Non-Fungible Tokens (NFTs): The Digital Answer to Art & Collectibles

Non-fungible tokens (NFTs) have been around since the early days of cryptocurrency. However, they are only now starting to reach mainstream adoption, with some of the world’s biggest companies like Adidas, Nike, Gucci, Time Magazine, Budweiser, etc. joining in on the fun. In this article, we’ll discuss what non-fungible tokens are and how they work. We’ll also cover why people buy NFTs and what benefits they might bring to both buyers and sellers.

What are non-fungible tokens (NFTs)?

Non-fungible tokens (NFTs) are unique digital assets. They’re not limited to one type of asset, like cryptocurrency or fiat currency; they can be used to represent anything, from a car to a piece of art. What’s more, NFTs are not limited in terms of quantity–you could have millions of these things if you wanted them!

Evolution of NFTs

NFTs existed long before they gained popularity in the crypto market. The first NFT known to be sold was “Quantum”, in 2014 by Kevin McKoy on the blockchain called Namecoin; it was eventually minted and sold on Ethereum in 2021.                                                                                                    [https://www.sothebys.com/en/buy/auction/2021/natively-digital-a-curated-nft-sale-2/quantum ].

The blockchains on which NFTs are traded follow the ERC-721 (Ethereum Request for Comment #721) standard, which governs how ownership is transferred, methods for confirming transactions, and how applications handle safe transfers (among other requirements).                                                
  [ https://eips.ethereum.org/EIPS/eip-721 ]

The ERC-1155 standard, approved six months after ERC-721, improves upon ERC-721 by grouping multiple non-fungible tokens into a single contract, reducing transaction costs. [https://eips.ethereum.org/EIPS/eip-1155 ]

How are NFTs Created and Made Functional?

The process of creating NFTs entails a process called minting – in which detailed information of the NFT is recorded on a blockchain. The process of minting process results in a new block or metadata being created, NFT information being validated by a validator, and the block being closed. This minting process often includes incorporating smart contracts defining ownership and managing the transferability of the NFT.

As tokens are minted, they are assigned a unique identifier directly linked to one blockchain address. Each token has an owner, and the ownership information (i.e., the address in which the minted token resides) is publicly available. Even if 15,000 NFTs of the same exact item are minted (similar to multiple bank-notes of a fiat currency where each one has a unique serial number), each token has a unique identifier and can be distinguished from the others.

The Non-Fungibility Principle in Blockchain

Non-fungible tokens (NFTs) are unique digital assets that can be used to represent unique assets, such as physical collectibles or even property. Unlike fungible tokens, which are interchangeable with other types of cryptocurrency and can be traded on a secondary market, NFTs are not meant to be traded on a secondary market at all. Instead, they’re meant for use within an application or platform like CryptoKitties. To help distinguish and understand this better, one can exchange one bitcoin for another on a given exchange since they are worth the same price. However, one NFT cannot be exchanged for another just like you cannot exchange a painting made by Vincent van Gogh for one made by Monet or Leonardo da Vinci, simply because each one of them is unique and irreplaceable!

Fungibility is the principle that every unit of currency is essentially interchangeable with every other unit–you could use it in place of another coin or token and it would still be worth exactly the same amount because it’s made from metal or plastic instead of paper money printed by banks (or minted by governments). 

Examples of NFTs

NFTs are being used for many different purposes outside of just being used as a digital collectibles or digital asset on some other platform like Ethereum. They’re also being used as part of online games. 

The initial market for NFTs revolved mostly around digital art and collectibles (like trading cards of sports celebrities), but this space has grown into a wider arena for animes, digital characters (like CryptoKitties), stickers etc.

A reliable marketplace of good repute for NFTs like OpenSea has several NFT categories to choose from:  

• Art: includes everything from pixel to abstract art
• Collectibles: Bored Ape Yacht Club, Crypto Punks, and Pudgy Panda 
• Domain names: NFTs that represent ownership of unique domain names for website(s)
• Sports: Collections of digital art based on celebrities and sports personalities.
• Photography: Photographers can tokenize their work and offer total or partial ownership. For example, OpenSea has a collection of beautiful palm trees called “Somewhere Else” by Will Nichols who goes by the username PalmTreeGod
• Trading cards: Collectible trading cards or others that can be traded in video games such as CryptoKitties where players can buy rare cats from each other or breed them together to create new ones with better stats!.
• Music: Musicians can tokenize their work, granting buyers the rights the artist wants them to have

Why do people buy and trade NFTs?

NFTs can be very empowering. Here’s how.

Eliminate the need for middlemen / agents / brokers: Anyone can tokenize a physical asset, control and streamline the sales process and eliminate intermediaries who often don’t allow an artist or seller to connect directly with his / her target audience (given that the artists are conversant with hosting their NFTs securely).  

Investing: A fine example of the benefit of tokenizing can be seen in real estate. A property could be divided into a variety of sections, each with a unique USP – a lakeside view, proximity to a beautiful forest or, swimming pool etc. These unique features of each section will help price each piece of land differently, represented by an NFT. In the real world, a real estate transaction is mired by complexity of bureaucracy which can be simplified by incorporating relevant metadata into a unique NFT associated with only the corresponding portion of the property. 

Security: NFTs are effective in identity security. For example, the personal information of a trader, stored on a secure blockchain cannot be accessed, stolen, or used by anyone that doesn’t have the digital keys to the respective wallet.

How to Buy an NFT

To begin with, an investor who would like to park his/her funds in NFTs is required to own the cryptocurrency called Ether (ETH) , polygon(Matic), or respective blockchain coin and storing it in a digital wallet. Some NFT marketplaces which enjoy a good reputation are OpenSea, SuperRare & Rarible. One can start simply by connecting one’s wallet to these marketplaces and start shopping for NFTs.

Conclusion

Non-fungible tokens are becoming the most common type of blockchain assets in the world, with many practical applications. They have been used to create digital collectibles, transactional records and even represent ownership shares in companies. Non-fungible tokens can also be used to track physical goods or services using an immutable ledger system.

NFTs are not only an innovative evolution of the concept of cryptocurrency, but also a forward leap in redefining modern finance systems. NFTs also empower digital artists as they identify and connect directly with a massive customer base in crypto enthusiasts.