Non-Fungible Tokens (NFT)

Non-Fungible Tokens (NFTs) are those crypto assets that are created to be unique because they represent something unique, like an artwork, a house, a movie ticket, or maybe a game pass.

From celebrity-backed art pieces selling for millions to collectible gaming items with unique ownership to utility NFTs like NFT-based tickets that play a real role in the real world, NFTs are transforming the way we think about digital ownership and assets.

Explanation For Beginners

NFTs (Non-Fungible Tokens) are unique digital assets that represent ownership of specific items, media, or collectibles on a blockchain. Unlike cryptocurrencies like Bitcoin or Ethereum, NFTs cannot be exchanged one-for-one with each other because each one is unique and represents something specific and different.

Example: Imagine a baseball card, each with a unique value and design, compared to regular money, where each $1 bill is identical and can be exchanged. NFTs are similar to baseball cards—they have unique attributes and, therefore, different values.

Key Concepts in NFTs

NFTs use blockchain technology to confirm ownership and authenticity. When you buy an NFT, you get a certificate of ownership recorded on the blockchain. This means no one can copy or claim your unique asset, even though digital files can be easily replicated.

Here’s a closer look at the primary concepts that define NFTs:

1. Non-Fungibility: “Fungibility” in economics refers to an asset’s ability to be exchanged one-for-one with another of the same kind. For example, one Bitcoin is equal to any other Bitcoin. NFTs, on the other hand, are “non-fungible,” meaning each token has its unique value and cannot be exchanged on a one-for-one basis with another NFT.
2. Blockchain Technology: NFTs are generally built on blockchains like Ethereum, Polygon, and Solana, which support the token standards necessary for NFTs. This decentralized network keeps a public record of each NFT’s ownership, ensuring transparency and security.
3. Token Standards: Common standards for creating NFTs include ERC-721 and ERC-1155 on Ethereum. ERC-721 provides the foundation for most NFTs, defining ownership, metadata, and transferability. ERC-1155 allows for both fungible and non-fungible assets in the same smart contract, a major innovation for gaming and media assets.
4. Smart Contracts: NFTs operate using smart contracts, self-executing digital agreements that verify and enforce transactions based on pre-set conditions. This means that when an NFT is bought or transferred, the smart contract autonomously updates the blockchain.

How NFTs are Created: Minting

The process of creating an NFT is known as “minting.” When an artist or developer mints an NFT, they create a unique token on the blockchain that includes metadata, which can contain the asset’s name, description, file format, and even additional unlockable content. Here’s a step-by-step breakdown:

1. Creation and Registration: The creator, such as an artist or developer, registers the digital file they want to mint as an NFT on a blockchain. They include all the metadata, including title, description, and media link.
2. Smart Contract Execution: The smart contract, which may include specific terms (like royalties), executes during the minting process, securing the creator’s rights over the asset.
3. Listing and Selling: After minting, the NFT can be listed on marketplaces like OpenSea or Rarible, where buyers can browse, purchase, and collect NFTs. The smart contract automates the transfer of ownership to the buyer.

Practical Use Cases for NFTs

NFTs are not only limited to art; they have numerous applications across various fields:

1. Digital Art and Collectibles: NFTs first gained popularity through digital art and collectibles. Artists can mint digital art, music, or multimedia files as NFTs, giving buyers proof of ownership.
2. Gaming: Gaming has become one of the largest applications for NFTs. Players can purchase in-game items like weapons, skins, or characters as NFTs, and unlike traditional games, they truly own these items, even outside the game ecosystem.
3. Tokenized Real-World Assets: NFTs can also represent real-world assets like real estate and collectibles. A digital property deed or a unique asset (like a collectible car) can be tokenized as an NFT, enabling fractional ownership or easier trading.
4. Identity Verification and Membership: NFTs can serve as verifiable digital identities or access keys to exclusive communities, events, or content, which only specific NFT holders can access.
5. Royalties and Monetization: NFTs allow creators to embed royalty structures directly into smart contracts, meaning artists can earn a percentage of resale value every time the NFT changes hands.

Diving Deeper into NFT Technology

For experts, NFTs are not only a cultural phenomenon but a technological advancement with profound implications. Let’s examine the intricacies of token standards, protocol compatibility, and advanced NFT utilities:

NFT Token Standards (ERC-721, ERC-1155, EIP-2981)

• ERC-721: The original standard for NFTs, ERC-721 enables the creation of non-fungible tokens on the Ethereum blockchain. It’s suitable for unique, one-off assets like artwork or property deeds.
• ERC-1155: This standard allows both fungible and non-fungible assets within the same contract, ideal for creating game items or bulk assets with varying levels of rarity. They also help create fractionalized NFTs (explained later).
• EIP-2981: A new Ethereum Improvement Proposal that enables on-chain royalty payments for creators, ensuring they receive a share of future sales, a critical feature for sustainable creator compensation.

Where are NFT images/Videos/Text Stored?

NFT files like images, video, audio, text, and others cannot be stored in blockchains because doing so would make the latter bulky. Hence, these files are stored in off-chain storage protocols like the InterPlanetary File System (IPFS).

Fractionalized NFTs and DeFi

Fractional ownership is possible via ERC-1155. This token standard (in Ethereum) allows users to buy and trade portions of high-value NFTs. Fractionalization broadens access to NFT assets, driving liquidity while enabling collective ownership.

NFTs in DAO Governance

Decentralized Autonomous Organizations (DAOs) are incorporating NFTs as membership or voting tokens. For instance, NFT holders can vote on governance issues within a DAO, such as fund allocation, proposal approval, or content direction, giving NFTs a functional utility beyond mere collectibles.

Soulbound Tokens

Soulbound tokens are those NFTs are those which once minted using a wallet, will stay in that wallet forever.

Though some soulbound tokens can be deleted, most are non-transferable.

These tokens are used as identifiers for intra-institutional purposes, such as identifying members, participating in governance decisions, qualifying as a badge, and establishing proof of authority.