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Home Articles

Non-Fungible Tokens Explained

20 January 2022
in Articles, NFTs, Opinion
Reading Time: 8 mins read
117 4
Non-Fungible Tokens Explained

Introduction 

Non-fungible tokens (NFTs) have been a hot topic for quite some time. The frenzy initially took off in 2017 with the introduction of CryptoKitties developed by Dapper Labs on the Ethereum blockchain (although the first known NFT was created a bit further back in 2014 by Kevin McCoy and was called Quantum). The CryptoKitties game allows players to buy, collect, breed, and sell virtual cats.  

After several new developments, NFTs started to get publicly recognised in 2017 with the success of CryptoKitties, which raised a $12.5 million investment. Then in 2018, the NFT based online game Axie Infinity was launched, after which in 2019 Nike patented CryptoKicks which was a system for verifying authentic physical sneakers and also giving a corresponding digital asset to the owner of the physical asset.  Then in 2021 with Covid-19 and everyone having to stay at home, we saw the Boredom Markets Hypothesis come into play, due to which there was a surge in the number of people buying NFTs.  Also, later in 2022, we expect the launch of SolChicks, an NFT-based multiplayer game built around SolChick NFT collectibles where players can collect, breed, and battle one another for fame and glory.  SolChicks is built on the Solana blockchain.

NFTs enable you to produce, own, and sell original digital items such as artworks, music, in-game assets, domain names, and many other things. When developed as NFT, the original thing becomes rare and impossible to imitate. Here is an explanation of how these NFT’s work and how you too can own one. 

What is an NFT?

Non Fungible Tokens are digital assets that are unique non-interchangeable and stored on a blockchain. Basically, an NFT is a token on a blockchain that acts as a digital certificate of authenticity. It can be verified instantly and also show the history of its previous owners.

How are NFTs Different from Cryptocurrencies?

The main difference between Cryptocurrencies and NFTs is fungibility. Cryptocurrencies fall under fungible digital assets, i.e., the asset can be easily replaced or interchanged with an asset of the same type. For example, one bitcoin can be exchanged with another one and it won’t make any difference – just like fiat currencies.

However in the case of NFTs, as the name suggests, they are non-fungible digital assets i.e., they cannot be exchanged at equivalence; that is, each NFT is unique. This can be seen in the case of digital collectibles like Red Bull Racing Digital Collectibles.

Another significant difference would be that NFTs are typically indivisible while cryptocurrencies are divisible i.e., you have to buy the whole NFT as one unit unlike cryptocurrencies where you don’t necessarily have to buy one whole unit of it, you can buy fractions of the currency.  However, there are now solutions in the market that allow for fractional NFTs – these use smart contracts to create fractional ownership stakes in an NFT such that owners of fractional NFTs can trade their assets without the underlying whole NFT having to be sold.

What makes NFT’s valuable?

As it is with any other asset, the price of NFTs is determined through supply and demand dynamics.  Buyers are typically willing to pay a premium price for NFTs due to their scarcity and strong demand from gamers, collectors, and investors.

There are four factors that can be used to determine the value of a Non Fungible Token:

  • If it is a first– the first NFTs of specific creators or businesses can be expected to have a higher value. For example, Jack Dorsey’s first tweet was sold for $2.9 million.
  • If it has utility– NFTs that will have some real-world value and can be used to attain some kind of access, perks, and/or opportunities.  For example, in-game assets like weapons, that players can purchase and use within the game. 
  • If it is unique or rare– an NFT can likely have a high value if it is one of a kind or very difficult to find. For example ‘Everydays: The First 5000 Days’ by Beeple was sold for $69.3 Million. Another example would be CryptoPunks- no two crypto punks in the entire collection are alike causing its value to be high.
  • Its Ownership history– the value of an NFT can also be determined by the identity of the issuer and previous owners of the NFT. For example, Steph Curry’s collection of 2,974 non-fungible tokens featured digital replicas of shoes that he wore when he broke the 3-point scoring record in December 2021. The collection allows the owners to show them across different metaverses.

 Why Are NFT Tokens Important?

NFTs are a fascinating innovation built on the concept of cryptocurrencies. It enables the digital representation of physical or digital assets. The idea of representing physical assets digitally or with the help of a unique identification number is not new. In this case, we are pairing these methods with the perks of tamper-resistant smart contracts.  The fact that NFTs are powered by blockchain technology and its attendant cryptographic and programmability properties is truly a game-changer as it allows for much more utility.  For example, NFTs can be used as collateral when taking out a loan on a Decentralized Finance (DeFi) platform.

For NFTs linked to physical assets, one of the most evident advantages of NFTs is market efficiency.  Converting a physical item to a digital asset simplifies operations and eliminates intermediaries. They can also be used to enhance company operations. They can also be found useful in the case of identity management.  By fractionalizing tangible assets like real estate, NFTs can help democratise investing. A digital real estate asset is considerably easier to split among several owners than a physical one. This tokenization ethic does not have to be limited to real estate; it can be applied to other assets as well, such as physical artwork. As a result, artwork does not necessarily need to have a single owner. Its digital counterpart might have numerous owners, each of whom owns – and can trade –  a portion of the artwork.

What are the Benefits of NFTs?

The primary advantage of non-fungible tokens is their proof of ownership. Being on a blockchain enables irrefutable ownership to be associated with a single account. This also ensures that the buyers are secure from the concerns of counterfeit NFTs. NFT creators have the ability to issue a specific number of NFTs. So, in the case of event tickets or music albums, the creators can create multiple copies. The immutability of blockchains provides the assurance of authenticity to the buyers.

NFTs have the potential to create economic opportunities in the creator economy. This economy basically focuses on helping content creators avoid the need for transferring ownership to such platforms where the artists publish their content and the companies make revenue by selling ads to their followers. NFTs enable the ownership of content so that when creators sell their content, the funds generated directly go to them. With each resale, they can also receive royalties.

Are Non-Fungible Tokens safe?

Non-fungible tokens use blockchain technology and just like cryptocurrencies, are generally secure. Due to the decentralized nature of blockchains, NFTs are difficult to hack. One security issue associated with NFTs is that you may lose access to your non-fungible token if the (centralized) platform that hosts the NFT goes out of business.

How to Buy NFTs

NFTs are typically sold in marketplaces that specialise in NFTs, such as OpenSea.  Most NFTs are purchased using Ether, the cryptocurrency of the Ethereum blockchain.  After buying the cryptocurrency you need to transfer it to a wallet with which you can buy an NFT.

The first step is to create an account on a specific website like OpenSea or SuperRare.  Step two is to either buy crypto on another exchange and then transfer it to the wallet on that exchange.  NFT  wallets are very similar to those of any other cryptocurrency wallet, and most of them are based on the ERC721 protocols. Then lastly you can actually bid in an auction and pay for whichever NFT that you’re interested in buying and if you win, that NFT will get added to your account and then stored in your wallet. 

 

If you would like to read more articles like this, visit our Website.  You can also follow DeFi Planet on Twitter, Facebook, Instagram, and LinkedIn.

 

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