If you have been on the internet for the last few months, you would have noticed something called ‘Non-Fungible Tokens’ or ‘NFTs’ being sold for crazy amounts. For example, an NFT of Michael Jordan’s rare video highlight was sold for over $100 million! Also, an NFT of the famous internet meme sensation ‘Nyan Cat’ was sold for $3 million.
Each of these Non-Fungible Tokens made use of a new Ethereum standard called ERC-721 intended to identify unique assets on its blockchain. However, before explaining any further, we need to first clarify what NFT means and what does it represent, which we will discuss in this article.
What is a non-fungible token (NFT)?
A Non-Fungible Token (NFT) can be described as a cryptographic token that can uniquely define an asset. An NFT can represent both digital assets (images, GIFs, videos) as well as real-world assets (houses, cars, books). It is much more convenient to prove ownership of assets and their authenticity using uniquely defined NFTs.
To track unique assets, we need to ensure that they can’t be divisible or interchangeable, which a regular token like ERC-20 is. Dividing your digital image into several distributable tokens would ruin the purpose of pointing it to a single uniquely defined asset. A token like ERC-721 handles this problem precisely by ensuring these tokens can’t be divisible or interchangeable, ensuring each NFT tracks a different unique asset and can’t be interchanged.
So is NFT like cryptocurrency? The difference between NFTs and cryptocurrencies is the same as the difference between a Lamborghini Gallardo LP 50th Anniversary, and $5 million in cash. You can trade the latter without having to uniquely identify which note belongs to you, but the Lamborghini Gallardo LP 50th Anniversary is unique and identifiable.
What are the Characteristics of NFTs?
While the importance of non-fungibility for NFTs has been clarified, we need to have a look at the four characteristics that make it so desired. Let’s take a look at the following three properties that make NFTs so desired – uniqueness, rarity, indivisibility, and security.
As mentioned earlier, NFTs can uniquely define an asset by providing ‘metadata’ describing the asset and sets it apart from other assets.
Rarity is a key element that adds to the popularity and expenses. With a traditional ERC-20, limits for the token can be freely defined to increase or decrease the total supply, however, only one asset can be defined on the ERC-721 blockchain, adding to its charm among collectors.
This means that another individual can not register the same asset again, making them a rare collectible, making it valuable as long as it is wanted in the market.
Indivisibility is also a very crucial aspect to what makes NFTs attractive, i.e. these cannot be split into two or more. For example, if you cannot afford to buy 1.00 BTC (bitcoin). you can always split a single bitcoin into many smaller denominations. I own 0.00063 Bitcoins (around 2000 rupees) with my cryptocurrency exchange. However, this cannot be applied on NFTs. If BTC also had an indivisibility characteristic, I would have to shell out approximately 43 lakh rupees to buy one full bitcoin, the minimum unit.
As NFTs simulate real-world assets as well, this indivisibility makes practical sense. It does not make sense to purchase and own 0.4 books; you either own the entire book or you don’t.
NFTs are also revered for their security it follows from the ERC-721 standard. The information can not be modified or tampered with unless destroyed completely, an improvement from the ERC-20 standard.
But how do NFTs work exactly?
The story of NFTs actually dates back to 24th January 2018, with the introduction of the Ethereum ERC-721 standard allowing developers to uniquely define assets and helping define smart contract functions to comply with it. The metadata contract of the ERC-721 is what provided the platform for the art boom in 2021.
You too can make your own NFT art! While this is not a full-fledged tutorial, you can start by providing a name and a symbol for the NFT, then providing a URL to point to a JSON file. A JSON file is a data notation form to keep track of properties like name, description, and image URL to define and structure the NFT.
But how are NFTs useful?
While NFTs are broadly known for being very convenient in online and virtual economies, there are some very handy uses of NFTs.
1. Benefits of an Artist
NFTs have allowed graphics designers to genuinely create and sell digital artwork as a piece of art without worrying about duplicates and stealings. Now we have thousands of artists who are able to sell their work in the form of NFTs as the owner(s) and the artist can be tracked precisely using the Ethereum ERC-721 standard, meaning unless there are copies made by the artist himself or bought from the current owner, there is no way to own the original copy. NFTs also help the original creator receive royalties every time his/her work is transacted from one individual to another, helping generate long-term financial benefits as well.
2. Investing in Artwork
Wealthy investors consider artwork not just as a beautifying add-on but as a solid long-term investment as well. NFTs in the form of digital art has turned into a rising investment opportunity for such investors, some of whom have bought art at $1 and sold at $50,000 within a week. These are phenomenal returns that even Dogecoin was unable to offer!
There are many games like Counter-Strike Global Offensive, Minecraft, Assassins Creed, Skyrim, etc. that offer in-game assets like swords and skins to buy and sell later on. NFTs have emerged as a potentially viable solution to help in this as well, with platforms like Decentral Land allowing you to trade such assets and earn a good return on your investment.
These transactions can even potentially open up possibilities to create inter-game economies for using a weapon across different games and different versions.
When the whitepaper of Bitcoin was written back in 2009, nobody could have imagined in their wildest dreams that the world would be interested in buying digital, collectible CryptoKitties and celebrity music. This became possible with the birth of non-fungible tokens - a product of the Ethereum ERC-721 standard to uniquely define assets and modify smart contracts to oblige with it.
The applications of NFTs can be found in collectibles, physical and digital art, virtual world items and real-world assets, possibly transforming the way human beings see ownership in the future.