What are Non-Fungible Tokens?
Introduction to Non-Fungible Tokens (NFTs)
Well, firstly, fungibility is the ability of any good or asset to be interchanged for another good or asset of a similar kind. Goods that are alike but not interchangeable are called non-fungible.
When it comes to tokens, fungible tokens are the digital assets that have been developed in a manner such that the whole or a fraction of the token is equivalent to the next. As mentioned in this guide on Bitcoin, every Bitcoin and its fraction is interchangeable. This makes Bitcoin a fungible token.
Non-fungible tokens on the other hand contain information that makes one different from the other, making them irreplaceable. These tokens became popular in October 2018 when more than 1 million cats were bred on the CryptoKitties’ platform. For example, each CryptoKitty is represented as a non-fungible token as the smart contract on which they are built has over 4-billion variations of phenotypes (what you see) and genotypes (what you don’t see). This makes each CryptoKitty different and unique from one another.
While cryptocurrencies have been around for a long time, NFTs have started gaining popularity as more and more use cases are created each day. There are many reasons why the NFT economy is bound to rise soon. We can see its future in the gaming industry, art industry and even the real estate businesses. Total sales of NFTs hit $100 million in early July 2020.
Well, we have discussed what non-fungibility means and how the NFTs are going to change the blockchain industry. But, to deal with NFTs, it is imperative to know how they are made and how they work. This blog has been written to explain everything you need to know about NFTs.
Let’s begin by discussing the characteristics of non-fungible tokens that distinguishes them from fungible tokens.
Fungible vs Non-Fungible Tokens
While tokens, in general, can be a representation of an asset, identity or information. These tokens have value and are often traded on various marketplaces, used for staking, for network governance and to get access to any utility that a Dapp may provide. Non-fungible tokens enter the picture here where they provide ownership rights to anyone who has the token.
NFTs are cryptographic tokens that represent unique assets and contain information that is different from what is contained in other tokens. This information cannot be altered and these tokens can therefore neither be divided into smaller denominations if needed. The information contained in each token is proof of the originality of the token on the blockchain network.
Non-fungible tokens can only be traded and held in whole, unlike Bitcoin which can be bought and sold in fractions. This is similar to assuming that you cannot own or trade two-thirds of the Mona Lisa.
What makes these tokens special and of value is their scarcity. While developers have the power to supply unlimited quantities of the token, specifying the limit only makes the token more attractive with FOMO (Fear Of Missing Out) leading many to purchase them, thus driving up their prices. Moreover, NFTs are not fungible like Bitcoin or other cryptocurrencies. This allows each NFT to have its price depending on its demand in the marketplace and the exclusivity of the token.
Remember that the value of a token is assigned by the people who consider them to be valuable. No one can determine the exact price of your CryptoKitty but only you and the buyer can do that.
While most fungible tokens are developed using the ERC-20 standard set on Ethereum, various frameworks have been set in place to create NFTs on several platforms, ERC-721 is the most prominent one among all of them. This is especially because of the prominence it received after the success of CryptoKitties. Other frameworks include ERC-1155 and ERC-998.
To Summarise -
What are NFTs used for?
NFTs are most commonly used as collectibles. One of the best examples being CryptoKitties. What made CryptoKitties unique? The fact that users could breed digital cats in different ways only to sell them if needed. Each cat has its unique features that distinguish them from the other. Other collectibles include tokenized versions of your favorite celebrities or sports stars, stamps, baseball cards and more. For those who don’t know, during the craze of CryptoKitties, one of the digital cats called Dragon was sold for a whopping 600 ETH which at that time was around $120,000.
Blockchain technology can be valuable for certifying physical and digital art. Artists use NFTs as a medium to sell their art while blockchain technology helps to ensure that the piece is the original one. This helps to fight the counterfeit of art and also helps to improve the lifestyle and living standards of the artists.
In normal cases, players in traditional games get access to different in-game content by purchasing them from the game itself. While these assets are sought after by many players, it is not possible to return or sell them or even gain access to them once the game is shut down. Gaming on the blockchain allows players to preserve these assets and even resell them in the form of NFTs. The price of assets might increase or decrease over time depending on their demand and supply. NFTs in gaming could be in the form of trading cards or traditional collectibles, memorabilia and even the avatars in the games.
While there are not many real-world assets that have been tokenized, it is possible to tokenize assets such as real estate, art, antiques and more. NFTs could also be used to generate and trade virtual assets such as Decentraland and Cryptovoxels that allow users to buy plots of virtual land.
Non-fungible assets like plane tickets, cars, houses have existed for a very long time. What is the need to tokenize them?
Need for Tokenization
Well, tokenization ensures that no one can steal the asset that belongs to you. In case of your Youtube channel, Youtube can delete any video that it wants to without informing you. Tokenizing only ensures that your video stays on the blockchain forever and there is no way it can be removed.
Again, a Youtube video that has been uploaded by one channel cannot be transferred to another channel in case the channel is willing to pay for it. Yes, the video of the channel can be uploaded on the new channel but cannot be transferred. Tokenization helps you to trade your unique tokens or videos for maybe some other videos or for some sort of compensation.
Especially in case of games, various assets on the games exist on independent developers’ servers. With blockchain technology, the assets can be incorporated and transferred to multiple servers, thus allowing for interoperability.
Lastly, there are copyright issues on Youtube that all artists and channel owners try to fight against. Wouldn’t it be good if the system does it for you? On the blockchain, counterfeiting can easily be fought. Assets cannot be duplicated or tampered with by frauds, or be lost if the application is shut down.
Advantages and Disadvantages of NFTs
The development of NFTs has led to the creation of new revenue streams in the field of gaming, art, sports and technology. People can now create and trade assets by tokenizing non-fungible assets. This will also help us in introducing people to the world of cryptocurrencies and tokens.
The transparency and security provided to the owners of NFTs are so simple that anyone in the world can now own or have access to different types of assets across the world. All this is done in a trustless manner where one party does not have to know the other party before they trade the NFTs.
But on the other hand, building and tokenizing assets is not as easy as we think it is. The Ethereum network got congested in 2018 due to the increased popularity of CryptoKittiies. Unless the scaling issue of Ethereum is solved and more reliable smart contract development platforms come into the picture, creating and maintaining NFTs on any network might be a challenge. Moreover, there needs to be enough technical knowledge to build such tokens as a flaw in the codes could lead to serious security breaches and hacks.
Another issue is the market for NFTs. Some very passionate people believe in NFTs and even invest their funds but this is not enough. Gamers especially face this challenge of not getting the expected profits, especially because of market crashes. While the CryptoKitties were being sold for an average of $60 in 2018, today most of them could be easily traded for less than $5.
NFT Projects
Since the launch of CryptoKitties, several other projects have been developed using ERC-721 token standard.
Some of the hottest NFTs we know are -
CryptoKitties
CryptoKitties is a blockchain-based video game that allows players to purchase, collect, breed and sell various types of virtual cats.
My Crypto Heroes
My Crypto Heroes is a turn-based battle game for smartphones and PC featuring blockchain technology. It features PvE and PvP battles. Users can pick their heroes, level them up, and battle against other players and monsters for items.
Rabbids Token
Rabbids Tokens are mischievous, unpredictable and elusive. They transform every time they get a new owner. Catching them is easy and for a good cause — you donate to UNICEF when you nab one from its owner!
The Sandbox
The Sandbox is a decentralized gaming platform where creators can make voxel assets and gaming experiences and monetize them on the blockchain. It features 3 main components: an NFT builder, a Marketplace and the Game Maker.
Gods Unchained
Gods Unchained is a triple-A quality game on the blockchain, backed by investors such as Coinbase.
SuperRare
SuperRare is a marketplace to collect and trade unique, single-edition digital artworks. Each artwork is authentically created by an artist in the network and tokenized as a crypto-collectible digital item that you can own and trade. SuperRare could be imagined as a combination of Instagram and Robinhood where artists post their creativity which gets tokenized and can be sold and later traded on the platform.
Cryptovoxels
Cryptovoxels allows players to build, develop and sell their property on the blocks and streets of cryptovoxels. Players can now own a property, with their ownership recorded permanently on the blockchain.
Conclusion
While the DeFi space has been under the limelight since the beginning of 2020, another sector in the blockchain space that has been gaining traction is the NFT industry. The Non-Fungible Token (NFT) industry even registered nearly $3.5 million in volumes over the last month. There are many websites and many more are creating their databases to follow all NFT marketplaces on different platforms.
Check out nonfungible.com to learn more about the database. As of September 28, 2020, the number of sales of NFTs was as high as 53217 with the volume of trades amounting to $6,594,667.62 with each NFT having an average price of $123.92
