What is a Non-fungible Token (NFT) and How Does it Work?
As time passes, the world of digital assets continues to expand. At first, all of the hype was focused on cryptocurrencies and Bitcoin, but as new technologies developed, our perspective broadened. Today, everyone knows about blockchain, e-wallets, decentralized exchanges, security tokens, utility tokens, and so much more.
The most recent sector to catch the attention of the crypto-community is non-fungible tokens.
We will also examine why NFTs have gained so much traction in a relatively short amount of time and what makes them so unique within the crypto-space.
Definition of non-fungible tokens
Non-fungible tokens can be defined as digital assets that have unique information recorded in a piece of code.
This code has a general design that allows it to execute desired groups of instructions. In the case of NFTs, the code used is called “Smart Contracts.”
The original term was first introduced by Nick Szabo in an academic paper. The digital information recorded within makes every single NFT unique. Because of this uniqueness, there are no two NFTs in the world that are interchangeable.
In other words, you can’t swap one token for another because they are not identical or completely equal. Typical banknotes can be exchanged with the same value, and there’s no difference between holding one $5 bill or another one.
However, you can do this kind of exchange with “Fungible Tokens.” When it comes to cryptocurrency, the most popular fungible token is Bitcoin. A single Bitcoin is equal to another, and they can replace each other. They are both divisible and interchangeable.
Difference between fungible and non-fungible tokens
The first most obvious difference between fungible and non-fungible tokens is that NFTs aren’t interchangeable. Non-fungible tokens also can’t be divided in any way, while their fungible counterparts can be divided into the smallest units possible.
Another important difference is their uniqueness. Each NFT can be looked at individually, while fungible tokens are all the same within a single token system. This means that all fungible tokens such as Bitcoin have the same value and can be exchanged and transferred from one account to another.
On the other hand, non-fungible tokens all need to be looked at separately. Their value isn’t determined by their token system. Instead, they are valued more subjectively based on the information they contain, their functions, individual applications, and so on.
The technology behind NFTs
Most NFTs are stored and built on blockchain (mostly on Ethereum). Many blockchain networks support non-fungible tokens. Since a blockchain is transparent and anyone can review it, it’s easy to trace and verify NFT ownership.
At the same time, an organization or an individual that owns NFT is anonymous and has a pseudonym they’ve created for themselves. NFTs are recorded on smart contracts and stored on the blockchain. Blockchain is a distributed digital ledger that’s completely public and records all transactions.
Since NFTs are located on blockchain the same way that fungible tokens are, they can be purchased and traded similarly. In other words, when someone makes an offer to another person for their NFT, the owner decides whether to accept or not. When all set conditions have been met, the transaction is executed autonomously.
Why they are so unique
What makes NFTs special is that they can represent the ownership of physical items in the digital world. At their core, NFTs are collector items in the digital environment. Simply put, rather than acquiring an actual oil painting, holders receive a digital file.
NFTs also provide exclusive ownership to their holders. In other words, unlike other digital files, NFTs are completely unique, and only a single owner can have the rights to an asset. Owners also have the option to store additional data within their NFTs.
For example, since NFTs are often used for artwork, creators can add digital signatures into the metadata of the NFT. Even if they sell that NFT to someone, they will remain the authors of that piece, even though they no longer own it.
Different uses of NFTs
NFTs and blockchain have given creators, artists, and creative workers the ability to protect their work in the digital realm and monetize it more effectively. Instead of using middlemen to sell their work, they can do this directly with potential buyers. However, there are many other uses of NFTs.
Here are some of the most common applications.
NFTs and artwork
When it comes to art, the issues of authenticity and uniqueness have been present for a long time. In the past, it was easy to copy ideas and steal someone’s art online and claim it as your own. Not only does this make it difficult for artists to make money from their work, but it also decreases their art’s value.
The digital world has given people more access to art than ever, introducing new media such as movies, TV series, plays, music, painting, design, and so much more. However, this work has also continued to be undervalued.
Because of these historic challenges, there is now a massive wave of artists and dealers working with NFTs and using these tokens for safe trades while protecting the integrity of artists and their work.
NFTs in games
In 2020 and 2021, we’ve witnessed an explosion in the development and release of NFT games. Basically, these are typical video games running on blockchain networks with NFTs. What do the NFTs represent? They are all of the items that players collect and possess within the game.
This has opened up many opportunities in the gaming world, especially when it comes to the growth of play-to-earn titles. NFT games allow players to become true owners of various collectibles within games and to acquire assets that they can use to earn crypto, trade and benefit from their digital economy
DeFi non-fungible tokens
DeFi or decentralized finance is a brand new financial technology that uses distributed ledgers (blockchain networks). DeFi uses dApps to run transactions and control them on the blockchain, and this includes NFTs.
Operating with DeFi produces general benefits that NFTs offer, including no charges for transactions, secure asset storage in digital wallets, no approvals, and quick transfers. There are many different ways that DeFi and NFTs can be used together in business, politics, healthcare, and more.
dApps can be developed in a variety of ways to perform multiple functions and transactions under different conditions. This potential customization and flexibility are the future keys to the various uses of these two technologies.
Digital identity and NFTs
We mentioned earlier that NFTs are great for authenticating and verifying digital assets. However, there is also a lot of potential for future use of NFTs for verifying someone’s online identity. The truth is that all online users are already being tracked and targeted by various companies.
These companies have our personal information and use it to target us with ads and different media content that we might find appealing. Because of these developments, using NFTs to verify people’s identities online is being considered.
Even though there are potential downsides, this could lead to more visibility and transparency regarding who sees and accesses your data, where it is going, and how it is used. There’s also potential for limiting access to your data through NFTs with utmost traceability.
NFTs in metaverses
Metaverses are a brand new thing in the digital world. They are large digital environments that work on blockchain networks. Even Facebook is working on a metaverse project of its own. They allow technologies like AR and VR for the visual experience, and the decentralized world offers a number of opportunities for social interaction and business dealings.
NFTs are almost synonymous with metaverses. They represent users, their avatars, and all
of their assets in that world and record their actions. NFTs also allow users to use a variety of assets across different areas of the metaverse that are connected within a large ecosystem.
Digitizing other physical assets
Apart from being used for digital assets, NFTs also present a lot of potential in the physical realm. We are already seeing examples of attaching cryptographic assets to physical products. The goal is to have physical assets in the digital world as well through a secure connection.
This would allow owners to claim ownership of that asset both physically and digitally and authenticate sales. At the same time, potential buyers looking to buy second-hand items could transparently check prices online and any transaction history.
These are just some of the common uses of NFTs today, but there are many more new projects and applications currently being implemented.
NFTs have subjective value
When looking at a broader perspective, the value of all items, both digital and physical, is subjective. We create large ecosystems that are connected and derive value out of something. They are complex structures that can be explained by a simple old phrase – “beauty is in the eye of the beholder.”
Let’s explain this further by looking at an example. Let’s say that we have an economic system within an NFT game. Players earn skins that represent their achievements, skill, and rankings within the game. Those skins are NFTs and rightfully owned by players who have excelled at the game.
The more the other players want to succeed in the game and earn those skins, the more valuable the skins will be. At the same time, the fewer the number of those items is, the higher the value will be. Simply put, NFTs give owners the option to use their knowledge, skills, and creativity to create something and earn from it.
The NFT community role
Since the crypto hype began, the community was one of the key factors driving it forwards. It’s the same with the NFT sector. Many people invest their time in NFT projects, trade, invest money, collaborate, talk about ideas, collaborate, buy into projects, and so on.
This growing community contributes to the entire NFT sector in many different ways. First of all, as we mentioned before, the value of NFTs goes up because there are people out there who have an interest in them. At the same time, many people are willing to teach others and brainstorm ideas.
This makes the community more newbie-friendly, even though getting into this world isn’t simple. For example, 2.8% of internet users in the US own at least one NFT. The fact that the US ranks third in this statistic is even more encouraging.
Safety of non-fungible tokens
Since NFTs work on blockchain, smart contracts, and DeFi, they are generally quite safe. However, some malicious organizations and individuals impersonate exchanges, different platforms, and digital wallets to steal people’s data and their assets.
One of the key security threats is fake marketplaces that sell NFTs that don’t exist. At the same time, some new projects also don’t work enough on their security strategies and end up with vulnerabilities in their ecosystems, leading to hacks.
That’s why it’s important to vet a project before investing and stay updated while using your assets securely to minimize risks.
The NFT trend is here to stay, and it’s only picking up steam. The key to success is to get involved with the community and learn more about current developments because things are happening fast. Those who will be able to earn the most and establish themselves as leaders in the industry are the ones who find great opportunities early on.
(Reprinted by courtesy of Crypt Does)