines something as interchangeable with other units of the same type, or "having the quality of being interchangeable." And this means that each unit of the item has equal value to other units.

For example, one dollar bill can be exchanged for another dollar bill if both are part of the original issue. On the contrary, items that are not fungible have different values per unit. Some examples are rare artwork, wines, diamonds, etc. All these may have a high value per unit but cannot be exchanged for other units.

Atomic Wallet's view on NFT vs FNT: Atomic Wallet is a non-custodial desktop and mobile app with an easy interface and built-in crypto trading features.

Fungible tokens are used in cases where mass transactions of goods, commodities, etc., will occur. They also serve as storage for value since one token has the same value as another token. This implies that each token is equal to the other token. An example is cryptocurrencies like BTC or ETH which are all interchangeable because they have the same underlying technology - blockchain.

On the contrary, non-fungible tokens make it possible to keep track of unique items during digital transactions. With this type of token, you can store information about every single asset separately on the blockchain network making them traceable.

How to buy and sell NFTs?

NFTs are not traded on exchanges like cryptocurrencies. They are being traded on various online marketplaces. These marketplaces provide different types of collectibles and arts. In order to buy or sell an NFT, one must identify a suitable marketplace.

Various marketplaces for NFTs are:

  1. Opensea
  2. SuperRare
  3. Cryptopunks
  4. Rarible.com
  5. Binance NFT marketplace

After identifying the marketplace, there is a need to connect a Ethereum wallet with the marketplace. These wallets must support ERC standards like ERC-721 and ERC-115 standards as most NFTs are built on these standards.

There are various blockchain wallets that support ECR standards and provide a gateway for the payment to buy NFTs. MetaMask and Coinbase wallets are the most popular ones.

After setting up all the prerequisites, you can buy the NFTs from the marketplace. The buying process in most of the marketplace is based on auction mode, where the buyers submit their bids and the highest bidder wins the NFT ownership.

The process for selling the NFT is also simple. You just need to locate the NFT on your account and then select the option “sell”. It will take you to another page where you can specify the pricing and auction conditions.

Utility of NFTs

NFT is revolutionizing the way arts are being perceived. NFT has a wide range of utilities spanning from collectible arts to tokens to gaming. NFT will not only create a new web3 digital art community but will also provide various established brands to market their products in the web3 space.

NFT utility classification

  1. Collectibles: Rare art collections for enthusiasts and collectors. It will empower the artists to develop their digital art and claim their ownership. For example Rarepepe, cryptokitties, Cryptopunks.
  2. Community access: Ownership of certain rare NFTs will help the owner to access certain communities. It will create a closed fanbase for the owners.
  3. Gamified NFTs: The gaming industry will be the major consumer of NFTs in the future. In this kind of NFT, the gamers will have to compete with each other to earn NFTs. The Sandbox is the most prominent in-game NFT platform.
  4. Major brands endorsements in Web3: Recently brands like Adidas have entered in NFT marketplace. The famous Taco Bell also sells its taco-themed NFTs. NFT universe will help major brands to market their products and services via NFT.
  5. Fantasy Sports NFTs: Sports enthusiasts can collect their favorite players' digital cards on various marketplaces. Nftdraft.io provides a wide range of NFL players with collectible digital cards.

NFTs: Bubble or Future?

The question of whether NFT is just another bubble or will deliver genuine advantages to the community has been debated for a long time. Many skeptics believe that the overly inflated market is unsustainable and that it will eventually burst. NFTs, on the other hand, are extremely unlikely to be thrown away.

NFT not only provides artists a platform, but it also decentralizes the collectibles market. From the artist to the collector, it will undoubtedly strengthen the entire community. It's a significant step forward for digital creators.

NFT projects can be seen as a convergence of technology and art, with blockchain serving as a safe harbor for unconventional digital artwork.

With the future of NFT space on the horizon, there are a few things that you should know. The first is that they will be used as rewards for those who participate in blockchain networks and help to maintain them. Next, it’s important to recognize how these tokens can also serve as an alternative form of money or store value outside traditional fiat currencies. Finally, keep in mind that this type of token may not have any intrinsic value right now but could someday NFTs could replace current cryptocurrencies like Bitcoin and Ethereum because transactions with NFTs would be cheaper and more secure due to their unique properties.

Conclusion

Non-Fungible Tokens (NFTs) are a new form of digital asset for the blockchain that is designed to be unique and non-interchangeable with other tokens. You can think about NFTs as cryptocurrency meets baseball trading cards, where each token represents something different.

This article explores what they are, how you can use them in your business, and why many believe this technology has game-changing potential. If you’d like more information on these novel forms of NFTs or want to share your thoughts about their application in various industries please leave us a comment below!