NFTs, Blockchain & Decentralization: Explained
NFTs (Non-Fungible Token) are tokens that are used to represent ownership of digital assets. NFTs tokenise Games, Music, Art, Collectibles etc.
NFTs can only have one owner at a time and are secured by the blockchain.
NFT (Non-Fungible Token) is a non-interchangeable unit of data stored on a blockchain that can be traded. Much of the current market for NFTs is around collectibles such as digital arts, games and music.
NFTs function like cryptographic tokens, but unlike cryptocurrencies, NFTs are not mutually interchangeable, hence not fungible. Similar to Bitcoin, NFTs also contain ownership details for easy identification and transfer between token holders. Owners can also add metadata or attributes pertaining to the asset in NFTs.
NFTs & Blockchain:
A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format.
Top Blockchain platforms:
NFTs are created when blockchains string records of a cryptographic hash, a set of characters identifying a set of data, onto previous records, creating a chain of identifiable data blocks.
This cryptographic transaction process ensures the authentication of each digital file by providing a digital signature that is used to track NFT ownership. The distributed nature of blockchains makes NFTs difficult to hack, and the innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
How do NFTs work?
NFT ownership is managed through the unique-ID and metadata properties, which cannot be replaced by any other tokens. NFTs are minted through smart contracts through which ownership and trading rights are assigned.
Standard protocols describe how to build an NFT on different blockchains. For example, ERC-721 is an open standard that describes how to build NFTs on EVM (Ethereum Virtual Machine) compatible blockchains. ERC-721 is a standard interface for NFTs, and it has a set of rules which make it easy to work with NFTs.
Advantages for NFT creators include:
- Verifiable ownership of assets
- Creators can sell their assets on any platform
- Creators can determine the scarcity of the asset and earn royalties every time the asset is traded
What is minting?
The minting process involves the following steps:
- Creating a new block
- Validating the information
- Recording information into the blockchain
How to buy NFTs
NFTs are created and sold via marketplaces. Most of the marketplaces allow users to create and trade NFT collections along with integration to multiple crypto wallets.
The number of NFT art sales surpassed 1.5 million in a single month in 2021. Gaming is the NFT sector with the highest number of sales, and NFT marketplaces are recording an YoY growth of 120% from the last two years.
Some top NFT marketplaces are:
Decentralization: Why it matters to NFTs
In blockchain, decentralization refers to the transfer of control and decision-making from a centralized entity (individual, organization, or group) to a distributed network.
What is DeFi ?
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. DeFi removes the control banks and institutions have on money, financial products, and financial services. By decentralizing the management and access to resources in an application, greater and fairer service can be achieved.
Benefits of Decentralization:
- Improved data reconciliation: Decentralized data store ensures every entity has access to a real-time and shared view of the data. It prevents data loss.
- Optimized resource distribution enables better performance and consistency for services
- Reduce points of weakness in systems where there may be too much reliance on specific services, reducing the impact on services in case of systemic failures, corruption and periodic outages.
To conclude, in this blog post we glanced over the detailed introduction and concepts of NFTs and how NFTs are connected to blockchain and decentralization, elaborating the relationships and benefits. I hope you enjoyed reading this article, and you know the drill — clap, comment and share.
Cheers, Karthik
