See this weird-looking collage image below? This was sold for more than $69 million as a Non-Fungible Token on the internet. Non-Fungible Tokens or NFT have got so much attention that we often hear about these and wonder what are these? How can an image or video which I can simply download for free, just like I downloaded this $69 Million image for this article, has such insane worth? And why would you pay when it’s free? Well, that’s the beauty of NFTs. Let’s break it down, one by one.
What are NFTs
There are main two things to understand, the first is Non-Fungible and the second is Token. By definition, a fungible is anything that can be exchanged for another. Let’s start with a real-world example. I have a $100 currency note, I have no problem exchanging it for any other $100 currency note because they both are the same and hence fungible. I can exchange my gold for anyone’s gold of the same quantity because the value remains the same.
Similarly in the digital world, I can exchange my bitcoin or Ethereum with your bitcoin or Ethereum in the same quantity because we agree that both are interchangeable, exchangeable, and Fungible. Now the Non-Fungible is as simple as this: the painting of Monalisa is one of its kind and can’t be exchanged for another because no other painting matches the worth of it, hence making it Non-Fungible. In the digital world, you can consider it like a trademark that has its unique value and can not be exchanged for another.
To make it even more clear, consider Nathan and Ali has a $100 note each. Can they both exchange it? Of course, because both notes have the same worth and are interchangeable with any other. Now the scenario changes and Ali gets an autograph of his favorite singer on his $100 note, with signatures and date. Now if Nathan asks him to exchange, will he do it? No, because now the Autograph has become unique and one of its kind in the whole world. So the note is now Non-Fungible.
What is a token?
Before coming to the token part, we first try to understand what is blockchain. Think of a digital ledger that is publically accessible to everyone. We need Ali and Nathan again in this example to break it simple.
Say, Ali sends $500 to Nathan. The transaction is recorded in a digital ledger that both Ali and Nathan have copies of. Now consider the page of that ledger as one block.
When Ali sent $500 to Nathan, he wrote on that page or block the following details:
- Page Number (Contract address)
- Page number of the Previous page (Address of the previous Block)
- Who he received from
- Who he is sending to
This page or block is chained to the previous block and makes a chain of blocks, Blockchain. Blockchain transactions can not be altered or changed and they are publically available to everyone. This helps not only make assets unique but also shows the ownership of the assets to everyone on the internet. That’s the part we use for NFTs.
Let’s use that Autograph $100 note again as a reference. What Ali does is, take a picture of that note and change it into a token. Changing into a token means that the picture is associated with an ownership certificate on the blockchain which is now a publically verifiable property. This makes that Non-Fungible $100 note a token hence rendering it NON-FUNGIBLE TOKEN – an NFT.
Working of NFTs:
NFTs exist on the distributed public ledger that stores transactions. This distributed public ledger or we can say blockchain provides the underlying infrastructure for any cryptocurrency to work. NFTs are minted from digital objects that represent both tangible and intangible items.
For example, if a buyer takes NFT paintings then he will not receive oil paintings to hang on the wall rather he will receive a digital file which will be a certificate of ownership. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.
The difference between cryptocurrency and NFT:
Some of you might be wondering what’s the difference between the cryptocurrencies like Bitcoin or Ethereum and NFTs. This difference lies in one term and that is ‘Fungibility’. The only similarity is that NFT is created by the same programming by which cryptocurrencies are minted.
The crypto-assets like Bitcoin or Ethereum are fungible which means that we can have their duplicate. There are more than 18 million Bitcoin in the world today date and if we pick one coin from this and compare it with other individual coins, their price is the same and they are exchangeable. On the other hand, NFTs have such a mechanism or we can say a digital signature that stops them from exchanging and equating.
What are NFTs used for?
People who like to collect artwork or are interested in crypto-trading use NFTs. This isn’t it because it has several other uses cases.
- Digital content is the most significant use of NFTs in today’s world. With NFTs in the scene, the creator has the ownership of their content and this enhances their profits.
- The gaming industry is another conquered realm of NFTs. Developers and players both benefit from NFTs.
- NFTs can be used as collateral in Decentralized Finance (DeFi) to borrow money. DeFi applications let you borrow money by using collateral. NFT and DeFi, both work together to explore using NFTs as collateral instead.
- Domain names are easier and more memorable because of NFTs. NFTs provide a more relevant and valuable length to IP addresses.
Why are NFTs so Valuable?
NFTs are of different types, which we’ll read in the next part, and each has value because of its uniqueness. The scarcity is the scale that decides their value. The decentralized era of Blockchain assets – Cryptocurrencies and NFTs are revolutionizing the traditional centralized financial systems by rooting out almost all their problems straight away in a single solution. In this digital era, we face the problems of authenticity, origin, and verification of digital files which is not possible without being on blockchain. Non-fungible tokens (NFTs) address such problems solely and transparently so that the idea could only
belong to its origin through proof of ownership.
While trading an NFT doesn’t mean you have to send your image or video associated with that NFT. You have to transfer the Token which is actually a certificate of ownership of that particular NFT. As soon as the transaction is recorded on the blockchain, the ownership changes to the new owner.
There are many kinds of NFTs mainly, the followings:
- Event tickets
- Virtual items
- Real-world assets
- Domain names
- Music and media
NFT Art and Blockchain Games
The most famous of these are Art and Gaming NFTs. We understand the Art NFTs as paintings presented as digital assets. However, Gaming NFTs are different. These blockchain games have assets used as NFTs. In the traditional game, there are options to unlock characters and skins like the game proceeds. Like in PUBG, you obtain a character called Victor and a Glacier M416 Gun skin. You own both the assets as long as you play this game. You cannot use those assets in another game nor do you own those assets outside the game.
The blockchain games are different. If you unlocked an asset, it is turned into an NFT and can be used in other blockchain games. Even if the game decides to shut down its servers, you still own those assets and can trade those like any other NFT. Those NFTs are stored on the blockchain on different parameters stored in blocks like the one in the example above, sword asset.
Blockchain Allows You to Create Items, Storing Their Info
You submit the information that includes
- Item Name
- Item picture
- Quantity that exists
- Who owns it to start?
- Golden Sword
- The quantity that exists – 50
- Who owns the first series released
Popular NFT Marketplaces
Non-fungible tokens or NFTs are trending since the advent of Cryptokitties in 2017. NFTs are redefining digital assets by leveraging blockchain technology. Blockchain games, Metaverse, Virtual Real Estate, PFPs, and exclusive entry passes – NFTs are everywhere. Cyber Punks, Cryptokitties, Beeple’s Collection, and Bored Ape Yacht Club are some famous names in the NFT world. Some NFTs were even sold for millions of dollars. There are millions of user-owned NFTs available on this decentralized platform and more are being uploaded every day on the NFT marketplaces. Few popular NFT Marketplaces are given below:
NFTs are great and have got so much media attention. From empowering content creators with the proof of ownership to turning real estate decentralized, NFTs are serving with their unique use cases. However, environmentalists have their concerns because NFT transactions are performed through blockchain and carbon emission, and increasing electricity usage to perform these transactions is still worrying them.