What is an NFT?

5 min readJun 23, 2021

What is an NFT?

Decentralized Finance (DeFi) pushed yield farming to the forefront of crypto-based passive income strategies. However, there is one more rising star in this ecosystem that is about to explode in both value and popularity: NFTs.

If anyone ever tells you that NFTs do not have a future, remind them of how kids from the 90s used to collect Pokemon cards, Yugioh cards, football stickers, and all sorts of other collectibles.

People love owning items that depict the symbol of their favorite team, platform, or in this case, crypto project. As a matter of fact, the same kids that used to own these cartoon collectibles are now all grown up and actively participate in DeFi,

Obviously enough, there is an interest in not only owning NFTs but investing in them as well. The rise of NFT marketplaces in recent months has shown that there is a financial incentive to participate in this segment and that the community is drawn to it.

But what is an NFT exactly, and what is it used for? It may sound complicated at first; however, rest assured knowing that the technology behind them is extremely simple. Let’s take a deep-dive and find out what NFTs are, shall we?

NFTs explained

Non-fungible tokens (NFTs) represent a type of cryptocurrency that is unique and indivisible. Each NFT has different characteristics and values compared to another NFT, and they often come in limited quantities.

The best way to explain it is by taking a look at standard cryptocurrencies. Let’s say that you and another investor meet up. You both own exactly one Bitcoin. The coin that you hold has the same value and format as the other investor’s coin. If a potential buyer showed up and he wanted to buy some BTC, he could freely choose either person’s coins.

The apparent basis is that cryptocurrencies like Bitcoin are fungible. Their individual units (in this case coins) are entirely interchangeable. With NFTs, we have the opposite cases

Each NFT has a digital hash imprinted into its being that makes it different from another NFT. This is perfect for tracking Proof of Provenance (PoP), a type of documented evidence that establishes the real owner of a token and its entire transaction history. PoP helps with documenting ownership and protecting assets against alterations, forgery, and reproductions.

In 2021, developers still build NFT tokens using the Ethereum network’s ERC-721 token standard. The protocol’s smart contracts enable these tokens to be indistinguishable, used for payments, and overall create traits that support non-fungibility.The use of memes, fan art, and artwork in the crypto space has led to the rise in the popularity of NFTs. Users would tokenize their artistic renditions and sell them on an NFT marketplace. Others would then buy NFTs to create collections or for the purpose of investment speculation.

Use cases of NFTs

Although NFTs fill many niches and gaps in the blockchain industry, their dominant use case lies in tokenization.

Simply put, tokenization is the process of converting a material or abstract object into a digitally tradeable asset on a blockchain network. An NFT can therefore represent anything: a house, a car, a piece of work equipment, or even your smartphone. As long as you can relay ownership of something and verify it on a blockchain, the object can become an NFT.

Nowadays, NFTs are mostly used by artists who wish to tokenize their artwork and sell it on an online market. By doing so, creative souls can manage the ownership of their digital items, prove their copyright or IP, and fractionalize ownership of certain assets.

Let’s say that someone on Crypto Twitter creates a meme depicting Yearn Finance. If it gains enough momentum and engagement, the artist will naturally want to monetize his newly gained popularity and tokenize the meme. He creates an account on an NFT marketplace, verifies the ownership of his artwork, and sells it to other people for a certain price.

If someone attempts to steal the meme and sell it under his own name, the act of PoP will prevent him from doing so. Potential buyers will be able to verify the real owner of the artwork and discover that the thief’s token is a forgery. He can then be reported on the platform and, through a governance proposal (or another mechanism), have his account banned.

Most popular NFTs

As previously mentioned, the number of NFT platforms grows by each day. Rarible used to dominate the market, but things have changed with the arrival of new developers who sought to cash in on the innovative niche. Mere competition did a lot for the DeFi market, and non-fungible tokens went from being a tokenized meme jpeg to a real work of art.

Based on data from OpenSea, the top 5 NFT marketplaces processed a total of $25 million in ETH in the past seven days.

CryptoPunks, an algorithmically generated pixel art NFT platform, is currently ranked as the number one project based on trading volume. The project reached massive popularity as early as 2019, and with the rise of DeFi the next year, CryptoPunks only became bigger. Inspired by the ERC-721 token standard and the crypto universe, the project reached fame after being featured on The PBS NewsHour and the New York Times.

Hashmasks is an even newer NFT platform that is supported by only 70 artists from all around the world. The platform features a collection of more than 16,384 digital portraits created by Suum Cuique Labs, a company based in Switzerland. To make their NFTs scarcer, Hashmasks utilizes the Name Changing Token (NCT) feature that distributes unique names to each token.

Last but not least, we have the world-famous Rarible. Operated by a group of smart contract developers based in the U.S., Rarible is a community-owned NFT marketplace where artists can create, sell, and collect digital collectibles. The project gained hype on Crypto Twitter around September 2020 when developers and users alike began to invest in NFTs as an alternative to earning income from yield farming.

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Written by Vaulty.fi