NFT Simplified.
In short, Non-fungible tokens (NFTs) are uniquely encrypted tokens tethered to digital (and occasionally physical) content, serving as evidence of ownership. They exhibit diverse applications, encompassing art, digital collectibles, music, and virtual items in gaming scenarios.
Elevate your Web3 Gaming Experience with Decrypt’s Hub for Art, Fashion, and Entertainment. Cryptocurrencies, utility tokens, security tokens, privacy tokens... the realm of digital assets and their categorizations is proliferating and transforming parallel to cryptographic and blockchain advancements.
NFTs stand out as a swiftly expanding sector within the cryptocurrency industry. In this guide, we delve into their nature, functionality, and prevalent applications.
What exactly are non-fungible tokens?
Non-fungible tokens are digital assets with distinctive information encoded in smart contracts. It's this specific data that grants each NFT its uniqueness, rendering them irreplaceable by another token. Unlike banknotes, which can be easily exchanged, NFTs are incomparable as no two are identical.
For instance, one cannot be swapped for another, as they lack interchangeability. In contrast, Bitcoin is a fungible token; you can send and receive it in various amounts, including smaller units called satoshis, making fungible tokens divisible.
Typically, non-fungible tokens are indivisible, much like sending someone a portion of a concert ticket would have no value or redemption. However, in recent months, some investors have explored fractionalized NFTs, yet this remains legally ambiguous and may be perceived as securities.
Among the earliest non-fungible tokens were CryptoKitties collectibles. Each blockchain-based digital kitten possesses unique attributes, making the one received from someone else entirely distinct from the one sent.
The game revolves around collecting different digital kittens. The distinct details of a non-fungible token, such as a CryptoKitty, are stored in its smart contract and permanently recorded on the token's blockchain.
Although originally launched as ERC-721 tokens on the Ethereum blockchain, CryptoKitties later migrated to their dedicated blockchain, Flow, for easier accessibility to crypto newcomers.
What sets NFTs apart?
Non-fungible tokens possess distinctive characteristics, often associated with a specific asset. They serve as proof of ownership for a range of items, from digital game skins to tangible assets.
In contrast, fungible tokens, like coins or banknotes, are identical, sharing the same attributes and value during exchanges. Fun fact: In March 2021, digital artist Beeple achieved a record by selling an NFT collage of his work for $69 million, securing the third spot among the most expensive living artists at auction, following David Hockney and Jeff Koons.
How are non-fungible tokens used?
As well as representing digital collectibles like CryptoKitties, NBA Top Shot and Sorare, non-fungible tokens can be used for digital assets that need to be differentiated from each other in order to prove their value, or scarcity. They can represent everything from virtual land parcels to artworks, to ownership licenses.
They’re bought and sold on NFT marketplaces.While dedicated marketplaces such as OpenSea and Rarible have hitherto dominated the field, recently some of the leading cryptocurrency exchanges have begun to muscle in on the space. In June 2021, crypto exchange Binance launched its own NFT marketplace, while rival Coinbase announced its own plans for a NFT marketplace in October 2021, with over 1.4 million users signing up for the waitlist in the first 48 hours.
How do NFTs operate?
Contrary to fungible tokens like Bitcoin and ERC-20 tokens on Ethereum, which are interchangeable, Ethereum's non-fungible token standard, exemplified by platforms like CryptoKitties and Decentraland, is ERC-721.
Non-fungible tokens can also be generated on alternative smart-contract-enabled blockchains utilizing tools and support for non-fungible tokens. While Ethereum pioneered widespread use, the ecosystem has diversified, with blockchains such as Solana, NEO, Tezos, EOS, Flow, Secret Network, and TRON embracing NFTs.
These tokens, along with their smart contracts, enable the inclusion of detailed attributes like owner identity, rich metadata, or secure file links. The potential of non-fungible tokens to incontrovertibly establish digital ownership represents a significant advancement in our increasingly digital landscape. This progress could extend blockchain's promise of trustless security to the ownership or exchange of nearly any asset.
Blockchain, as it stands, poses an ongoing challenge in the evolution of non-fungible tokens, their protocols, and smart contract technology. The development of decentralized applications and platforms for managing and creating non-fungible tokens remains a complex task.
Additionally, establishing a standard proves challenging due to the fragmented nature of blockchain development, with many developers pursuing individual projects. Success in this realm may hinge on the establishment of unified protocols and interoperability. Looking ahead to
The future of NFTs
the initial surge focused on digital collectibles like CryptoKitties and profile picture (PFP) collections such as CryptoPunks and Bored Ape Yacht Club.
2021 saw explosive growth in the NFT space, with trading volumes soaring as NFTs began to trade hands for eye-watering sums. In March 2021, digital artist Beeple sold a single NFT artwork for $69.3 million at auction, propelling him into the ranks of the top-selling living artists overnight. CryptoPunks, Bored Apes and Art Blocks traded hands for millions of dollars. Scenting a new market, venerable institutions such as auction houses Christie’s and Sotheby’s have embraced NFTs, hosting sales and (in the latter’s case) launching its own NFT platform. Art galleries wrestled with the thorny question of how to display digital artwork.
Big money was accompanied by ever-bigger names, as artists and celebrities rode the wave of enthusiasm for NFTs.
Following the 2022 crypto crash, NFT sales plunged alongside the wider crypto market, with NFT floor prices and trading activity continuing to stagnate through 2023. But even as the market slumped, innovation within the space has continued.
NFTs have been used to represent a wide variety of digital and physical content, including items in video games, music, films, event tickets and more.
In September 2021, thriller film Zero Contact became the first feature-length movie to be released as an NFT; weeks later, pandemic-themed thriller Lockdown followed suit. In October, Tom Brady’s NFT platform Autograph launched a music vertical, with The Weeknd as its first signing.
For gaming, non-fungible tokens could be used to represent in-game items like skins, potentially allowing them to be ported to new games or traded with other players.
Video game companies have seized on the possibilities of NFTs, with Assassin’s Creed publisher Ubisoft becoming the first major gaming company to launch in-game NFTs in late 2021. Other game companies including Konami have experimented with NFTs, but many gamers remain skeptical of the technology; in December 2021, developer GSC Game World abandoned plans to include in-game NFTs in its game S.T.A.L.K.E.R. 2: Heart of Chernobyl, following a widespread backlash among fans.
NFTs are anticipated to play a pivotal role in the metaverse, a continual shared virtual space where users engage as 3D avatars. Entities like Meta (formerly Facebook), Adidas, Nike, and Samsung have entered the metaverse realm, and it's anticipated that more brands will join in. Platforms like The Sandbox within the metaverse already employ NFTs to signify virtual land plots and in-game items like clothing for avatars. The progression toward a unified and enduring metaverse is likely to leverage the interoperability of NFTs, empowering users to transfer virtual items across diverse metaverse platforms.
Non-fungible tokens introduce potential for creating security tokens and tokenizing both digital and tangible assets. Tangible assets like real estate could be tokenized to enable shared ownership. When these security tokens are non-fungible, ownership of the asset becomes transparent and traceable, even if only partial ownership tokens are traded. Expanding the use of non-fungible tokens could involve certification for qualifications, software licensing, warranties, and even official documents like birth and death certificates. The immutable smart contract of a non-fungible token serves as conclusive proof of the recipient's or owner's identity and can be securely stored in a digital wallet for convenient access and representation. In the future, our digital wallets may encompass evidence of every certificate, license, and asset we possess.
