Non-fungible tokens (NFTs) are digital assets that derive value from their scarcity and uniqueness.
Today, there is a growing need for secure possession and transfer of digital assets.
With the advent of cryptocurrencies, the concept behind digital assets, including security tokens, utility tokens, and privacy tokens, has gained popularity.
NFTs make it possible for digital assets to enjoy the same secure and trustworthy status as cryptocurrency transactions, courtesy of cryptographic and blockchain technology.
Introduction to NFTs
Before discussing what NFTs are and how they work, let’s first understand the difference between the terms ‘fungible’ and ‘non-fungible.’
Fungible assets are mutually interchangeable and can be replaced by another identical asset. For example, Bitcoin, Ethereum, or even traditional money are fungible.
Non-fungible assets are the exact opposite of that.
In simple words, non-fungible tokens or NFTs are digital assets stored on a blockchain network like Ethereum and cannot be interchanged.
Meaning, two NFTs can never be the same.
Let’s consider the example of Bitcoin. All Bitcoins carry a universal price. For instance, if one of your Bitcoins is valued at $58,000 at a particular time, another Bitcoin you own will also cost the same. Meaning, there is no way you can differentiate between two Bitcoins you own.
Unlike Bitcoin and Ethereum, each NFT is essentially different and has its unique properties.
Why do we need NFTs?
NFTs can be used to prove the ownership of both digital and physical assets through smart contracts. They are not traded on standard cryptocurrency exchanges. Instead, they can be purchased and sold on particular marketplaces like Rarible, OpenSea, and Enjin. It is impossible to counterfeit NFTs since they are permanently recorded on a blockchain network.
How do NFTs work?
Ethereum-based NFTs are ERC-721 tokens. ERC-721 is a free, open standard that paves the way for building NFTs on the Ethereum blockchain.
NFTs can be created on other blockchain platforms that support smart contracts. For example, NEO, EOS, and TRON support NFT standards.
Each NFT carries detailed attributes like the owner’s identity and rich metadata that helps determine digital ownership of an asset.
Examples of NFTs
Now that you know what NFTs are and how they work let’s understand what assets can qualify as NFTs. Anything digital can essentially be treated as NFTs. Your digital art, drawings, or music are typical examples of NFTs.
Does that mean NFTs are limited to digital assets? Not necessarily. It is possible that physical assets like property could be tokenized.
Following are some popular projects using NFTs:
- Officially licensed via the National Basketball Association, NBA Top Shot makes short videos of in-game moments available as an NFT.
- CryptoKitties is a game wherein each NFT represents a virtual cat that you can purchase.
- Rarible is a marketplace where you can purchase digital collectables such as arts and memes as NFTs.
NFTs make the tokenization of both digital and real-world assets possible. They could also be used in issuing certificates such as birth or death certificates and software licenses in the future.
The future of NFTs could benefit from the reliability, uniformity, and interoperability of blockchain platforms.