Arcana’s Guide to Understand NFTs

NFTs, short for Non Fungible Tokens, are now some of the most discussed digital assets in the realm of crypto and blockchain. It is an understatement to say that NFTs are a rage, considering the fact that the third quarter of 2021 alone saw a trading volume of $10.67 billion. While the past year has been a phenomenal one for Blockchain and other cryptocurrencies at large, NFTs have grown wildly popular in mainstream media since the March of 2021. That was around the time when the auction house Christie sold digital art for a record breaking price of $69.3 million. Called “Everydays: The First 5,000 Days” and created by graphic designer Mike Winkelmann, it was a collage of 5,000 pieces of digital art he had created so far since 2007.

On one end, we have a huge group of enthusiastic investors going gaga over NFTs, while on the other hand, some are still unsure about what NFTs are, how they work, and the technology behind them. Whether you’re looking to understand how NFTs came into being, or why they are being traded the way they are, you are at the right place. Our guide to NFTs starts off by exploring the fundamentals of NFTs, the underpinning technology, and use cases. Read on.

Tokens & Fungibility

If one were to understand what NFTs fundamentally are, we have to go back to the “T” of NFTs– tokens! Simply put, tokens are an asset which can be either held or traded. Uniswap and Polygon are two popular examples of tokens in the crypto world. It is worth noting that tokens are largely different from cryptocurrencies. While cryptocurrencies are a medium of exchange, tokens are an asset. Owning a crypto token is much akin to owning shares of a company listed on the stock exchange. There are, moreover, various kinds of tokens in the crypto world, such as utility tokens and security tokens.

Types of crypto tokens and a few examples.

Now that you’ve understood what tokens are, we walk you through another concept that you need to understand before piecing together what an NFT is– “fungibility.”

Here’s a simple internet definition of fungibility: “It is the interchangeability of a good or asset with other specific goods/assets of the same type, simplifying trade and exchange processes.”

In essence, a fungible token is not unique and can be divisible. The fiat currency we all use, for instance, is fungible. 1$ holds the same value no matter where you go, and can also be exchanged for another dollar. If you apply this principle to fungible crypto tokens, you would understand that they are non-unique and hold the same value across the board. What if a token is unique and non-divisible? It becomes an NFT, or a non-fungible token.

NFTs are non-fungible cryptographic assets that are tied to a blockchain to authenticate the assets they represent. Starting from art and collectibles to real estate, NFTs are used for representing the ownership of unique items. They are secured and backed by a blockchain (in most cases, Ethereum). What this means is that the record of ownership of every NFT is traceable and non-modifiable.

NFTs & How They Came into the Picture

If one were to trace back the history of NFTs, it becomes clear that they have been around since 2012. Their existence can also be tied to the colored coins concept that emerged on the Bitcoin blockchain. More on colored coins here.

Apart from colored coins on the Bitcoin blockchain, few of the earliest NFTs have also been found on the Ethereum blockchain as well. CryptoKitties, for instance, is one of the first real-world use cases for NFTs and has been on the Ethereum blockchain since 2017. It is a digital representation of several cats, each with their own identity, on the Ethereum blockchain. Now these kitties also reproduced among themselves and gave rise to new kitties, or new NFTs rather. In a matter of few weeks from launch, CryptoKitties earned a huge fan base with close to $20 million worth of Ether spent for these NFTs.

Although CryptoKitties’ use case doesn’t sound like a solid opportunity for NFTs, it has paved the way for multiple applications and uses. Cut to the present day, NFTs are everywhere– starting from artwork to real estate.

Technical Underpinnings of NFTs

Before we move on to the technology behind NFTs, it is worth revisiting a slightly tech-heavy definition of an NFT.

One can define NFTs as a cryptographic asset on a blockchain. Each NFT comes with its own identification code and metadata to prove its uniqueness. It is said that NFTs have evolved from the ERC-721 standard, which is also known as the Non-Fungible Token standard. The ERC-721 standard ensures that each token (or NFT) is unique and different from any other token from the same smart contract.

To put things into perspective, let’s dive deeper into the process of minting an NFT: On a higher level, it can be said that NFTs are minted when the code in a certain smart contract is executed. So as a result, a new block is created, the information, including ownership, is validated, and then recorded onto the blockchain.

In the above process, smart contracts play a key role as they are the ones that conform to standards, such as ERC-721, and are responsible for assigning ownership and managing the transferability of the NFTs.

So whenever someone purchases an NFT, the ownership of it is transferred to their respective wallets through their public address. While the NFT validates that a user owns a unique, original copy of the digital file, their private key will be a proof-of-ownership of their NFT. Now, the authenticity of the digital asset from which NFTs are issued can be validated through the public key of the content creator.

What an NFT comprises!

Use Cases

Starting from digital content to domain names and physical items, NFTs can be used for a wide range of purposes. That being said, one of the biggest use cases of NFTs is found in the digital content creation space. This is because middle men and intermediary platforms eat into the earnings of content creators.

But through NFTs, a creator-centric economy is unlocked as ownership becomes a deeply ingrained aspect of the content. Creators no longer need intermediary platforms such as social media to showcase their content while letting the said platforms profit off of their creation. Even piracy can be combated with the help of NFTs as they always carry the original creator’s information. What’s more, this information about the creator (their public address), is made a part of the metadata of the NFT– which is both traceable and non-modifiable. As a result, creators earn royalties whenever their content is sold and re-sold too.

Apart from artwork, NFTs are also revolutionizing the gaming industry at large. This is because NFTs allow game developers to provide ownership records for an array of in-game assets. Such an in-game economy is profitable for both the developer and players. Decentraland is an apt example.

For more information on other use cases of NFTs, you can check this article out.

Lastly

Scarcity and rarity are two aspects that come into play when one purchases an NFT. Being a unique part of a whole, NFTs are rare, which makes them collection-worthy for many. Much like any other collectible, NFTs tend to command popularity, and in some cases, enjoy a massive increase in their value too. If you are looking to purchase NFTs, you can do so via a large number of online marketplaces, such as Rarible, SuperRare, and OpenSea. As most of these NFTs are on the Ethereum blockchain, they can be bought with Ether.

About Arcana Network

Arcana Network is a decentralized storage layer for Ethereum, offering storage for DApps built on EVM compatible chains, such as Ethereum, Binance chain, and Polygon (Matic). But Arcana doesn’t stop at storage. To fully realise the privacy and data ownership benefits of decentralized storage, you need a suite of services, which are currently not decentralised. Arcana fixes this with its Privacy Stack. Arcana’s Privacy stack offers Decentralized Storage that is end-to-end encrypted, along with Non-custodial Key Management Services (KMS) and Decentralized Identity and Access Management.

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