Pandora Protocol 101 — A Layman’s Guide to NFTs
NFT’s or Non-fungible tokens have been a trending topic of discussion in the crypto world. With their popularity on the rise, it is predicted that NFTs are here to completely transform markets by revolutionising the way assets are transferred and used. The market cap value of the NFT industry has moved leaps from $31 million in 2017 to an anticipated $315 by the end of 2020. But what is it about NFTs that make them so popular? The simplest answer lies in opening up several monetising and branding opportunities for brands and individuals as authentic, legitimate, and safe to trade assets. To understand this better, let us find out more about what NFTs are and how they are used.
What does the term ‘Non-Fungible’ mean?
The term fungibility is an asset’s property to be exchanged with another asset of a similar type or category. It indicates that the interchangeable assets are equal or nearly equal in value. A simple example of a fungible asset would be a currency note. A $5 note can be exchanged with another $5 or five $1 notes as they clearly hold the same value at all times.
On the other hand, non-fungible assets have unique properties. They are not easily interchangeable as each one has its own special features. For instance, a pre-owned car may be up for sale, but we cannot say that it is the same as every other pre-owned car of the same model. Its value is determined by several factors like the initial purchase time and how the previous user handled it. Paintings, houses, rare gems are more examples of non-fungible assets.
It is important to note that sometimes fungibility is subjective; for instance, a rare stamp holds a much higher value in the eyes of a stamp collector than it would for anyone else.
NFTs and Blockchain
Blockchain technologies are best known for the creation and distribution of tokens like bitcoin.
Cryptocurrencies like Bitcoin are fungible, i.e., they are interchangeable with one another. On the other hand, social media handles, in-game items, domain names are examples of digital assets that are non-fungible.
NFTs create a digital certificate of sorts for such assets, whose ownership can be traced on a blockchain. These assets can further represent anything from digital goods within virtual worlds to physical assets in the real world.
Blockchains provide a medium for NFTs to be stored and distributed. They facilitate complete transparency when it comes to ownership, transaction details or embedded metadata within the tokens. They enable users to own and manage non-fungible assets, consequently revolutionising the relationships between creators and users. This, in turn, gives rise to several industries around digital assets and NFTs.
Prominent Features of Blockchain-based NFTs
As we’ve discussed so far, we know that non-fungible assets are all around us. With blockchain, users are given all permissions concerning ownership and management of these assets. Let us now look at some prime features of blockchain-based NFTs.
Conventionally, digital assets do not have a unified representation in the digital world. Domain names are represented in a very different manner from other assets, say in-game collectables. When NFTs are represented on public blockchains, developers can create common, reusable, and inheritable standards applicable to all NFTs.
These standards form the basis for management, transfer, and ownership of assets, upon which advanced features such as standards for displaying NFTs can be added. One can compare them to other existing protocols in the digital world, such as HTML/CSS formats for content on the web or the PNG and JPEG formats for pictures.
As blockchain facilitates the liberal movement of NFTs across various platforms, a newly launched NFT project becomes accessible through various platforms or wallet providers. They can be traded and viewed on a huge assortment of virtual marketplaces. This interoperability can be attributed to NFT standards that provide consistent and dependable interfaces authorised for reading and writing data.
- Ensuring Immutability and Scarcity
Immutability refers to the properties of NFTs that cannot be altered after they are issued. Developers can ensure that the key properties stay enforced, and they can also set limits on the supply of NFTs. The scarcity of certain assets makes them more valuable, and developers can make sure that they remain scarce.
The interoperability of NFTs facilitates free trade in a plethora of marketplaces. This is one of the most riveting features as it allows users to trade items outside their original environments. The users can easily make use of trading platforms and techniques to trade using any currency. This feature highlights the shift from a traditionally closed economy to an open and free-market economy. It means that creators and developers do not have to be responsible for everything from sourcing resources to pricing. They can instead let free markets manage a portion of their economy.
The easier it is to trade assets, the higher the liquidity. As NFTs are instantly tradeable, the path for higher liquidity is paved. Non-fungible assets are exposed to an extensive range of consumers as NFT marketplaces can cater to a wide variety of users. Therefore through almost instantly liquefiable tokens, NFTs expand the market by increasing the demand for digital assets and their trading potential.
Standards for Non- Fungible Tokens
We know why standardisation is a compelling feature of blockchain-based NFTs. Standards play a significant role in the scope of NFTs; they assure users about the behaviour of assets and describe how interactions will work. Most NFT tokens are built using Ethereum token standards ( Ethereum is a global, decentralised blockchain ). Let us now look into some of the existing NFT standards
ERC721: the first NFT Standard
ERC721 was the very first standard for representing non-fungible digital assets. It was used for Cryptokitties, a blockchain game developed on Ethereum. Cryptokitties mark an important milestone in the history of NFTS as they were the first project where blockchain-based NFTs were employed.
The ERC721 standard includes two relatively simple methods. The first involves providing a mapping of unique identifiers of assets to addresses representing the owner of that specific identifier. Secondly, it provides an authorised way to transfer these assets with the ‘transferFrom’ method. In a nutshell, ERC721 has a way to check ownership of things and facilitate their movement.
This standard is an inheritable Solidity smart contract, which means developers can build ERC721 compatible contracts by importing them from the OpenZeppliin library.
The ERC1155 standard was developed by the Enjin team(Enjin is a platform for integrated blockchain products). The distinguishing feature of this standard is that it brings the concept of semi-fungibility to the world of NFTs.
With this standard, each identifier represents a class of assets instead of one single asset. Semi-fungibility implies that the assets are relatively fungible within their classes but are non-fungible concerning other classes. For instance, let’s say an identifier represents ‘cards’. The ‘transferFrom’ method would enable a user to transfer a specified amount of these cards from one account or wallet using the ‘card’ ID.
The main advantage of using ERC1155 is its efficiency. Compared to the ERC721, it reduces the effort required to alter contracts for many items belonging to the same class. In other words, a single operation can be performed on a large number of items at once. The drawback here is that with such an approach, one can no longer trace an individual asset among a group.
The ERC1155 can be used to build ERC721 assets. The individual assets would have separate IDs and quantities. Therefore, due to its flexibility, ERC1155 is widely adopted as the preferred NFT standard.
Ethereum standards may be the most widely used, but several other NFT standards emerge on other chains. The non-ethereum standard was pioneered by Mythical Games, which focuses on a feature-rich and heavy cross-chain standard. Other blockchain platforms like Neo and Tron have also come up with their own NFT standards to encourage developers to create and host NFT on their networks.
Why do People Invest in NFTs?
Supply and demand are the key drivers for pricing with regard to all assets. The unique and scarce nature of NFTs makes them very popular among investors and collectors who are willing to shell out a lot of money for them. Thus, NFTs open up several opportunities for their owners to capitalise on their investments.
NFTs have the potential to be the building blocks of a new blockchain-fueled digital economy. They can be applied in various fields, and they even allow fractional ownership. Storing data of ownership on blockchains increases data integrity, security, and privacy. Transfers are made to be convenient and trustless. Therefore trading assets becomes simpler, leading to an enormous change in the traditional economy.
We at Pandora is providing the platform where any real-world asset can be traded in a trustless and frictionless way via NFT. We are leveraging the existing blockchain infrastructure and building a middle-layer Pandora protocol on top of it. This middle-layer will help any real-world asset get tokenized in NFT, which can be traded globally anywhere.
The Limitless Scope of NFTs: Where do NFTs exist, and what assets do they represent?
Given that NFTs are basically digital representations of ownership and cover a wide range of areas, including gaming and art. NFTs have incredible potential because when combined with a blockchain like Ethereum, anyone can create or own them.
Just as cryptocurrency is more efficient than traditional payment modes, NFTs are a lot more efficient than conventional trading methods.
Most of the NFT related activity happens on the Ethereum ecosystem. However, several smart contract platforms enable users to mint NFTs, irrespective of whether they have the development skills to establish a contract.
In the gaming world, the viral success of cryptokitties led the way for several other gaming platforms to use NFTs with their in-game items. Decentralised marketplaces are more efficient while it comes to trading these items, and the transaction cost is minimal. NFT marketplaces like OpenSea provide a platform for players to trade their tokens. They allow players to make actual money from their in-game collectables
The world of digital art is another area that NFTs have revolutionised. The ability to prove ownership of a piece of art and display it on a platform is what makes it valuable. NFTs make this possible for digital art. Digital art can be displayed and traded in virtual art galleries within platforms like Cryptvoxels.
While digital art can be easily replicated in the form of something as simple as a screenshot, NFTs prove the original ownership and authenticity. There may be several copies of a painting in the physical world, but not one is as valuable as the original. Similarly, NFT platforms ensure that the ownership history of digital art is easily verifiable
When it comes to the potential of NFTs, the surface has barely been scratched. In addition to trading, NFTs also support fractional ownership of assets. They can be used as collateral in taking out loans, and they can also be combined with DeFi (decentralised finance) blocks. These are just a few applications of NFTs.
The Future of Non-fungible Tokens
In addition to the applications and instances discussed, NFTs can be adopted across an even wider spectrum of applications. NFTs are fairly new, and the technology behind them is still going through several upgrades. As with every emerging technology, certain limitations can be worked upon, like creating more efficient applications that support larger transactions.
That being said, the future looks quite promising for NFTs as the total market has already crossed $100 million as of July 2020. Experts predict that a large section of new crypto users will use NFTs as an entry point
With the decentralised finance market surpassing $4 billion, the NFT space is sure to see exponential growth. With more traditional assets being tokenised, NFTs could be the building blocks of the new-age digital economy.