What are Non-Fungible Tokens? NFTs Explained
At this time, most of us have heard of digital currency. The advent of Bitcoin has brought cryptocurrency into the mainstream. Currency is, however, merely one application of the underlying blockchain technology. The most exciting blockchain potential arise when non-fungible tokens are used to certify and ensure uniqueness and identity. What exactly are non-fungible tokens?
Non-fungible tokens are a form of token that represents a one-of-a-kind asset.
Below, we explain what non-fungible tokens are, how they are used, and how can you trade and store NFTs.
On this page:
A Primer to Non-Fungible Tokens (NFTs)
Before we discuss non-fungible tokens (NFTs), we must understand fungibility. In reality, if you’ve ever used money, you instinctively understand what fungibility is.
The ability of a currency to maintain a standard value and universal acceptance is referred to as fungibility. It indicates that a currency’s history has no bearing on its value and that each piece of that currency is worth the same as every other piece.
The $100 bill in your pocket is worth the same as the $100 bill in mine. Even if yours were printed in 2020 and mine in 1990, a shop owner would accept them. Even if your $100 bill was used in a crime before you got it, it’s still worth something at the store. That is the ability of fungibility.
A currency that is not fungible is unstable and is likely to collapse.
Consider what it would be like if you had to look into the history of every dollar bill before accepting it. Consider a world in which specific $20 bills are worth more than others. That would be fiscally untenable.
Fungibility is critical for any currency, whether the dollar or Bitcoin.
How do NFTs and cryptocurrency differ?
Both NFTs and cryptocurrencies are based on the same blockchain technology. While NFT users may acquire NFTs using a cryptocurrency, NFTs and cryptocurrencies are created and used for distinct purposes.
Cryptocurrencies aspire to function as currencies by holding value or facilitating the purchase or sale of products. Tokens issued by cryptocurrency exchanges are fungible, similar to fiat currencies such as the dollar. NFTs create one-of-a-kind tokens that can demonstrate ownership of and rights to digital items.
| FUNGIBLE TOKEN | NON-FUNGIBLE TOKEN |
| Fungible tokens are assets that are interchangeable and can be exchanged with another asset of a similar kind | Non-fungible tokens are unique assets that are not interchangeable and cannot be exchanged with another NFT of the same kind |
| Fungible tokens are divisible assets meaning the item can be broken down into any number of units as long as the value remains the same | Non-fungible tokens are non-divisible assets, and they represent a whole entity and be sub-divided into multiple units |
| Fungible tokens are uniform, and they do not have a unique value proposition like NFTs | NFTs have a unique value proposition, and each token has a unique ID |
| Fungible tokens use the ERC20 standard used to create the fungible token on an Erthereum blockchain | NFTs use the ERC271 standard for the representation of their tokens |
How are Non-Fungible Tokens (NFTs) used?
Blockchain tokens can represent more than simply currency, such as BItcoin. The applications of blockchain assets are practically limitless.
Non-fungible tokens are blockchain assets that are not intended to be identical. NFTs effectively function as a database entry for any form of goods.
The most obvious example is CryptoKitties, the most popular NFT in blockchain history. There are thousands of CryptoKitties globally, but not all are created equal. Each one is distinct, with its name, eye colour, fur colour, fur pattern, facial expression, and distinctive characteristics.
When you purchase a CryptoKitty, you buy a non-fungible token that belongs to that kitten. Some kittens are more valuable than others, and depending on the rarity of your NFT, you can buy and sell it for variable quantities of fungible tokens.
To grasp the significance of non-fungible tokens for blockchain-based asset and identity security, consider a few additional examples of how NFTs function:
Collectibles
CryptoKitties are one example of an NFT-secured collectible. However, the collectibles industry is vast, with Art collecting making up a substantial portion.
Experts could verify and certify paintings and sculptures before issuing a non-fungible token. If the owner of a particular piece of artwork wants to sell it, they can list the NFT on an auction as proof of ownership.
Because art assets are owned on the blockchain, this type of certification prohibits fabrication and fraud in the art industry.
The same applies to baseball cards, stamps, jewellery, autographed guitars, and collectable objects. The blockchain’s security ensures the transaction’s authenticity.
Sports
Sports memorabilia frequently has a high collectible value, and NFTs may enhance the fan experience and serve as a means of establishing the authenticity and ownership of high-value memorabilia.
NBA Top Shot, for example, auctions NFTs of player moments throughout games. Additionally, there may be a use for NFTs in the ticketing of sporting events.
Licensing or Smart Contracts
NFTs are useful in licencing agreements involving intellectual property. This may present significant potential for owners of many types of intellectual property to licence their assets.
The use of blockchain to maintain these contracts may assist in ensuring that all users are aware of the ownership and restrictions on the use of these assets, such as royalties paid on music usage.
Real Estate
In real estate, an NFT can serve as the digital representation of ownership on a blockchain network.
For instance, rather than a paper deed saying that you own a single-family house, you may have an NFT establishing your ownership. In terms of security and accessibility, this presents several advantages.
Identity & Certification
Consider identification and the role NFTs can play in verifying personhood. A nontradable digital token might replace your birth certificate, passport, and driver’s licence. These tokens can’t be traded, but they can be communicated and verified by the appropriate authorities.
This information to employers, doctors, or anybody else who needs it.
NFT Standards
The most common NFT is built on Ethereum’s ERC-721 token standard. The standard defines how to create a non-fungible token and set up the smart contract that runs it. The standard ensures that tokens interact well with the Ethereum network.
This is crucial when transferring NFTs and building marketplaces for buying, selling, and trading them. The influx of digital collectibles and game-based assets has fueled the production of ERC-721 tokens.
What is ERC-721?
ERC-721 is an Ethereum standard for developing non-fungible tokens. The standard assures that the token is non-fungible and one-of-a-kind. Additionally, it may originate from the same smart contract but have a different value due to its age or rarity.
What ensures an NFT is unique?
A token ID is defined by an uint256 variable (unsigned integers 256 bits) in an NFT smart contract. Each ERC-721 smart contract has a globally unique uint256 token ID. The token ID is converted to a digital collectible by the dApp (decentralized application).
These token identifiers are also referred to as NFT Identifiers, and they remain constant during the life of the smart contract.
What are other NFT standards?
ERC-1155
ERC-1155 is another widely used non-volatile memory standard. Enjin developed it, and it became the official token standard for NFTs. It is noteworthy that it is a multi-asset token standard that enables the creation of fungible and non-fungible assets on Ethereum.
As with ERC-721, ERC-1155 is based on the Ethereum network, which ensures that tokens created per these standards are secure, transferable, and resistant to hacking.
While it enables the establishment of many assets, it also significantly reduces transaction costs. Additionally, developers can use ERC-1155 to implement escrow/atomic exchanges of several tokens.
The standard eliminates the need for individual token contracts to be approved independently. Additionally, this standard allows for describing fungible and non-fungible tokens in a single contract. As a result, it enables more secure and efficient token trading.
ERC-998
ERC-998 is essentially an extension of the ERC-721 standard, advancing the NFT standard. It enables non-fungible tokens to own other non-fungible tokens and ERC-20 tokens. Additionally, it can be viewed as a portfolio of digital assets. NFTs that support ERC998 also support ERC-721.
Under the ERC-998 token standard are 4 different token standards, including the following:
- ERC998ERC721 (Top-down composable) – These ERC998 tokens receive, hold, and transfer ERC721 tokens.
- ERC998ERC20 (Top-down composable) – These tokens receive, hold, and transfer ERC20 tokens
- ERC998ERC721 (Bottom-up composable) – These tokens attach themselves to other ERC721 tokens.
- ERC998ERC20 (Bottom-up composable) – These tokens attach themselves to ERC20 tokens.
How are NFTs traded and stored?
Purchasing and holding NFTs is not the same as traditional bitcoin trading. You’ll probably need a digital currency like Ether to buy a digital collectable or tokenized object, though individual sellers may accept cash or trade.
You’ll also need someone to conduct business with. NFT exchanges do not exist because each token is unique. Marketplaces, on the other hand, link individual buyers and vendors. You must negotiate a price with the individual selling the token. Then you can buy it from them directly.
If you purchase an ERC-721 token, it will be sent to your Ethereum wallet address like an ERC-20 token would. Viewing it in a wallet client, on the other hand, tells you nothing about its worth other than the fact that you have it.
Its worth is determined by the system in which it is embedded. So, a CryptoKitty NFT is tied to a sketch of a kitty with specific characteristics, and that kitty can be offered on the open market if you decide to sell.
How is an NFT transferred?
The ERC-721 standard provides a secure transfer function. This function, dubbed safe Transfer From, is utilized during the construction of non-fungible token platforms to differentiate between safe and unsafe transfers.
Transfers of NFTs can only be initiated by:
- The NFT’s owner
- An individual who has an approved address for the NFT
- An individual who is an authorized operator for the NFT’s actual owner
To permit an operator, the approved address must be specified. This appears to be a pretty robust technique for developing wallet, broker, and auction applications.
The Future of Non-Fungible Tokens
When you consider the possibilities of non-fungible assets, it’s impossible to imagine a theoretical limit to what NFTs could digitize. NFTs can represent your identity, qualifications, real-world property, and various digital assets, all of which exist on the blockchain. These tokens can be stored, displayed, shared, or sold.
NFTs enable businesses to transact and do instant business with anyone globally, and organizations may use digital tokens to control entire inventories. Provided a robust ecosystem can be created, NFTs have the potential to be the foundation for the future economy.
