Non Fungible Tokens, or NFTs for short, are creating waves in the cryptocurrency and traditional finance world. NFTs have surged in popularity, with the industry’s market capitalization rising from $31 million in 2017 to more than $310 million at the end of 2020.
With the surge in its popularity, it’s clear that NFTs are here to stay. So, what are they? What are their uses? How do they work, and why do they have value? Let’s take a quick look at NFTs and how they are changing the cryptocurrency space.
What Is the Meaning of Non-Fungible ETH Tokens?
To understand NFTs better, we must first understand what “Non-Fungible” means. A fungible item is an exchangeable item. A fungible item can be exchanged for another identical fungible item. Bitcoin is an example of a fungible asset, and each bitcoin is exchangeable with another bitcoin.
Non-Fungible items are unique and cannot be exchanged. An example of a non-fungible item would be limited-edition collection cards or a painting. These items cannot be exchanged for an identical item because they are unique. Each non-fungible item has distinct properties that set it apart from other items. These properties can be things like the year it has been made, how it is preserved, its uses, among other things.
Non-fungible tokens, like non-fungible items, are unique digital assets that use blockchain technology to issue and track digital goods.
What Are Non-Fungible Tokens?
NFTs can be defined as unique digital assets whose identifying information is recorded in smart contracts. The information stored in the smart contracts makes each NFT unique, meaning another token like fungible assets cannot replace them.
An NFT cannot be exchanged for another as they are unique. Fungible assets like money or even bitcoin can be exchanged. Bitcoin, the world’s largest cryptocurrency, is a fungible asset that can be mined by miners. You can send someone a bitcoin, and someone can send bitcoin to you. You can also send smaller amounts of Bitcoins, called Satoshis since fungible assets are divisible. Similarly, Ether (ETH), the native currency of Ethereum, is a fungible asset. Users of the Ethereum blockchain and Ethereum miners can exchange ETH.
Non-fungible tokens, unlike their fungible counterparts, are not divisible. For example, you cannot send anyone a part of a movie ticket since it would be worthless on its own.
NFTs act as digital certificates of ownership for digital assets. To explain an NFT, it is a smart contract that is used to secure any digital item or asset. Once the code is written, it is published into a token (the most common being ERC 721) on a blockchain, Ethereum, for example. Popular NFTs include gifs, videos, jpegs. However, almost any digital asset can become an NFT.
One of the first NFTs was Cryptokitties collectibles. Each collectible kitten is unique, and collecting different digital kittens is the aim of the game. Cryptokitties were originally launched in the form of ERC-721 tokens on Ethereum. This is the perfect example of the information of an NFT recorded on its smart contract and stored on the blockchain.
How do ETH NFTs work?
ETH is more than just a cryptocurrency and NFTs are a part of the Ethereum blockchain. Ethereum’s blockchain also supports them. These NFTs store information that makes them function differently from Ether (ETH), which is Ethereum’s native cryptocurrency. Other blockchains and cryptocurrencies can also implement their own NFTS.
Ethereum was the first network to support NFTs, although there are other blockchains supporting them.
Let’s look at an example to see how they work. Works of art are one of a kind, which is what makes them so valuable. When it comes to digital assets or items, they can be duplicated endlessly. NFTs allow digital files to be tokenized, creating a digital certificate of ownership which can then be bought or sold. A record of who owns them is stored on the blockchain. The records once stored on-chain cannot be forged or changed.
NFTs and smart contracts allow details to be added to them, like details of the owner. NFTs can prove digital ownership of an asset, and this is an important characteristic in a world that is going increasingly digital. NFTs use the security of blockchain technology to assign ownership of any asset. The smart contracts in them also give the owner a cut from any sale of the token.
NFTs reside on the Ethereum blockchain making it immutable. In simple terms, the ownership of them cannot be altered or recreated.
Benefits of NFTs
- NFTs have changed what the concept of ownership means. They cannot be reproduced, duplicated, or exchanged. A record of their ownership is recorded on the blockchain, making it immutable.
- NFTs are transferable almost instantaneously. There are several secondary markets where they can be bought and sold.
- NFTs can solve a longstanding issue that has plagued collectible and art ticketing industries. Physical goods come with a certificate of authenticity. NFTs inherently come with a certificate of authenticity.
Why do NFTs have value?
Why would anyone buy an NFT?
NFTs have value because you want them to have value. It should be valuable in an ideal scenario because you like it and attach some value to it. For example, if you are a football fan, you may want an NFT that represents your favourite club or your favourite player. There may be another digital asset that you attach value to.
Of course, you may argue that you can easily copy NFTs, but NFTs reside on blockchains like Ethereum, which means that it is impossible to copy them in their entirety. The blockchain stores the record of who created it, who owns it. For example, if an artist creates a digital image, it can be verified on the blockchain.
What are the Use Cases of NFTs?
NFTs have recently shot up in popularity, with considerable interest in the gaming industry and the digital art space. Several brands have started to experiment with NFTs. F1 has signed a deal with Animoca brands; the deal enables users to collect NFTs in an Ethereum powered game. The NFTs can be anything from car parts to drivers. Ubisoft, a titan in the gaming industry, has also gotten in the act by releasing its Rabbids tokens. Samsung’s latest phones come with a preinstalled cryptocurrency wallet to store NFTs.
They have also caught the fashion industry’s eye, with fashion houses like Louis Vuitton applying NFTs to their products to verify their authenticity better. The sports industry has also seen the value of NFTs, with Nike patenting its NFT-based footwear. The footwear can be traded, with NFT owners also having the option to turn them into shoes in the real world. The NFL and NBA have also agreed to have leading players represented by NFT cards.
Why Are NFTs popular?
NFTs are changing the way ownership of a digital asset works, allowing individuals to purchase authentic images, animations, and music. Users can turn almost anything into NFTs and sell them for ETH or any supporting tokens. The digital art space has seen several high-profile NFT sales, while sports fans have started trading NFTs related to their favourite players and teams. NBA Top Shot allows fans to collect video highlights of important moments from games as NFTs.
The news of Canadian musician Claire “Grimes” Boucher selling $6 million worth of digital artwork and digital artist Mike “Beeple” Winkelmann breaking records by selling his “EVERYDAYS: The First 5000 Days,” art piece on Christie’s for $69 million.
What Is the Future of NFTs?
Currently, the buzz and attention around NFTs are mostly focused on gaming, crypto-collectibles, and artwork. However, more and more brands are licensing their content for NFTs.
NFTs can have several use cases in gaming, where they can be used to represent in-game items, allowing players to trade them with other players. They can also be applied to intellectual property rights, copyright, ticketing, and video game trading.
NFTs also add potential to security tokens. Properties could be tokenized for shared ownership, and if the security tokens are non-fungible, then the ownership is transparent and traceable.
More applications of NFTs could be in the spheres of warranty, software licensing, and even birth and death certificates.
Conclusion
It isn’t difficult to understand why NFTs have caught the eye of the world. Even though the current adoption rate isn’t very widespread, recent developments have drawn significant attention towards NFTs. They appear to have a solid foundation with individuals like Elon Musk backing them.
Given the digital nature of NFTs, you can’t compare them to physical artworks or assets. However, they can certainly be just as valuable and even sustain their value longer than physical assets.
The true potential of NFTs is yet to be unlocked. NFTs are very popular with the younger generation and it remains to be seen if the younger generation will have the economic power to purchase them. NFTs are changing the future of ownership of assets and trading.
NFTs have opened the door for digital artists, musicians to be recognized and valued. The smart contract functionality of blockchain technology ensures that artists get their dues from any future sales of digital assets.
How to Enter the NFT Space
If you are planning on buying NFTs, you will want to first buy Ethereum. Why? That’s because as we mentioned earlier, almost all NFTs are based on the Ethereum blockchain. A majority of the NFTs were made using two Ethereum token standards, which are ERC-721 and ERC-1155. The use of these Ethereum tokens ensures that NFTs are compatible with the larger cryptocurrency universe, including cryptocurrency exchanges and cryptocurrency wallets. Ethereum’s London hard fork will make NFTs more accessible to users, thanks to the EIP 1559 which will significantly reduce gas fees, making NFTs relatively easier to access to the masses.
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