A non-fungible token (NFT) is a digital token that is built to represent any unique asset as a crypto resource. NFT can be used to prove the ownership of physical goods like art, collectibles, a ticket to a concert or a sports event, real estate, or digital assets like digital artwork, domain name, or digital collectibles. In simple terms, you can consider it as a certificate of ownership for a virtual or physical asset. This certificate could further generate some value for you because of its rarity and authenticity.
The things that fall in the same category as songs could be represented as NFTs as each song has unique properties and needs to be identified as a separate asset. No two NFTs are interchangeable.
On the other hand, Fungible tokens are defined by the value they represent. Any two fungible tokens with the same value can be interchangeably used. For e.g., 1 DAI can be exchanged and used for any other 1 DAI, but 1 house represented as an NFT will not be equal to any other.
Metadata of NFT minting, ownership, and its entire history is saved as transactions in the blockchain. This is publicly verifiable and impossible to manipulate on the blockchain.
NFTs are secure just like any fungible token such as Bitcoin, which means no one can steal them. Making a copy of an NFT would be the same as taking a photo of a painting or making a pirated copy of a movie, but there will only over be one original thing. Though actually, a copy of a digital work is literally as good as the original for just viewing, but that does not make it a part of the blockchain.
If an NFT is created on Ethereum, it is portable across many products and markets. Moreover, with the development of interoperability between different blockchains using protocols like Polkadot, NFT built on one blockchain could be used, traded, and sold on other blockchains as well without any intermediary.
Most NFTs are issued and traded on Ethereum. The creation and lifecycle of an NFT are maintained by the smart contract. It can contain other logic such as giving royalty to the creator of an NFT any time the token is further sold.
Ethereum has developed some token standards to ensure tokens’ compatibility with existing decentralized exchanges. Most NFTs are built using the standard token interface called ERC-721. All NFTs built using this template have a tokenId. For each NFT, the pair of the address of the smart contract and the tokenId must be globally unique. The template provides the following functionalities to track and transfer NFTs:
Some NFT smart contracts implement other methods also other than the standard ones. According to Etherscan NFT tracker, a total of 9,716 ERC-721 token contracts are deployed on the Ethereum main network till the time of writing.
Popular NFTs built on Ethereum according to their transaction volume are:
Some of the popular NFT marketplaces are:
For semi-fungible tokens, the token template ERC-1155 is used. It is a standard interface that manages multiple token types. ERC-721 token standard requires a separate contract to be deployed for each token type or collection. Ex. There are over 1lac different items in the game of World of Warcraft. If ERC-721 is used, each item type requires deploying a separate contract on the blockchain. This would place a lot of redundant smart contracts on the blockchain.
Using ERC-1155, different item types can now be stored in a single contract with the minimum possible amount of data needed to distinguish each token from the other. It implements methods to transfer single or batches of tokens between users.
Another improvement in the way NFTs are minted is proposed as EIP-2309. It is proposed to extend the capability of the ERC-721 token to support the creation and transfer of many tokens at one time.
Game developers develop NFTs for creating tradable in-game items. They can be traded on any decentralized platform. Aavegotchi is one such project which combined NFTs with the realm of DeFi. It is a game offering digital collectibles backed by Aave interest-bearing aTokens. This offers new alternatives for yield farming. The collateralized aTokens increases the liquidity of the Aave lending pool which generates yield over time. In mid-2020, fans bought 1,25,000 NFT trading cards featuring Star Trek’s William Shatner.
NFT is gaining popularity because of its adoption by artists and growing interest in collectors. According to Cryptoart data, a total of 1,44,950 artworks are sold till now worth 2,34,890 ETHs ($405M). You can check out some popular NFT art galleries like Nifty Gateway, SuperRare, Foundation, MakersPlace, KnownOrigin, and Async Art.
Though it all seems like hysteria, the most expensive artworks sold till now are:
Recently, Twitter co-founder listed his first-ever tweet for sale as an NFT. It was sold at a whopping amount of $2.9M. However, the Tweet will remain publicly available on the platform even after the auction. The buyer would receive an NFT claiming that he is now the owner.
Nike is trying to combine NFTs with real-world assets. It has attached NFTs with their sneakers series called CryptoKicks. Each pair of sneakers would be saved on the blockchain as an NFT. Further, this will be used to track the ownership and verify the authenticity of sneakers using blockchain.
Development on blockchains is associated with a huge carbon footprint just like cryptocurrencies, but Ethereum is evolving to become energy-efficient.
Many think NFTs to be of no physical value and no sense as it is not tangible. It sounds crazy to spend thousands of dollars buying digital tokens. However, many think it to be a bubble that will soon burst.
Many blockchain researchers believe that the destiny of NFTs lies somewhere else. However, we are every day seeing some meaningful applications of these digital tokens. In the future, NFTs could be combined with DeFi or may be traded on DEXs by any other crypto token. We believe that the main potential lies in using it for sectors like supply chain, real estate, digital identities, and we will see those uses sooner than later.