Non-fungible tokens (or NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency
In pills:
- NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated.
- NFTs can be used to represent real-world items like artwork and real-estate.
- "Tokenizing" these real-world tangible assets allows them to be bought, sold, and traded more efficiently while reducing the probability of fraud.
- NFTs can also be used to represent individuals' identities, property rights, and more.
The distinct construction of each NFT has the potential for several use cases. Because they are based on blockchains, NFTs can also be used to remove intermediaries and connect artists with audiences or for identity management.
Much of the current market for NFTs is centered around collectibles, such as digital artwork, sports cards, and rarities.
Curiosity: Twitter's Jack Dorsey tweeted a link to a tokenized version of the first tweet ever written where he wrote "just setting up my twttr." The NFT version of the first-ever tweet has already been bid up to $2.5 million.
How does it work?
Like physical money, cryptocurrencies are fungible i.e., they can be traded or exchanged, one for another: this fungibility characteristic makes cryptocurrencies suitable for use as a secure medium of transaction in the digital economy.
NFTs shift the crypto paradigm by making each token unique and irreplaceable, thereby making it impossible for one non-fungible token to be equal to another.
They are digital representations of assets and have been likened to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning you can combine one NFT with another to “breed” a third, unique NFT.
NFTs also contain ownership details for easy identification and transfer between token holders. Owners can also add metadata or attributes pertaining to the asset in NFTs. For example, artists can sign their digital artwork with their own signature in the metadata.
A little History:
NFTs evolved from the ERC-721 standard. Developed by some of the same people responsible for the ERC-20 smart contract, ERC-721 defines the minimum interface – ownership details, security, and metadata – required for exchange and distribution of gaming tokens. The ERC-1155 standard takes the concept further by reducing the transaction and storage costs required for NFTs and batching multiple types of non-fungible tokens into a single contract.
We could safely say that the most famous use case for NFTs is that of cryptokitties: launched in November 2017, cryptokitties are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitty is unique and has a price in ether. They reproduce among themselves and produce new offspring, which have different attributes and valuations as compared to their parents. Within a few short weeks of being launched, cryptokitties racked up a fanbase that spent $20 million worth of ether purchasing, feeding, and nurturing them. Some enthusiasts even spent upwards of $100,000 on the effort.
While the cryptokitties use case may sound trivial, succeeding ones have more serious business implications. For example, NFTs have been used in private equity transactions as well as real estate deals. One of the implications of enabling multiple types of tokens in a contract is the ability to provide escrow for different types of NFTs, from artwork to real estate, into a single financial transaction.
The Importance of NFT:
Non-fungible tokens are basically an evolution over the concept of cryptocurrencies: modern finance systems consist of sophisticated trading and loan systems for different asset types, by enabling digital representations of physical assets, NFTs are a step forward in the reinvention of this infrastructure. When these concepts are combined with the benefits of a tamper-resistant blockchain of smart contracts, then they become a potent force for change.
Efficiency: the conversion of a physical asset into a digital one streamlines processes and removes intermediaries. NFTs representing digital or physical artwork on a blockchain removes the need for agents and allows artists to connect directly with their audiences.
Identity Management: if we consider the case of physical passports that need to be produced at every entry and exit point, by converting individual passports into NFTs, each with its own unique identifying characteristics, it is possible to streamline the entry and exit processes for jurisdictions. Expanding this use case, NFTs can be used for identity management within the digital realm as well.
Democratize investing: it is much easier to divide a digital real estate asset among multiple owners than a physical one. That tokenization ethic can be extended to other assets, such as artwork - a painting need not always have a single owner, its digital equivalent can have multiple owners, each responsible for a fraction of the painting; such arrangements could increase its worth and revenues.
Creation of new markets and forms of investment: if we consider a piece of real estate parceled out into multiple divisions, each of which contains different characteristics and property types, one of the divisions might be next to a beach while another is an entertainment complex and, yet another, is a residential district. Depending on its characteristics, each piece of land is unique, priced differently, and represented with an NFT.
Are non-fungible tokens safe? Non-fungible tokens, which use blockchain technology just like cryptocurrency, are generally secure. The distributed nature of blockchains makes NFTs difficult, although not impossible, to hack. One security risk for NFTs is that it’s possible to lose access if the platform hosting the NFT goes out of business.
The Upsurge of NFTs
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Global sales volumes of NFTs reached $10.7 billion in the third quarter of 2021, making an eightfold increase from the previous quarter. This magnitude of attention is eye-catching, to say the least, and it has businesses and individuals around the world taking action.
Asian countries have expressed the most interest in NFTs, especially China. Interestingly enough, although many Chinese citizens are intrigued by NFTs, the marketplace is almost nonexistent because of the government’s recent anti-crypto regulation, which makes using the Ethereum blockchain illegal. Nevertheless, two Chinese tech giants, Alibaba and Tencent, are now selling NFTs to the public, thanks to their own semi-private blockchains. These blockchains have reportedly been in development since 2019 – A move that these two companies are surely proud to have made as they’re now able to meet demand for one of the hottest commodities.
NFTs are gaining traction in more unlikely places as well, such as India. In the past few months, some of India’s biggest celebrities have launched NFTs, including famous cricketer Dinesh Karthik.
The ubiquitous rise of NFTs has been quick and unpredictable.
An NFT’s unique characteristics, including the utilization of blockchain technology, gives it the potential to become its own asset class.
On the other hand, the technology will have to face many hurdles involving transaction costs, environmental costs, and intellectual property. At this moment in time, it’s difficult to predict the impact, or lack thereof, that NFTs will have on the global economy.
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