What is NFT, and How Does it Work?

With the world focusing all attention on bitcoin and other cryptocurrencies, another type of digital asset is slowly gaining popularity from the background. The Non-Fungible Tokens (NFTs) are rising slowly all the time and have been considered as the future of the gaming industry, the art industry, and even the real estate industry at large.

What is NFT? 

A Non-fungible token (NFT) is a cryptographic token that showcases something that is unique. It is something that is indivisible, and just like a fungible token is interchangeable, a non-fungible token is not interchangeable. NFTs provides an avenue for creating and trading digital assets, such as unique artwork and blockchain integrated collectible games like CryptoKitties. 

For example, in fungible assets, one BTC is the same as any other BTC in circulation. That is also the same with euros, dollars. These are because they are practically indistinguishable from one another. They are the same and have common traits. While, on the other hand, non-fungible tokens are indivisible and unique. They are mostly built on smart contracts. Just like DAI and ETH, NFT contracts have specific information that distinguishes each NFT from another. This means that one NFT cannot be interchanged with another NFT, and the whole can not be broken down into smaller units and used. These attributes signify non-fungibility.

How Does NFT Work? 

Non-fungible tokens are mainly built on Ethereum using the ERC 721 token standard. Tokens like Bitcoin and Ethereum based ERC 20 tokens are fungible. The ERC 721 token standard is Ethereum’s non-fungible token standard used by platforms such as CryptoKitties and Decentraland. 

Non-fungible tokens can also be built on other smart contract authorized blockchains with non-fungible token support and tools. Even though Ethereum was the first to use NFT, other tokens like EOS, TRON, and NEO all have NFT standards presently. 

The NFT and their smart contracts come with a feature that allows for storing rich metadata that is beyond the token symbol, name, supply, and balance. The feature stores assets and ownership details too. Therefore, the owners and the upcoming buyers are guaranteed about the origin, which is an important progression for an increasingly digital world. They could achieve the blockchain’s goal of having trustless security applied to the ownership or the exchange of almost any asset. 

Although the non-fungible tokens, their protocols, and the smart contract technology project are still in the developmental stage, there are still diverse challenges. Creating decentralized applications and platforms for Non-fungible token management is relatively complicated. And with the challenges involved in creating a standard and blockchain development being fragmented, there will be a need for unified protocols and interoperability for the project to be successful.

Value Proposition

In real life, NFT can be utilized in potential use cases, such as; it can be used in art, antiques, vintage, real estate, etc. In the gaming industry, the NFT’s became the first to push forward for its actual implementation because the stakes were low, and the gamers were already familiar with the concept of digital collectibles. 

The NFT impacts the gaming industry in three ways; 

  • It permits in-game items that can be moved from game to game. It means that you could win a new skin for your avatar in one game, and then you move it to a different avatar in a totally different game. 
  • NFT’s and Blockchains allow for the public player record. Just as the in-game allows for movement from game to game, the player’s record can also be transferred between games. Like scoreboards and achievements, all your player data can be stored on a blockchain and shown to other developers, thereby boosting your experience as a gamer. 
  • NFT and blockchain make it easier to create a single, unified identity maintained across different games and platforms. It means that you could use a single avatar for all your games. Instead of creating an avatar on every new game you want to play, you could use a single unified identity. 

For innovations, NFT will likely link the physical assets to these tokens for trustless transfers in the real world. For example, NFT can trade things like; software licenses and identification certificates. 

Characteristics of NFT

There are many characteristics of Non-fungible tokens; some of them include, NFT; 

  • Are not interchangeable with another similar NFT.
  • Always have a unique digital identity that allows users to control their identity from one place. 
  • Represents ownership, privileges, and rights. 
  • Are not divisible. 
  • Manage ownership of digital items within blockchain integrated games. 
  • Are also easier to transfer in bulks. 
  • Enhances creating digital or crypto collectible. 
  • Prove authenticity of digital art while allowing artists to hold on to the copyright and IP.  
  • Allow partial ownership of high-value items like real estate.

CryptoKitties, an Ethereum based game that permits for selling, breeding, and buying of adorable digital cats, still remains the most popular application for NFTs to date. CryptoKitties was unveiled in 2017 and had over 150,000 users and $15 million in transactions within two weeks of its launch. 

The platform went viral when a single CryptoKitty was sold for $170,000 – leading to a surge of gamers to Ethereum along with worldwide attention. Although the CryptoKitties was successful, it came with consequences such as; transaction congestion on the Ethereum network. 

The number of large amounts being used for the digital cat transaction coupled with the urgent need to accommodate network scalability drew the media’s attention to cover CryptoKitties. The positivity of the whole thing is that it created blockchain awareness as a technology that doesn’t only offer just cryptocurrencies.

Another example of NFTs is NBA Top Shot. Recently, a blockchain company Dapper Labs signed a deal with the NBA to bring a new kind of NFTs – NBA Top Shot. Top Shot has already done more than $7 million in sales that includes LeBron James Dunk worth $47,500, Ja Morant Dunk worth $35,000, Giannis Antetokounmpo Dunk worth $20,00, and many more.

Top 5 NFT Marketplace:

 

1. OpenSea

Established in 2017, OpenSea is one of the largest peer to peer marketplace for crypto goods, NFTs, and collectibles backed by blockchain technology.

OpenSea

OpenSea is opening gates to a new kind of economy letting users truly own the digital assets leveraging interoperable standards like ERC1155 and ERC721.

2. Decentraland

Decentraland is basically a fully decentralized digital world where users can own digital assets such as pieces of land and develop structures.

decentraland

It works in virtual reality and allows users to truly own their virtual land with the help of blockchain tech.

3. Super Rare

superrare

As the name suggests, Super Rare is an NFT marketplace that deals in rare collectibles and art-works. 

4. Rarible

Rarible is not just another NFT marketplace, but it also allows users to mint them.

Rarible

The platform also leverages its governance token called RARI to allow voting and take community decisions for important matters.

5. Enjin Marketplace

Enjin

It’s an official marketplace for NFTs that are based on the Enjin blockchain ecosystem and leverages its native wallet.

The Pros and Cons of NFT

There are many pros and cons of NFT. Below are a few of them; 

PROS CONS
• NFT’s could lead millions of people worldwide to cryptocurrencies for the first time. • Creating decentralized apps for Non-fungible tokens can be time-consuming and tricky.
• With the help of NFT, new revenue streams could be unlocked in the gaming, arts, sports, and technology industry. • It requires more in-depth simplification so that it will be easier for people who don’t have blockchain knowledge to use.
• It has the capacity to transform our attitudes towards ownership – making it possible for people to own a real-world asset that is thousands of miles away. • NFT games can create an adverse effect. That is because, since players purchase an asset with the intent of selling it for profit, they stand at a loss if the market collapses.

Final Thought

The fungible cryptocurrencies have shown how useful they are to the ecosystem. Also, the Non-fungible tokens offer a potential opportunity to digitize all intellectual property rights and tokenize all assets. In summary, NFTs will enlarge the scope of blockchain in real life. 

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Written by:  Narender Charan

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