NFTs — A Mind-Blowing New Topic? Or An Old Concept With A New Name?
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Every 1 in 3 people who have heard of Crypto at some point in their life perhaps has also heard of the name NFT or Non-Fungible Token. But that doesn’t necessarily mean each one of those 1 in 3 people is an expert on the topic. In fact, there are still a lot of people who have no basic understanding of Crypto, Blockchain, or NFTs, even though they have heard of the terms. Surprisingly, many people who have actually heard of the terms at some point in their life think all these Crypto, Blockchains, and NFTs are just a part of a big scam, and they use the examples of the fraudulent transactions, and scams that have taken place in the crypto world in the past to back their claim.
Well, for starters, blaming the whole crypto and blockchain world based on these scams is not quite fair, scams have happened with the best banks in the world as well, but we still put our monthly salary and future savings in the banks without any hesitation.
I am not here to judge these people (of course!). And also discussing whole crypto and blockchain is out of the scope of today’s topic.
For readers who do not know what NFT is (or readers who want a recap) here’s a quick overview:
IPOS & ICOS:
The concept of NFT is not new actually. According to Investopedia, the concept of Initial Public Offering or IPO is:
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors.
So the general idea is to provide shares of a new company (or a new project of an existing company) in exchange for investments. The IPO is like the #101 in the codebook of Crowdfunding.
The concept of Initial Coin Offering or ICO is quite similar to IPOs, but it exists in the blockchain world.
A big difference between IPOs and ICOs is, that while in IPO the startups provide shares in exchange for investments (the return from the shares can be used anywhere, not necessarily in the crypto world), in ICO the startups provide a special Token to the investors. This token has no monetary value in the outside world (not even in the crypto world). But a consensus is maintained in a way that any such token holder will have certain facilities in this specific project after its launch.
The Drama Club Example:
I will explain the concept of the token with a real-world example. Suppose Anna and Maria are two school students who have decided to create a Drama Club for their school. The idea is, that they will hire 5–6 more performers, 2–3 musicians, and 1 narrator. Anna designed a flyer and asked Maria to publish it in the school’s weekly newsletter.
The concept that every member will have a free burger in the weekly meeting creates a kind of Invisible Token that will be accepted by anyone in the Drama Club (thus achieving Consensus). The interesting thing is, that this invisible token is not valuable in any other club in school, be it a Football Club, Painting Club, or even a second Drama Club!
In the following week, as the hiring is done and they can finally perform their first drama on stage, Maria finds a new problem.
The school committee requires a one-time deposit of 200usd for students to register as a club (in order to provide them with facilities such as the school theatre).
Now Anna designs a second flyer for the newsletter, asking fellow students to donate 10usd each. The first 20 contributors will have free access to attend all the Friday night dramas organized by the Drama Club.
It was quite clever of Anna, as not only did they manage to get the funds but they also got their initial customers (they got the free tickets, but the popcorns had a fixed price of 2.5usd for everybody!), which is really important in any business.
If we check really carefully, the second flyer comes with a second type of Invisible Token, now for the contributors.
Like the first token, the second token is also valuable only in the Drama Club. It cannot be used to have free entry in a basketball game organized by the Basketball Club.
Now that the idea of Token is clear to us, let’s finally move to NFTs -
What is NFT?
According to Wikipedia:
A non-fungible token (NFT) is a financial security consisting of digital data stored in a blockchain, a form of distributed ledger. The ownership of an NFT is recorded in the blockchain, and can be transferred by the owner, allowing NFTs to be sold and traded. NFTs can be created by anybody, and require few or no coding skills to create
Why do NFTs have such hype right now? Well, the answer lies in the name. NFT is short for Non-Fungible Token.
According to Cambridge Dictionary, the word ‘fungible’ means:
Easy to exchange or trade for something else of the same type and value
So the opposite term non-fungible basically means that the token is unique in the world and it cannot be traded. So effectively the owner of such a token holds something which no one else holds in the world. So it is kind of like holding an alien technology that came from a distant galaxy far far away!
As per reports, the market for NFT was worth $41 billion in 2021. According to Forbes:
Most of the NFT transactions have been done in the Ethereum mainnet. But a significant amount of transactions have also been done in blockchains such as Polygon, Solana, Cardano, and Tezos.
Though Ethereum has an upper edge over the other 2 networks, mostly since Ethereum came far earlier than the other 2, resulting in having enough time to build a proper user base, Solana and Polygon are also here for the long run. It is because the gas fee in these 2 networks is effectively less than Ethereum and the transaction speed is also quite faster.
Types of Ethereum-based NFT Tokens:
Before going any further we must understand what the ERC-20 is, which is not an NFT token actually.
ERC-20 is the most famous and most widely used token standard in the Ethereum blockchain. ERC-20 is the technical standard approved by the Ethereum community and is used for the purpose of token implementation in Ethereum smart contracts. To remove any sort of misunderstanding, ERC-20 is not itself a token, rather it is a token standard on the Ethereum blockchain used to create tokens. For example, many ICO tokens are ERC20 tokens.
ERC-20 defines a common set of rules that all Ethereum tokens must follow. ERC-20 defines six different coding functions:
total supply
balance of
allowance
transfer
approve
transfer from
For a more technical overview, visit the ERC-20 code by Openzeppelin:
ERC-721, unlike tokens generated from ERC-20, generates tokens that are non-fungible. Any token generated with the ERC-721 standard is a Non-Fungible Token or NFT.
The maximum number of NFTs out there are created with the ERC-721 standard. Since tokens generated with the ERC721 standard are non-fungible, that basically means any such NFT is unique and different from any other NFT.
The ERC-721 code comes with an Interface called IERC721 which initializes some specific functions:
balanceOf(owner)
ownerOf(tokenId)
safeTransferFrom(from, to, tokenId)
transferFrom(from, to, tokenId)
approve(to, tokenId)
getApproved(tokenId)
setApprovalForAll(operator, _approved)
isApprovedForAll(owner, operator)
safeTransferFrom(from, to, tokenId, data)
Perhaps the most important function in the ERC721 standard is the mint and its updated version safemint.
_safeMint(to, tokenId)
_safeMint(to, tokenId, _data)
_mint(to, tokenId)
The objective of Mint and Safemint is to get the token stored in the IPFS storage and publish it in the Ethereum mainnet, thus making it available for others to purchase. If the contract address of an NFT smart contract is listed in any NFT marketplace such as Opensea and Rarible, then one can see the already minted tokens for the specific collection.
Almost all of the NFT projects allow customers to mint more tokens from their website.
ERC-1155 token standard is almost similar to ERC-721 but with one major difference that one can transfer multiple number of tokens at the same time. In other words, multiple tokes can be transferred while running the ‘transfer’ function in the smart contract a single time. The benefit is that it reduces both transaction fees and load in the network.
The ERC721 balanceOf function refers to how many different tokens an account has, not how many of each. On the other hand, in ERC1155 accounts have a distinct balance for each token id, and non-fungible tokens are implemented by simply minting a single one of them.
ERC-1155 provides batch operation: it is possible to perform a transaction over multiple tokens with a single transaction. For this purpose the standard provides 2 functions:
balanceOfBatch: balanceOfBatch(address[] accounts, uint256[] ids) → uint256[]
safeBatchTransferFrom: safeBatchTransferFrom(address from, address to, uint256[] ids, uint256[] amounts, bytes data)
The standard also provides a batch version of mint:
_mintBatch(address to, uint256[] ids, uint256[] amounts, bytes data)
The similarity between Drama Club Example and NFTs:
i) In our Drama Club example, we have seen that the invisible tokens are only valid within the Drama Club.
The concept is quite the same for NFTs as well. Say for example, you hold a Wasted Dodo NFT and currently, you are enjoying every facility that comes for a Wasted Dodo NFT holder within the same community.
Now suddenly you hear from a friend of yours that she enjoys even bigger facilities by holding a C86 Cyborg NFT.
At this point, you cannot use your Wasted Dodo NFT to enjoy the facilities of C86 Cyborg. The only way is to buy a C86 Cyborg NFT. The situation is true for the reverse scenario as well. Even if your friend wants to enjoy the facilities that come with Wasted Dodo NFT, she cannot enjoy them while having a C86 Cyborg NFT. It is true for any NFT actually. Your Bored Ape NFT cannot give you any privilege to the Doodle community. (It was easier for me to explain with the specific NFTs from Wasted Dodo and C86 Cyborg in the next image as I hold both of these NFTs right now.)
ii) If we look really carefully, there is another big similarity between NFT and our Drama Club example. Say one certain day you are unable to go to the drama club to see a theatre. But you do not want your free pass to go waste. So you call Anna in the morning and tells her that your sister will attend the evening theatre instead of you. The idea is the same as transferring the ownership of an NFT to another person, thus allowing her to enjoy the facilities that come with holding the NFT.
iii) Let’s imagine, at some point, the Drama Club becomes really popular so that the token holders start selling their tokens (at this point it’s hard to imagine the token as invisible, let’s consider them a written contract) to other people. Since there are a very limited number of such tokens, students in the school start buying them for a good amount of money. The concept is similar to any NFT transaction. The people do not buy NFTs just for their ‘faith in the NFT world’ but to secure the ownership of something which can be considered a 1/1 asset in the world.
iv) Like the invisible token in the Drama Club, the NFTs are nothing but keys to entering a specific community. For example, an NFT from a specific collection can allow the holder to join podcasts, games, streams as well as events in real life and in the Metaverse.
Conclusion:
Now that we have a good understanding of what NFT is, we can go further to more technical detail and also the pros and cons of NFTs. My next posts will be related to some of these topics.
Cheers!
