Glossary Finance Non-Fungible Token (NFT)

Non-Fungible Token (NFT)

If you are even remotely involved in the world of digital art, cryptocurrency and/or collectibles, you must certainly have heard of non-fungible tokens (NFTs). They have been in the headlines ever since a digital-only artwork, Beeple’s Everydays, sold at Christie’s auction house for a whopping $69 million. From music and art to tacos and toilet paper, these digital assets have been selling for exorbitant prices going up to millions of dollars.

Researcher firms NonFungible.com and L’Atelier BNP Paribas have discovered that NFTs constituted a $250 million market in 2020. Their investments have been rising 299% year-over-year. CryptoSlam has claimed that cryptocurrency blockchain marketplaces dealing NFTs grew exponentially to $1 billion in sales this March. Well-known celebrities like Boy George and Elon Musk have jumped on the NFT bandwagon too.

However, NFTs are much more than just insanely priced pieces of digital art. It’s rather remarkable that this is all most people know about what we may NFT 1.0. The real power of these entities lies apart from the realm of Cryptopunks and Christie’s. Before we take a closer look at the different NFT versions, let us understand what an NFT actually is.

What exactly are non-fungible tokens (NFTs)?

Nft photo

In order to understand what NFTs are, we need to first understand what fungibility is. Basically, this is a concept that can be applied to a group of items. If every member of this group is exactly identical to the other, such that none of them possesses any individuality, then that group of items is called “fungible”. As a result, you can freely trade any member of that group for another member without any issues.

Examples of fungible tokens are Bitcoin (BTC), Polkadot (DOT), Ethereum (ETH), and fiat money. Physical paper money is slightly different in this regard because it comes in the form of various notes. For example, all $20 bills are readily fungible with each other. However, if you were to consider a $1 bill, you’d require more $1 bills to match up to a $20 bill. Thus, we can say that paper money is semi-fungible. However, when you convert it to digital dollars, all dollars become identical.

Also, it is worth mentioning that the concept of fungibility is quite subjective in nature. For example, a $1 bill for you may be no different from another $1 bill. However, this may not be the case for police officers hunting for a particular $1 bill with a specific serial number.

The concept of non-fungibility

Now that we have understood the concept of fungibility, let us go to the other end of the spectrum – the concept of “non-fungibility”. You may already have guessed it by now; in contrast to fungibility, non-fungibility is the quality of an entity to be different from other members of its group. It is the ability to be unique and have a special identity of its own.

When it comes to tokens, a non-fungible token is one that is truly unique unto itself. This is possible if only one copy was created or minted when it was added to the blockchain. The popular NFT collections of today are simply groups of art pieces comprising of unique individual items.

You must definitely be wondering what’s the big hullabaloo surrounding NFTs, if that’s the case. Moreover, why do some of them happen to be so inexplicably expensive? Let us now understand the reason for this phenomenon.

Why are certain NFTs priced so highly?

In order to understand the reason behind the exorbitant pricing of some NFTs, let us consider physical paintings first. Have you ever wondered why some paintings are worth millions of dollars, while others can be purchased at the price of a walnut? Although there are quite a few factors involved, there is a singularly important reason for this. Namely, humans are social creatures who are dominated by subjective perception.

For example, certain NFTs are ridiculously expensive because of some bizarre story associated with them or their creation. Others are expensive because of their creators, time of creation, place of creation, popular perception surrounding them, and so on. Based on this perception, people are driven to buy them because of prestige or speculation. It doesn’t matter that the outside world (especially the media) greatly influences this perception.

Regardless of these reasons, the NFTs possess immense revolutionary potential now. Therefore, I’ll now help you understand how NFTs work and why they are such powerful game-changers.

How exactly do NFTs work?

An NFT can be created or minted from digital items representing both tangible and intangible entities. Examples of these include:

  • Art
  • Collectibles
  • Designer sneakers
  • GIFs
  • Music
  • Sports highlights
  • Video game skins
  • Videos
  • Virtual avatars

Twitter co-founder Jack Dorsey even sold his very first tweet as an NFT for over $2.9 million.

Thus, you can see that NFTs are more or less digital collector’s items. Instead of getting an actual physical object, the buyer receives a digital file along with exclusive ownership rights. NFTs possess two important qualities which make them game-changers:

  • Provable ownership
  • Provable uniqueness

Both of these qualities are by virtue of blockchain or distributed ledger technology. Basically, a blockchain is nothing but a spreadsheet maintained by a global network of computers. Like cryptocurrency, the blockchain keeps a record of who owns what.  Because this ledger is maintained by thousands of computers across the globe, nobody can tamper with the records.

Using this technology, NFTs allow the artwork to be “tokenized” to produce a digital certificate of ownership that one can purchase or sell. This is in contrast to other common digital files like JPEGs or MP3s that can be endlessly duplicated to produce identical copies. Most NFTs are held on the Ethereum blockchain, although other blockchains support them too.

The creators or owners of NFTs can also store unique information inside them. For example, artists can sign their artwork by storing their signature in an NFT’s metadata.

What are the various NFT versions about?

NFT 1.0 was simply digital art on the blockchain to be appreciated and traded. This was around the time when entities like CryptoKitties and CryptoPunks gained popularity. With the advent of NFT 2.0, digital art on the blockchain gained two important features – traits and utility. The traits of NFTs were concerned with their specific benefits.

The utility of certain NFTs serves as a trait as well, but not all utility NFTs have traits. For example, a particular kind of NFTs allows you to withdraw an uncollateralized loan from use in whitelisted DeFi (decentralized finance) applications. There are also some types that grant access to discounts on specific protocols. For example, a holder can use an NFT to avail a 100% discount on gas fees on Ethereum by making the app offer a refund.

NFT 2.0 continues to be implemented by some of the big names in the crypto world. However, NFT 3.0 is the latest talk of the town now. This new iteration gives executive functions like authority and ownership to digital art itself. This allows NFTs to actually come alive and perform actions like sending items, changing state, and much more. It even enables an NFT to own other NFTs!

For example, the “own and equip” feature in gaming allows players to own all their in-game items as NFTs. In this case, you can use the NFT 3.0 capability to equip your character with, let’s say, a shield NFT. These NFTs can now interact with each other and are be traded with other players or sold in the open market. Thus, the world of gaming has become more immersive than ever.

Where can you buy NFT tokens?

NFTs are available to purchase on many third-party online marketplaces, or NFT exchanges. The platform you must choose depends on what you want to buy. For example, a website like digitaltradingcards is a great place to buy baseball cards. On the other hand, you will find more generalized pieces on other marketplaces. You must have a wallet specific to the platform you are using and full it with cryptocurrency.

Recently, some NFTs have started turning up in more mainstream auction houses as well. Thus, you may want to keep an eye out over there. The aforementioned Beeple’s Everydays, which sold at Christie’s auction house for $69.3 million, is a good example of this. Highly popular NFTs are often released as “drops” and attract a frenzied rush of buyers as soon as the drop starts. In this case, you must be registered and have your wallet prepared beforehand.

Given below is a list of websites that sell NFTs:

Founded in 2018, OpenSea is the world’s biggest digital marketplace for NFTs and other crypto collectibles. Rarible and SuperRare are among other popular platforms for purchasing NFTs.

Conclusion

Owing to their highly versatile nature, NFTs are likely going to continue enjoying popularity for a long time. Of course, many use cases will probably be tried and failed. However, some will succeed and have a significant impact on our daily lives. People are already talking about creating public goods NFTs and NFTs that allow the creator or buyer to donate a part of their revenues to charity. That’s incredible, isn’t it?

NFTs allow us to trust, own, and share in a way that we could never have imagined. As a result, the scope for the evolution of NFTs is more or less infinite. We might soon witness the emergence of a system of arbitrary complexity built atop programmable NFT functionality. And when it comes to the uses of these primitives, as they say, the sky is the limit.