Non-Fungible Tokens (NFTs): A Beginner’s Guide
Non-fungible tokens are heating up in recent times, and there’s a good chance you have heard about them if you’ve been playing more than just “onlooker” in the cryptocurrency space. Unless you’ve been away to outer space (by which I mean, out of the crypto space) for a while now, that is.
Either way, read on to find out everything you need to know about non-fungible tokens.
What are NFTs ?
NFTs, as they’re popularly known, are a new type of digital currencies different from the cryptocurrencies we already know (Bitcoin, Ethereum, Litecoin and the like). They’ve steadily gained acceptance over the years, and are now widely popular for taking blockchain use cases and therefore, cryptocurrency market, a million steps further.
An NFT (also known as a ‘nifty’) is a type of cryptographic token that represents a tangible item, either digital or in the real world. Using NFTs, assets can be tokenized on a block chain and the tokens would then function as verifiable proofs of scarcity, ownership and authenticity within the network. A NFT works on smart contract, which prevents centralization or even double-spending.
Thanks to blockchain technology, NFTs follow a rulebook which dictates their behaviour and how to interface with them. Most fungible tokens launched using the ERC-20 standard on the Ethereum blockchain. However, NFTs are created using the ERC-721 token standard and the recent multi-token standard, ERC-1155.
Non-fungible tokens (NFTs) are unique tokens launched on the blockchain for managed ownership of assets like digital artwork, crypto collectibles, in-game items, flight or event tickets, domain names, and even real-world assets like real estate, precious metals, etc.
Unlike fungible tokens which are mainly used as digital currencies to represent a store of value, NFT tokens open up immense possibilities and far-reaching use cases through their uniqueness. Let’s briefly look at how these two types of tokens differ from each other.
Fungible vs Non-Fungible
When you first heard the word ‘fungible’, what came to mind?
Well, you’re not alone in this but you should also know that fungibility is a simple concept, one you’re even familiar with. Using a real-world example, here’s how NFTs differ from cryptocurrencies.
Those dollar bills in your hand, or the Bitcoin you have in your crypto wallet is a perfect example of a fungible asset. Both assets can be easily replaced by an identical (i.e., “identical” in the context of its value) asset of the same type.
If I borrowed five dollars from you, it doesn’t matter if I don’t give you back the exact bill(s) I got from you back — and that’s even if I still have it. Why? Well, think of it this way: a newly minted five-dollar bill is equally as valuable as a dirty one, so far it’s not fake.
You could define a fungible asset as an asset you can exchange for another one, as long as they’re identical in value. While you can swap a twenty-dollar bill for a ten and two fives, this all changes when something is non-fungible. Although two items may look the same from afar, they’ll typically have unique attributes that make them impossible to replace or exchange.
The concept of non-fungibility is really easy to understand, especially when you consider most tangible assets in everyday life are non-fungible. Have you bought a domain in the past, or gotten copyright protection? I’d like to keep it simple by painting a picture almost everyone can relate to — because “Pokémon!”
Your friend Annie holds the Pikachu Illustrator in her Pokémon card collection (as you probably know, this is one of the rarest Pokémon cards ever). Let’s say you borrowed it for an upcoming Pokémon TCG tournament. If at the end of the tourney, you gave her back a common card like Slowpoke instead of returning the rare card, she’d probably get really angry. Indeed the US-dollar valuation is not the same.
You could argue that the two cards are similar in shape, size, form, etc… but they’re unique in the information they hold. Each Pokémon card contains important information, like the name and type of the creature, the amount of HP, and the nature of attacks by that Pokémon.
Also, a plane ticket is another example of a non‑fungible asset. Sure, they look the same as another ticket, but each one has different passenger names, destinations, departure times and seat numbers. Let’s assume you managed to make it past airport security and instead of your planned flight to Sydney in economy class, you ended up flying in first class on a plane to Djibouti (yeah, imagine that).
Exchanging your ticket with someone else could land you in hot water and you could end up thousands of miles away from where you originally intended to go.
Okay, now let’s move on to non‑fungible tokens using blockchain — and how they work.
How Do NFTs Work?
I don’t know who needs to hear this, but NFTs are not cryptocurrencies.
Non-fungible assets are a different breed; this is even more true with non‑fungible tokens because of the added functionality of blockchain. Bitcoin, Ethereum and pretty much all other cryptocurrencies favour fungibility since they’re chiefly used a store of value, means of exchange, units of accounts, etc.
Unlike Bitcoin, which has a supply of 21 million coins, NFTs have key features that set them apart from one another. Here are three things that make them different from your typical cryptocurrency:
If there were ether blockchain gods, the ERC-721 and ERC-1155 token standards would no doubt be a blessing from them. The real use-cases for NFT tokens lie in their distinctness, and thanks to these standards, each non-fungible token contains metadata describing what makes it different from other tokens.
One thing most non-fungible assets have in common is there’s no permanent ownership; they can all be taken from you; domain names expire, copyrights can be lost, and event tickets are pretty much useless after the event date.
In the case of NFT, blockchain provides a transparent, immutable record that describes what each token represents and who owns it. Once you own an NFT you have it for life (unless you lose your key). That’s the difference between non-fungible assets and non-fungible tokens. This is almost like the certificate of ownership/authenticity you’re issued when you buy a rare painting.
The real reason why NFTs are so attractive is partly due to their scarcity. While blockchain developers can mint an infinite supply of certain assets (cryptocurrency), they equally have the power to limit the number of rare, desirable items in existence (NFTs).
Think of that rare Pokémon Charizard or Pikachu Illustrator card: thanks to blockchain, we can digitize these unique assets as NFT tokens which are equally unique, but on a decentralized network. The value of the asset is reflected in the NFT token, and it then becomes desirable due to its rarity (and utility), as opposed to being readily available like cryptocurrency.
Like I noted in the earlier example, you can ‘change’ a fifty dollar bill for five ten-dollar bills, or three tens and four fives — whichever way you want. As long as they all add up to $50, you’re good.
As a rule of non‑fungibility, NFTs are not denominated. For the most part, NFT tokens cannot be split into bits or pieces — you can only buy, sell, and hold them as a whole. Just as you can’t buy a half-plane ticket, you equally can’t sell 20% of a rare crypto collectible.
Benefits of NFTs to the Current Market
We’ve seen how NFTs can be used to represent virtually every tangible asset. NFTs can help to tokenize ownership of real-world assets, eliminate fraud through provenance and improve control over secondary market transactions in several industries.
NFT tokens are a strong alternative to ERC-20, and advocates believe it could become “the ultimate vehicle for putting every significant asset on a public or hybrid blockchain with 100 percent immutability and security.”
While it may seem like early days for non-fungible tokens, the NFT space is brimming with potential. However, some issues need to be addressed before NFT blockchains can capture a significant part of the larger blockchain market.
The major issue was lack of standardization but — thankfully — that’s been solved with the development of the ERC-721 and ERC-1155 token standards. More than that, there’s still a lot of work to do in the way of mainstream adoption.
Regardless, it’s still a long road ahead, and the coming years will be defining for NFTs.
Usescases of NFT
The "Collectibles" tokens
This family includes projects where the goal is to collect gaming assets.
The best known is Cryptokitties, where the goal of the game is to obtain cats with atypical physical traits to be resold later, real digital gold for some happy users. It is also possible to use its Cryptokitties in other games, to be transformed into a special card or change the appearance of your character, which enhanced speculation over them.
This family includes projects where each NFT represents a portion of building land on a very large map.
The best known is Decentraland, where speculation in the LAND real estate market is alongside a growing number of initiatives in this metaverse.
It is possible to exhibit one’s works of art, play a soccer game, try out mini-games…
Art in NFTs
This family includes all artistic projects, whether “generative” or “non-generative”. Projects with gameplay are excluded from this family.
The best known of them is Cryptopunks, with the issue by Airdrop of 10,000 ERC-20 tokens. Although it is the ERC-721 standard that defines NFTs on Ethereum today, Cryptopunks is indeed the first project to have created NFTs on this blockchain.
The "Trading Card Game"
This family includes all the card game projects to be exchanged.
The best known is Gods Unchained, where each card from the initial presale is a NFT. It is also possible in the game to “forge” on the blockchain the duplicate cards in your collection.