NFTs and Blockchain (Part 46)
Welcome to the 46th part of the 100-part series on Blockchain.
NFT stands for “Non-Fungible Token.” To understand NFTs, firstly, it is important to understand the difference between non-fungible and fungible.
You can think of something that is fungible as interchangeable while still maintaining the same value because its value defines them rather than its unique properties. For example, in fiat currencies like US dollars, a 10$ note can be exchanged with another 10$ note or even can be swapped for two 5$ notes. Cryptocurrency coins like Bitcoin, Ethereum, etc are also fungible because one coin can be exchanged for any other coin. They hold the same market value. It doesn’t matter from whom a BTC was purchased since all BTC units have the same functionality and are part of the same network. The only thing that changes is a record on the Blockchain registering the transaction.
On the other hand, non-fungible items are not interchangeable because they have unique attributes attached to them. You can’t trade one non-fungible item for a different item; otherwise, you would have something completely different. For example, a painting like the Mona Lisa.
What are NFTs, and how are they created?
Non-fungible tokens or NFTs are digital tokens that can be thought of as certificates that represent ownership of unique digital non-fungible items. You can’t trade one token for a different token, as you’d have something completely different. An NFT is created or “minted” from digital objects that represent both tangible and intangible items, including art, GIFs, videos, tweets, collectibles, music, and even real estate. NFTs are created to protect digital files from getting replicated and used without the permission of the original creator.
How are NFTs created?
To create an NFT, a creator first creates a digital asset, which could be an image, a video, a tweet, a domain name, a game, a digital trading card/collectible, artwork, a meme, or anything else that lives in the online world. The creator then creates a token or NFT using smart contracts on the Blockchain platform like Ethereum, Cardano, or Solana that supports smart contracts. The smart contracts on Blockchain are written using different standards, such as the ERC-721 standard for NFTs.
When you create an NFT, it is known as minting. You are basically writing the underlying smart contract code. Each token is unique and contains information about the digital assets, including the token name, the token symbol, and a unique token ID/hash that proves the authenticity of the NFT.
Additionally, these tokens cannot be traded or exchanged equivalently like cryptocurrencies. NFTs give exclusive ownership rights, which means they can have only one owner at a time.
How are NFTs stored?
It is very difficult to use encryption to store something as complex as a digital photograph, a digital painting, or a music album inside one of the smart contracts or blocks of data on Blockchain itself. Because the common media files such as JPG, PNG, GIF, MP3, etc. associated with NFTs are so large, the cost of encrypting and storing them on the Blockchain is exorbitantly expensive and consumes a lot of electricity.
NFTs exist in two parts — the smart contract and the metadata. The smart contract exists on a Blockchain, typically Ethereum (although that is changing rapidly), and contains a set of rules or standards that facilitates the transaction and serves as a digital description of the content. The smart contract also includes a link that points to the server that stores the digital asset somewhere else on the internet. Metadata is data that describes other data of the digital asset. Metadata helps servers find, process, and store data more efficiently. But the actual digital asset is what people value. It’s what you see and hear, like a profile picture, digital art, or a song. The metadata also describes characteristics of an NFT like its name, color, size, shape, etc. The smart contracts also specify certain rules about trading the NFTs. This could, for example, be the percentage of royalties they receive for every subsequent sale. Basically, smart contracts are what make each NFT unique and valuable.
The common misconception is this media is stored on the Blockchain, which typically isn’t the case. Sometimes, the media is stored on a centralized server or computer. For example, the image associated with an NFT may be stored on an Amazon Web Services (AWS) cloud storage solution. The problem with centralized storage is in any case if the servers shut down at any time, then the files stored would be lost and become inaccessible. In this scenario, the link contained within the smart contract of your NFT would point to nothing. Also, the files stored on centralized servers are susceptible to hacking. If somebody alters that URL, your precious digital asset JPEG, or song, is gone forever. This is in direct conflict with the immutable nature of the Blockchain. Collectors and owners of NFTs generally buy them, believing that what they’re getting will last forever and cannot be altered.
To help solve this issue, there are popular alternatives to centralized storage for storing NFT media like InterPlanetary File System or IPFS. IPFS is a protocol and peer-to-peer network for storing and sharing data in a distributed file system. A unique hash is generated for every uploaded file on the IPFS server, which is then stored on the smart contract. Decentralizing file storage helps guarantee that digital assets such as artwork, songs, etc., associated with your NFTs will be as immutable as the smart contracts that live on the blockchain.
In simple words, the content of NFTs, such as the physical art or image file, isn’t actually stored on the Blockchain; only the smart contract stating that the NFT exists is recorded on the Blockchain. The content is stored elsewhere, such as a centralized server or decentralized IPFS.
Where are the NFTs stored after purchase?
So if an NFT is stored on the Blockchain, where does it go after you purchase it? Technically speaking, once you purchase an NFT, it doesn’t go anywhere; it simply remains on the Blockchain indefinitely. However, the change of ownership is recorded on the Blockchain. Your wallet address will be the new owner in the smart contract of that NFT. It means that ownership of NFT with the old owner’s wallet address is replaced by your wallet address. The smart contract is also transferred to your wallet like MetaMask, and you become the new owner. To understand it better, let’s take the example of land. A land deed exists as a paper document that represents ownership of physical land. So, what happens if the landowner decides to sell their land to someone else? The land deed, which is a legal document, is used to transfer ownership of real estate from the seller to the buyer. The document still exists as a document, it is simply signed over to the new owner. So legally, the buyer becomes the legal owner of the land.
An NFT isn’t much different, the main difference is that the contract is digital and lives on a decentralized public ledger, i.e., the Blockchain as opposed to a piece of paper.
The smart contract stored in your wallet points towards the link where the digital assets associated with your NFT are stored. The wallet is secured by a private key, and to access your NFTs, you must access your wallet through the private key. Thus, you are solely responsible for controlling your wallet address via your private key.
Also, an NFT can be purchased, sold, or traded by having access to the wallet address.
If you liked this article and want to know more about Blockchain, NFTs, Metaverse, and their applications, click the below link.
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