What is an NFT? Non-Fungible Tokens Explained

What is an NFT? This is a question that often pops up in blockchain and cryptocurrency circles, with people trying to understand this new and innovative technology. NFTs are tokens that are not interchangeable and each one has its own unique characteristics. In this article, we will try to answer some of the most common questions about Non-Fungible Tokens and provide an overview of what they are, their benefits, and their use cases.

What does NFT stand for?

NFT is an acronym and it stands for non-fungible token. Although this is a term that is used by many people nowadays due to the hype of technology, very few people really understand what NFTs are meant for. Considering a person new to the space trying to understand what NFT really is, hearing many different definitions from different sources and mouths creates confusion and frustration.

In a nutshell, a token is a concept that represents an item, usually, that has value on the blockchain. The term Non-Fungible implies that this token has unique characteristics that make it distinct and unduplicatable.

What is an NFT?

One very common definition of NFTs is the one that describes NFTs as blockchain-based digital records of ownership and authenticity associated with a piece of media. This definition might be the most common one you will find out there but unfortunately is wrong for many, this definition is wrong.

The problem with this definition is that it associates NFTs with media. Yes, that is one application of NFTs, but this is not what NFTs are. That’s just one possible use of NFTs. Then if there are so many definitions out there, how do we define them? The best way is to go to the source, the pioneers of NFTs, Ethereum.

NFTs are tokens that we can use to represent ownership of unique items. And that’s about it.

With fungible tokens, someone can represent something of value on the blockchain that does not have any unique properties. Like a currency, a utility token, like reward points from an airline, or a fungible in-game asset, like wood, stone, and gold. Someone can create a security on the blockchain that has the same characteristics as the common securitize products, representing ownership in a company.

Instead with Non-fungible tokens, as the definition says, someone can represent ownership of unique items. This item may or may not have value. Or may have value to some people, but no value to others. They can be used for both digital and real-world assets.

They allow us to tokenize almost anything, including art, collectibles, and even real estate. They can only have one formal owner at a time, and they’re kept secure by a Smart Contracts platform, like the Ethereum Blockchain – no one can modify the record of ownership or create a new NFT from scratch.

NFT stands for non-fungible token. Non-fungible is a financial term that you might apply to anything from your furniture to a song file or even your PC. These things aren’t interchangeable with others since they have distinct features.

Fungible items, on the other hand, can be traded since their worth is determined by their value rather than their specific qualities. For example, 1 dollar is fungible because it may be exchanged for another 1 dollar.

Why are NFTs important?

NFTs are important because of the many possible use-cases. if you consider for a second the official definition, imagine how many things we have around us that are unique in nature. This technology allows us to digitalize them. By digitalizing them, we can exchange them. Let’s see some of the qualities of NFTs.

An NFT is a type of blockchain-based asset that can be used to verify ownership in a tamper-resistant and cost-effective manner.

In addition, an NFT can also be used to authenticate digital materials, such as artworks, documents, or other digital files. It serves as a certificate of authenticity that assures that any sort of media may be traced back to its origin and thus proven to have not been tampered with.

Now if you put in the equation the qualities of Blockchain technology, the power os Smart Contract Technology, Decentralization, and Fungible and Non-Fungible tokens, the possibilities are infinite.

How do NFTs work?

To be able to demonstrate ownership of a digital object, there must be a transparent, unalterable ledger that maintains an exact record of all NFTs, as well as who owns them and where the files they reference are kept.

This is where blockchain technology comes into the picture. All NFTs may be kept in a transparent manner by utilizing the publicly available, unchangeable nature of blockchains, allowing anybody to verify any NFT’s authenticity at any time.

Every time an NFT is transferred or generated, it is recorded on the blockchain and timestamped, making it possible to follow any specific NFT back to its origins – something that’s quite useful if you’re looking to ensure your digital asset or digitally-represented real-world asset isn’t a fraud.

Let’s start with the basics by revisiting what NFTs are from a technological standpoint.

Most developers create their own cryptocurrencies from the ground up, but in order to save money and simplify the process, most projects will typically use an existing blueprint. Early on, leading crypto initiatives realized that there needed to be some form of standardization among newly minted crypto tokens in order to establish interoperability.

Read More: What is Blockchain Technology?

The Ethereum token standards were created to achieve precisely this. These include a set of smart contract capabilities that a token must be able to execute in order to be compatible with all other tokens, platforms, and services in the wider Ethereum ecosystem.

With time, more platforms used Ethereum’s technology and are also compatible with those standards. These Ethereum-compatible platforms are what we call EVM-Compatible blockchains, referring to them using the Ethereum Virtual Machine (EVM).

The first two standards that Ethereum’s ERC-721 and ERC-1155 established for non-fungible tokens allow developers to make and deploy their own unique, digital assets on top of its blockchain.

Read More: What is Ethereum Blockchain?

Other notable blockchain platforms that have also established their own NFT token standards to encourage developers to create and host NFTs on their networks include Elrond, Near, and Solana.

Finally, it’s worth noting that NFTs are not just different from other types of cryptocurrencies because to their fungibility. The infrastructure that allows for the usage of NFTs is also unique.

Unlike all other cryptocurrencies, NFTs are not tradeable on centralized or decentralized exchanges. That’s due to their nature of being unique. You cannot use the same mechanisms, like an order book or an AMM to exchange NFTs.

Users must instead use custom-built NFT marketplaces to trade and list these assets. OpenSea and Rarible are two of the most well-known, but there are several more choices available depending on the NFT collection you want to participate in.

NFT marketplace resembles any other online marketplace that you are familiar with. The difference is that you can buy and sell NFTs on them instead of other items, like books and clothes.

How to buy and sell NFTs?

There are three methods that someone can use to buy and sell NFTs, two of them being the most common ones, but used for different purposes.

The two most common methods for buying and selling NFTs are the use of NFT marketplaces or custom-made contracts built by projects to mint new NFTs. The later method is usually used when the NFTs are newly minted or created. The smart contracts are specialized for this special case.

The most common method of buying and selling NFTs is with the use of NFT Marketplaces. There are many different types of NFT marketplaces, some of them are specialized for “digital art”, and some are specialized for in-game assets or just tailored made for a specific game.

With time we should expect more types of NFT marketplaces to be built to address the different sectors where NFTs are used. Especially when we will start seeing more real-world assets represented on the blockchain, as with real-world assets we should expect NFT marketplaces to adhere to regulations as well.

At the beginning of this section, we mentioned 3 ways. What’s the last one? Well someone can create special smart contracts to exchange NFTs. Special conditions can be coded in the smart contracts to ensure that the ownership of the asset the NFT represent is transferred if and only if the conditions of the contract hold true.

How to make an NFT?

On most blockchains, NFTs are created by interacting with a smart contract. Many smart contract templates for creating NFTs are available from a variety of open sources, including the blockchain platforms that support NFTs, prominent creators within the space and NFT marketplaces.

NFTs are created and registered on the blockchain through a process known as minting. Nearly any piece of media, from a single line of text to an entire virtual reality experience, can be minted as an NFT.

Through the minting process, the cryptographic address of the NFT’s creator and key pieces of identifying information known as metadata are added to the blockchain. The NFT is created and the digital media file the NFT represents is often uploaded to an external location (more on that in the next section).

The smart contracts that create NFTs require a gas fee to be paid to network participants, known as validators, who maintain the truthfulness of the NFT’s state of ownership. Gas fees incentivize the validators to act honestly and stay in agreement with others on the network.

A Brief History of NFTs

Despite their recent popularity, NFTs have long been a part of blockchain technology. Colored Coins was the first to offer the concept of NFTs in 2012. Colored Coins allowed investors to represent ownership of real-world assets such as real estate or shares of a stock on the Bitcoin blockchain.

After some time, Digital artist Kevin McCoy’s “Quantum,” a hypnotic loop of a pulsating multicolored octagon, was imprinted on the Namecoin blockchain and is widely regarded as the first NFT.

In 2018, Ethereum promoted the viability of NFTs with CryptoKitties and the ERC-721 standard, allowing for more complex digital collectibles.

This paved the way for other smart contract-enabled blockchain networks, such as Solana and Tezos, to assist in the wider adoption and circulation of NFTs.

NFTs have been widely used to track ownership and authenticity of digital art and collectibles so far. Some of the first NFTs, such as CryptoPunks, are souvenirs from the birth of a cultural paradigm shift in the idea of property.

The use cases for NFTs in other sectors beyond art, such as the verification of sensitive financial papers and limited access to pop culture experiences, are expanding.

What are NFTs used for?

There are many use-cases that NFTs can be used for, which is impossible for someone to compile in one article, however below you can find a lot of use-cases for which NFTs are used today and in the future.

1. Art & Collectibles

Despite the fact that any digital file may be represented as an NFT, the most prevalent applications today are collectible works of art.

The most serious problem with digital art or collectibles before NFTs was that ownership of a piece of art was difficult to track online and relied heavily on fraud-prone middlemen.

NFTs have enhanced the legitimacy of digital art as a means of expression and a valuable component of modern culture. Blue-chip collections’ NFTs (e.g., CryptoPunks, Bored Ape Yacht Club, and works by digital artists such as Beeple) have established sale price records not just for NFT marketplaces, but also for traditional art auctions.

2. Community Membership

Exclusivity is a popular feature of NFT collections. Holding a certain set of NFTs may provide its owners with unique real-world advantages, rewards, or experiences, resulting in added value. Owners of specific NFT sets typically interact with other members to network, cultivate relationships and share their interest in the project while also increasing feelings of community belonging.

Furthermore, various decentralized autonomous organizations (DAOs) have joined together to take part in the partial ownership and collaborative management of NFTs they have determined to be culturally significant.

Think for a minute about all the membership-based clubs we have in real-life: Gym membership, Sports-club memberships, Business club memberships, etc. All these memberships can be created digitally using NFTs instead of plastic cards.

3. Medical Records & Identity Verification

NFTs can also guarantee that medical records remain private and untampered by external sources because NFT transactions are validated on numerous nodes before being permanently added to the blockchain, ensuring that each record is correct and secure.

NFTs have also been designed with healthcare professionals in mind, as evidenced by NFT Birth Certificates, which may be given to newborns by health practitioners. Creating a permanent blockchain-based identity for each kid that is linked to their birth certificate and verified using NFT verification applications can be an excellent method to quickly produce a lifelong identification on the blockchain.

NFTs have the potential to solve many problems in healthcare. Storing sensitive medical information on a blockchain eliminates most of the concerns associated with sharing such data with non-trusted third parties that may be prone to manipulation and hacking attacks.

NFTs also provide safer methods of storing sensitive medical data while still allowing authorized healthcare providers access when needed. In recent years, narrow use cases for NFTs have emerged, in which hospitals, health insurance companies, and other organizations are beginning to explore how blockchains might help improve hospital operations.

Including verifying patient identities, and recording medical procedures performed without compromising patient confidentiality.

4. Real Estate

NFTs and real estate complement each other like peanut butter and jelly. Land deeds may be transferred using NFTs, proving ownership and even monitoring property value fluctuations over time.

The real estate business is one of the most NFT-ready industries. NFTs may be used in real estate to make transactions easier and quicker, enable smart contracts for properties (allowing automatic payments), and even create decentralized home rental services while protecting sensitive data like credit card numbers.

Wouldn’t it be nice to know everything there is to know about the home you are purchasing with a few taps on your phone? Know when the property was built, who owned it first, what modifications were made, and even how much you should pay for it.

5. Gaming Industry

The world of NFTs and the gaming industry are a match made in heaven. NFTs may be integrated into the gaming environment by allowing cross-platform playability. Gamers will have more incentive to continue playing a game if they already own characters or items within it, thanks to NFTs, which offer game developers another method to grow their brand and earn money.

NFTs also make trading in games easier, which can boost the value since NFT items in games may have a wide range of scarcity. There is no middleman in NFT transactions, and they happen quickly via the blockchain.

It also opens up a slew of possibilities that we’ve never seen before, such as buying weapons or other equipment that has been used by people who have already used it.

Read More: What is GameFi? Blockchain Gaming Explained

6. Music Industry

NFTs are being used by musicians to get out of the record industry’s and broader music industry’s influence, which has a mediating and monetizing function between artists and their followers.

Unique audio clips can also be registered, traded, and stored on the blockchain as NFTs for people to own and enjoy, just like unique photographs are able to do.

NFTs are being utilized by a slew of musical artists from different genres and eras, including Kings of Leon and 3LAU, to provide new experiences with their music while also fighting the intermediaries of the music business.

7. Academic Credentials

NFTs are also an excellent method to demonstrate academic credentials. NFTs may be used to document attendance, degrees obtained, and other critical information that will be stored on the NFT chain and cannot be altered or hacked into.

NFTs may be used to generate unchangeable records by issuing tokens for each course completed using smart contract verification systems, as well as verifying any degrees obtained.

A paper certificate will not be required in the future. NFTs will be utilized as a method of academic documentation and NFT education tokens can be transferred to other people, allowing them to verify that the person holding them obtained such an NFT.

8. Ticketing

NFTs will eventually be used to replace tickets. Parking passes, for example, may be replaced by NFT tickets that have been assigned a unique ID and must be used when entering the restricted area for validation purposes.

Because NFTs are not printed, there’s no possibility of fraud or waste. They also eliminate the need for numerous copies of a single token (much like how we don’t print out our cash). The same idea can be applied to bus tickets and other types of transportation where payment verification occurs at various stages along your journey using scanners.

9. Fashion

What is an NFT - Fashion

Companies from all over the world are experimenting with NFTs, which include niche luxury brands to fast-fashion powerhouses.

Several well-known companies are introducing NFT clothing collections for the metaverse, while others, such as Louis Vuitton, are creating full games around collecting and interacting with NFTs.

NFTs allow organizations to connect with consumers on an emotional level while also drawing attention to up-and-coming artists. Among the trendsetters that have utilized NFTs to create ground-breaking experiences are Gucci, Dolce & Gabbana, Nike, and Adidas.

10. Metaverse

What is an NFT - Metaverse

NFTs are quickly becoming a fundamental component of the next generation of the internet, where more immersive online experiences may be provided via NFTs’ unique ownership assets.

NFTs might have the potential to free a more decentralized and anonymized blockchain-based internet architecture, often referred to as Web 3.0. While the full potential of NFTs in these areas is still being determined, they will almost certainly continue to play an important part in the metaverse’s development.

Read More: Learn more about Web 3.0

Many believe that the potential of NFTs will be revolutionized across many sectors, with e-commerce, property ownership, and even personal identification being prominent examples.

Summary

Summing up, Non-Fungible Tokens (NFTs) are digital assets that are not interchangeable and each NFT represents a unique item.

NFTs have many benefits, including the fact that they cannot be replicated, they are tamper-proof, and they can be stored on the blockchain.

There are a variety of use cases for NFTs, including in the music industry, ticketing, fashion, and the metaverse.

The possibilities of using NFTs for digitalization and automation are infinite, only time will tell how Non-Fungible Tokens will shape the future.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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