What Is A Non-Fungible Token (NFT)?

Definition

NFTs (or “non-fungible tokens”) are a special kind of cryptoasset in which each token is unique — as opposed to “fungible” assets like Bitcoin and dollar bills, which are all worth exactly the same amount. Because every NFT is unique, they can be used to authenticate ownership of digital assets like artworks, recordings, and virtual real estate or pets.

Non-Fungible Tokens: An Explanation

Non-Fungible Tokens, abbreviated as NFT, are, in a sense, the collectibles of the future. They may be used to symbolize almost anything, and their scarcity and popularity are two of the key reasons why they are desired by individuals as well as merchants, gamers, and even billionaires and celebrities. There is no duplication among these tokens in any way, shape, or form, and we have assigned equal value to each one. In terms of the traits they possess, some are more uncommon than others, which is precisely what makes them more desired. But what exactly are they and how do they work?

• Non-Fungible Tokens are unique blockchain-based tokens that can represent anything.
• They can bring a new dimension to digital interaction.
• They are transferable and sold on special marketplaces.
• Their value depends on their uniqueness.

Why are NFTs important?

You might think about non-fungible tokens (NFTs) as being comparable to digital artifacts’ versions of certificates of authenticity. They are now being put to use in the process of selling a vast variety of digital collectibles, including:

• NBA virtual trading cards
• Music and video clips from EDM stars like Deadmau5
• Video art by Grimes
• The original “nyan cat” meme
• A tweet by Dallas Mavericks owner and entrepreneur Mark Cuban
• Virtual real estate in a place called Decentraland

The value of NFTs is projected to increase to an estimated $338 million by the year 2020, mirroring the meteoric rise in demand for cryptocurrencies like Bitcoin and others over the last year. Every non-fungible token is kept on an open blockchain, most commonly Ethereum’s, so that anybody who is interested may monitor its creation, sale, and resale at any time. Because they make use of technology known as smart contracts, NFTs are able to be configured in such a way that the original artist continues to receive a share of all future sales.

Along the way, non-traditional forms of ownership (NFTs) have given rise to a number of intriguing philosophical problems regarding the nature of ownership. You may be wondering whether digital artifacts that can be copied and pasted indefinitely might possibly have any worth. The majority of types of collecting are not founded on anything that has an intrinsic worth, which is something that supporters will point out. The production of old comic books only cost a few pence, including the cost of ink and paper. The materials that are used to make valuable shoes are often the same ones that are used to make common ones. While some paintings are shown at the Louvre, others are sold in second-hand stores.

You may snap a wonderful image of the Mona Lisa, but it’s not the Mona Lisa, as the collector who sold the Beeple piece pointed out. The item went for $6.6 million. According to the Beeple devotee, “it doesn’t have any value since it doesn’t have the provenance or the history of the art.” The truth of the matter is that, because of who is behind it, something has an incredible amount of value.

What does “non-fungible” mean?

Each individual Bitcoin is equivalent in value to all other Bitcoins. On the other hand, every single NFT is one of a kind. The term “fungibility” refers to items or assets that are interchangeable with one another since they are all the same. Another illustration point is a one-dollar note, which, as its name implies, is only worth one dollar.

Concert tickets, on the other hand, cannot be exchanged for another event or person. Even if all of the tickets for Radiohead were sold at the same price, they could not be traded directly with one another. Each one is unique in that it designates a certain seat and a particular day, and no other ticket will share those particular attributes.

How do NFTs work?

If you have any interest in DeFi, you have probably heard of the ERC-20 standard by now. This standard makes it possible for anybody to design a token that is compatible with the Ethereum network. These are what are known as “fungible” tokens. The vast majority of non-fungible tokens are constructed using the ERC-721 and ERC-1155 standards, both of which enable developers to issue one-of-a-kind cryptoassets via the use of smart contracts. There is an immutable record beginning with the token’s inception and including every sale since every NFT is kept on a blockchain. This record can never be altered. (Some developers interested in NFT have also created their own alternative blockchains, such as Dapper Lab’s Flow.)

NFTs have some special properties:

• Each token minted has a unique identifier.
• They’re not directly interchangeable with other tokens 1:1. For example 1 ETH is exactly the same as another ETH. This isn’t the case with NFTs.
• Each token has an owner and this information is easily verifiable.
• They live on Ethereum and can be bought and sold on any Ethereum-based NFT market.

In other words, if you own an NFT:

• You can easily prove you own it.
• No one can manipulate it in any way.
• You can sell it, and in some cases this will earn the original creator resale royalties.
• Or, you can hold it forever, resting comfortably knowing your asset is secured by your wallet on Ethereum.

And if you create an NFT:

• You can easily prove you’re the creator.
• You determine the scarcity.
• You can earn royalties every time it’s sold.
• You can sell it on any NFT market or peer-to-peer. You’re not locked in to any platform and you don’t need anyone to intermediate.

NFT Scarcity

The author of a non-fungible token has the ability to specify the level of scarcity for their asset.

Take, as an example, the purchase of a ticket to a sports event. The originator of an NFT has the ability to determine the quantity of copies that are produced, similar to how the organizer of an event may choose how many tickets to sell. Occasionally, they are carbon copies of the original item, such as 5000 general admission tickets. Occasionally, multiples that are quite similar to one another but each somewhat different are produced, such as a ticket that has a specific seat allocated to it. In a different scenario, the developer could have the idea of making a non-fungible token (NFT) of which only a single unit is produced as a unique and exclusive collection.

In these scenarios, each non-fungible token (NFT) would still have a unique identification (similar to the bar code that is often seen on conventional “tickets”), but there would only be one owner. The creator has some responsibility in determining how scarce they desire the NFT to be. The developer of an NFT may have the intention of making each one fully unique in order to provide a sense of scarcity, or they may have other motivations for producing thousands of duplicates. Keep in mind that all of this information is available to the public.

NFT Royalties

Some types of NFTs will automatically send royalties to the people who created them. This is a notion that is still in the process of being developed, but it is one of the most powerful. Original owners of EulerBeats Originals are entitled to an 8% royalty for any subsequent sale of their NFT. Additionally, certain platforms, such as Foundation and Zora, provide payments to the musicians that use their services.

Because this process is fully automated, creators need to do nothing more than sit back and collect royalties when their work is sold from one individual to another. The process of calculating royalties is currently exceedingly laborious and inaccurate, which means that many authors do not get the payment that they are due for their work. You will never be out of luck if your NFT comes pre-loaded with a royalty payment feature.

What can you do with NFTs once you buy them?

Good question! Some people display their digital artwork on large monitors. Some individuals purchase virtual real estate (obviously via the usage of NFT), on which they then construct virtual galleries or museums. You may also go exploring in virtual environments like Decentraland and look at the collections that other people have made. The act of purchasing and selling tokens, similar to that of any other asset type, appeals to a subset of followers. (In October of 2020, the collector who sold the Beeple for $6.9 million did so for a price that was less than $75,000).

The venue has also attracted the participation of an increasing number of popular artists, particularly those from the field of music. Kings of Leon, a band from Nashville, made the announcement that their next album will be released in the form of many NFTs at the beginning of March. When a fan makes a purchase, they will have access to a variety of benefits, such as unique cover art, limited-edition vinyl, and even a “golden ticket” to a VIP performance experience, depending on the product they choose.

Different Types of NFTs

Let’s look at a few popular types of NFTs:

1/1s (pronounced “one-of-ones”) are single unique assets. Examples of 1/1s are digital art and domain names. Like museum pieces, people consider the quality of the art, the notoriety of the artist, and the desires of other collectors when evaluating 1/1 art NFTs. In March 2021, the artist Beeple sold a 1/1 NFT for $69M at Christie’s. Other 1/1 NFT artists include Xcopy, Coldie, Hackatao, and Motionscape.

Collectibles like we touched on before, are sets of NFTs that each have unique traits. Like traditional collectibles (e.g., baseball cards), people consider rarity, cultural significance, and community when evaluating collectible NFTs. Popular categories include:

• Sports: Collectibles representing sports teams, players, and moments. Examples include NBA Top Shots (NBA moments) and Sorare (soccer players).
• Generative art: Collectibles that are generated from code. For example, ArtBlocks are generated from algorithms written by programmers.
• Profile pictures (PFPs): Collectibles that people buy to represent their online avatars and access PFP communities. Examples include CryptoPunks and Bored Ape Yacht Club.
• Badges: Collectibles that represent special access or ownership within online communities. Examples include Tom Brady’s Autograph series (holders get special access to future NFT drops and a private Discord) and NFT.Kred’s customizable brand badges (used to reward the most active fans of brands).
• “Lego blocks”: Collectibles designed to be building blocks for something else. Examples include Loot, which features simple text lists of adventure gear. You can imagine people creating character select screens or games from Loot NFTs.

In-game NFTs enable gamers to purchase and own in-game assets as NFTs. This is a nascent space with huge potential as gaming is by far the most popular entertainment category globally. Axie Infinity is a leading player in this space. The game is especially popular in developing countries like the Philippines where players can earn a living by buying, breeding, and battling digital pets.

Digital real estate includes NFTs that represent plots of land in a digital setting. As people spend more time in the metaverse, creating spaces for them to interact has become a lucrative market. Settings like Decentraland sell plots of digital real estate on a blockchain for creators to build upon.

If you think about the real world, most things in life are non-fungible (your house, a puppy, etc). We believe that NFTs will also expand to many more categories in the future (e.g., music, fashion, and maybe even your home deed).

How do you buy NFTs?

Step 1: Have a crypto wallet
Before you can buy an NFT, you’ll need some ETH (or another cryptocurrency) in a cryptocurrency wallet like Metamask or Coinbase Wallet. Read our guide “Cryptocurrency Wallets Explained” for more information on this.

Step 2: Visit an NFT marketplace
Once an NFT has been minted (e.g., created), it’s typically listed on an NFT marketplace. As of December 2021:

• OpenSea is by far the most popular NFT marketplace.
• Foundation and Rarible are other marketplaces for Ethereum NFTs.
• Solanart and TopExpo are marketplaces for Solana and Flow blockchains respectively.
• Coinbase is also launching a marketplace soon.

On OpenSea, you can search for NFTs by name or browse trending NFTs by category. Here’s a list of NFTs that are trending on OpenSea by volume.

Step 3: Buy or make an offer on an NFT
To purchase an NFT, you need to connect your wallet to the marketplace. On OpenSea, you can connect your wallet by clicking on “My Profile” on the top right and choosing your wallet:

After you connect your wallet, you have two options to acquire an NFT. We’ll continue to use OpenSea as an example:

• Buy now lets you buy the NFT right away for the listed price. You can buy an NFT on OpenSea directly using ETH.
• Make offer means that you’re placing a bid on an NFT and it’s up to the NFT owner to decide whether to sell it to you at your bid price. To make an offer, you first need to pay gas to convert your ETH to WETH (wrapped eth) either via OpenSea or a decentralized exchange like Uniswap. Once the conversion is successful, you should see WETH in your wallet that you can use to make an offer on an NFT.

When you buy an NFT, it’s transferred to your digital wallet. A receipt of sale is added to the blockchain so that everyone can see who now owns the NFT and what they last paid for it. This ledger is also visible from the marketplace listing for that NFT.