What are NFTs or Non-Fungible Tokens?

What are NFTs or Non-Fungible Tokens?

The evolution of the blockchain and cryptographic technology have seen cryptocurrencies, as well as other several types of tokens - digital assets experience a rapid and prosperous growth. Testament to the many successes have seen non-fungible tokens (NFTs) become one of the fastest emerging market in the crypto commerce. Evidently, the trading volume for non-fungible token shit $10.67 billion in the third quarter of 2021, a massive 700% increase from the preceding quarter. From digital art creators to intellectual property owners, realtors to everyone active in the digital space are becoming aware of the enormous opportunity presented by NFTs.

Figure1: Chart showing NFTs trading volume (in Bn USD) for 2021 (Source: Dapp Radar).

What are NFTs?

Simply defined, a non-fungible tokens (NFTs) is a unique type of token that acts like a receipt to a digital item verified by a blockchain. Their cryptographs are uniquely linked to digital (and sometimes physical) content which provides proof of ownership – it can only have one owner at a time. They can be used to represent both tangible and intangible items. NFTs have many use cases, including artwork, digital collectibles, music, and items in video games.

These tokens are digital assets that contain identifying information that makes each NFT unique, and as such, they cannot be directly replaced by another token. Bills, in contrast, can be simply exchanged one for another; if they hold the same value. However, with NFTs, they cannot be swapped like for like, as no two NFTs are alike.

Typically, non-fungible tokens are not divisible, therefore wouldn’t be worth anything on its own and would not be redeemable. On the other hand, cryptocurrencies like Bitcoin(BTC) is a fungible token because 1 BTC is exchangeable for another 1 BTC (although, the value of BTC might change during the time of exchange). Therefore, the lack of interchangeability (fungibility) distinguishes NFTs from blockchain cryptocurrencies, such as BTC or Ethereum (ETH).

Examples of NFTs

spicy chicken nft

While the representations of NFT are seemingly without limit, they are currently used in digital arts or real-world items.

Digital Art:

·        Collectibles

·        Video games

·        Music

·        Videos

·        GIFs

Personalized Items:

·        Tokenized real estate property

·        Deeds to a car or property

·        One-of-a-kind fashion items

·        Tickets or coupons to a real-world event

·        Tokenized invoices

·        Legal documents

·        Signatures, etc.

Brief History of NFTs

Arguably, Colored Coins - made of small denominations of a BTC were regarded as the very first NFTs to exist between2012 and 2013. They were used to represent a multitude of assets and have multiple use cases. However, in 2014, the first known NFT, Quantum, was created, and the first NFT project, Etheria was minted in 2015 on the Ethereum blockchain. The term "NFT" only gained currency with the Ethereum Token Standard, ERC-721, first proposed in 2017 via the Ethereum Github, following the launch of various NFT projects that year.

Public consciousness in NFTs began with the success of Dapper Labs creation “CryptoKitties”, the project went viral, raising a $12.5 million investment, with some kitties selling for over $100,000 each. Following its success, CryptoKitties were added to the ERC721 standard, which was created in 2018, and affirmed the use of the term "NFT" to refer to "non-fungible tokens.” By 2020, NBA collaborated with Dapper Labs to create a project to sell tokenized collectibles of NBA highlights, NBA TopShot. The project was built on top of Flow blockchain and reported over $230 million in gross sales as of early 2021.

2021 has witnessed heightened interest in NFTs with blockchains like Ethereum, Flow, and Tezos  all establishing specific standards to ensure that the digital item represented are authentically one-of-a-kind. NFTs are now being used to commodify digital assets in art, music, sports, and other popular entertainment, with most NFTspart of the Ethereum blockchain, while other blockchains can implement their own versions of NFTs.

How do NFTs work?

Like fungible tokens, non-fungible tokens are created or minted on blockchains which are smart-contract-enabled with non-fungible token tools and support. The key steps involved in the minting process include: creating a new block; validating information; and recording information into the blockchain. This allows for detailed attributes to be added, like the owner’s identity, rich metadata, secure file links, as well as manage the transferability of the NFT's. Therefore,when an NFTs is created, there is an execution of code stored in smart contracts that conform to different standards such as Ethereum’s non-fungible token standard (EthereumRequest for Comment 721 also known as ERC-721). This information is exclusively added to the blockchain where the NFT is being managed.

The compelling characteristics of non-fungible tokens to absolutely verify digital ownership is a significant progression for an increasingly digital world; however, they have their unique challenges. The creation of decentralized applications and platforms for the management and creation of non-fungible tokens is still relatively complicated. Also, since blockchain development is fragmented, there is need for a unified protocol and interoperability to maintain standards whilst supporting creativity.

Where to buy NFT tokens

With record-breaking sales such as the $530 million sale of the CryptoPunk #9998, the huge lucrative potential of NFTs has long exploded into public consciousness. A number of these marketplaces have sprung up where users can buy and sell NFTs. These include dedicated market places such as OpenSea, SuperRare, Rarible. Others include:

 

·        Known Origin

·        Axie Infinity

·        Foundation

·        NFT Showroom

·        Binance

·        DecentralandMarketplace

·        Atomic Assets

·        Atomic Hub

·        Zora

·        Nftone

·        NBA Top Shot

·        Cryptokitties

·        Crypto Punk

·        ArkaneNetwork

·        Polygon

·        Nifty Gateway

·        Polkadot

 

To buy or sell NFTs, log on the web addresses of the outlined market places and begin trading. An important tip is to avoid buying your NFTs during peak times- otherwise you may end up with an inordinately high gas fee!

Types of NFT Art

- Generative Art

In this art form, many different images can be created by assembly of selected simple picture components in different combinations. Simply put, they are arts created with the use of an autonomous system. One of the most famous examples of generative art is this “Edmond de Bellamy”painting from 2018 created by an AI-powered system like Generative Adversarial Networks (GAN).

Figure 2: GAN-created painting of Edmond de Bellamy (Source: Crypto NFT)

- Music NFTs

This kind of use-case shows the true value of NFTs as more than just collectibles .Approximately 150 music NFT sales have ever taken place, but that is set to change drastically over the coming years. Example of platforms for music NFTs include NiftyGateway, OpenSea and Opulous. Furthermore, with Opulous, music artists have the room to embed a share of their future music royalties so fans can essentially earn money from the music they love just by ownership.  

- Gaming NFTs

NFT games utilizes blockchain to validate ownership of definite game assets and earn profitable rewards in the process. With NFT, this digital asset can also exist outside of a platform. Also, NFT games deploy blockchain technology to demonstrate the history of ownership. While the assets are secured with blockchain (they cannot be hacked, stolen or changed), it is decentralized (it is available to all players to view and use). Some platforms for NFT video games areCryptoKitties, Illuvium, The Sandbox.

NFT Ecosystem

Since2019, there have been a massive growth within the NFT ecosystem. There are now over 100+ projects within the space and more in the works. NFT marketplaces are thriving, led by OpenSea and SuperRare gaining ground. The trade volumes are small in comparison to other crypto markets, but they are growing at a brisk pace and have come a long way. With Web3 wallets like Solanart and Metamask having continued improvement, entry into the NFT ecosystem has even become easier. Relatedly, Dapper Labs has also recently launched a Dapper wallet which requires no gas payments. This graphic illustration depicts the nature of the existing ecosystem.

Figure 3:Graphics showing the current NFT ecosystem (Source: Block Crypto)

Popular NFTs

From Bored Ape Yacht Club to CryptoPunk series, CryptoKitties to Axie Infinity, there are several popular NFT projects. According to report  from TRG Data centers, some of most searched for NFT in 2021 were:

·        Everydays - The First 5000 Days, traded for $69 million

·        The first tweet,sold for $2.9 million

·        CryptoPunks #7804, purchased for $7.5 million

·        Doge NFT, acquired for $4 million

·        Rick and Morty NFT, bought for $1.6 million

·        World Wide Web Source Code NFT, sold for $5.4 million.

·        Grimes NFT, sold for $6 million

·        Crossroads NFT, traded for $6.6 million

·        Hashmasks, bought for $16 million

·        Genesis estate NFT, purchased for $1.5 million.

NFTs on Blockchains

Though Ethereum (ETH) platform was the first to be widely used, the ecosystem is expanding, with blockchains including Solana  (SOL), Tezos,Flow, NEO,Secret Network, TRON, and EOS supporting NFTs.

·        Ethereum Blockchain

The present state of play sees the majority of NFT traffic occurring and originating on Ethereum - NFTs were born on Ethereum.  Due to the many underlying advantages of mining on ETH platform and the exponential growth it has mustered, most NFTs are part of this blockchain.  Some reasons for this patronage are because of the publicly verifiable transaction history and token metadata which makes it simple to prove ownership history. Again, once a transaction is confirmed, it's nearly impossible to steal ownership or manipulate data.

Also,in ETH blockchain, trading NFTs facilitates peer-to-peer without incurring losses from compensation. Since all Ethereum products share the same backend, this makes NFTs portable across the products and the trading easy. Similarly, as a creator you can list your NFTs on various products at the same time with every product having the most updated ownership information.

MetaMask  is used to interact with the Ethereum blockchain. It enables user to have access to their Ethereumwallet through a browser extension or mobile app, which can then be used tointeract with decentralized applications.

·        Solana Blockchain

Solana blockchain is fast-rising in NFT minting and trading. A protocol powered bySolana, Metaplex  allows for the minting of non-fungible tokens, as well as standardizes the visuals of NFTs across wallets and applications. It is a decentralized protocol in tandem withan open-source web framework that allows creators launch self-hosted NFTstorefronts with ease – all without writing code.

To buy a Solana NFT on most marketplaces, you will need to connect a Solana-basedwallet. While OpenSea commands a huge Ethereum-based NFT market, there are other marketplaces that trade Solana NFTs; however, most are in their beta or alpha phases.

Solanart is the first independent NFT marketplace on Solana. On this platform, you can get quick and easy access to digital collectibles and explore, buy and sell NFTs from different collections and artists. Relatedly, SolSea is among the most prominent of these marketplaces, making it the foremost NFT marketplace that allows creators to choose and embed licenses when minting NFTs.

Solana holders can also purchase SOL NFTs from the DigitalEyes marketplace, or from FTX.US. FTX also allows users deposit Solana NFTs into its platform for listing. Each of the Solana-supported NFT marketplaces have their own fees, collections, and terms. It’s noteworthy to do your own research on your platform of choice before committing funds to it –the same can be said for new NFT collections. In terms of pure fees, the costs for each platform are 3% per transactionon SolSea and Solamart, while 2% and 2.5% for FTX.US and DigitalEyes, respectively plus royalty fee.

The future of NFTs

Apparently, a lot of attention around NFTs is fixated on artwork, gaming and crypto collectibles. Gradually, many brands are licensing their content for NFTs; Sorare,fantasy soccer game,  Coca-Cola’s NFT, Asci’s Sunrise Red, etc. Relatedly, Twitter  launched its own collection of NFTs and has announced plans to verify users' NFT avatars. The possible application of NFTs is becoming wider. This may include copyright and intellectual property rights, ticketing, and the sale and trading of videogames, music and movies.

Also, Non-fungible tokens enhance potential to create security tokens for digital and real-world assets alike. Physical assets like property could be tokenized for fractional, or shared ownership. If these security tokens are non-fungible, ownership over the asset is completely traceable and clear, even if only tokens representing part ownership are sold. Further application of NFTs could be certification such as for qualifications, software licensing, warranties, and even birth and death certificates.

While NFTs have many positives, it equally has its challenges. Mining NFTs consumes a lot of energy – a core limitation in environmental sustainability. Ethereum consumes approximately 45 terawatt-hours of electrical energy annually, comparable to the power output of entire countries. Other concerns include high gas fees; low sustainability; and network congestion.

It is expected that innovation will come in the form of flexible economic models,complex and scalable native NFT functionality, advanced interoperability and most importantly, forkless updates. This will enable systems or software to exchange and make use of information, allowing NFTs from one parachain to communicate with another, and creating new possibilities for developers, players, and artists to evolve and grow over time.