What are Non-Fungible Tokens (NFTs)?
Non-Fungible Tokens (NFTs) are cryptographic assets on the blockchain that have unique identifiers and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged for equivalents. This is different from fungible tokens such as cryptocurrencies, which are identical to each other and thus serve as a medium for commercial transactions. 1
What you need to know
- NFTs are unique cryptographic tokens that exist on the blockchain and cannot be replicated.
- NFTs can represent real objects such as art and real estate.
- “Tokenizing” these tangible, real-world assets can increase the efficiency of buying, selling, and transacting while reducing the potential for fraud.
- NFTs can also be used to represent personal identity, property rights, and more.
Different constructions of each NFT have the potential for multiple use cases. For example, they are ideal for digitally representing physical assets such as real estate and art. Based on blockchain, NFTs can also be used to remove intermediaries, connect artists to audiences, or for identity management. NFTs can eliminate intermediaries, simplify transactions and create new markets.
Much of the current market for NFTs is focused on collectibles such as digital artwork, sports cards, and rare items. Perhaps the most hyped room is the NBA Top Shot, a place to collect irreplaceable tokenized NBA moments in digital card form. Some of these cards have sold for millions of dollars. Recently, Jack Dorsey of Twitter (TWTR) tweeted a link to a tokenized version of the first tweet, in which he wrote: “Just set my twttr.” The first tweet’s The NFT version sold for over $2.9 million.
Learn about NFTs
Like physical currencies, cryptocurrencies are fungible, meaning they can be traded or exchanged with each other. For example, one bitcoin is always worth the same as another bitcoin. Likewise, one unit of ether is always equal to another. This fungibility property makes cryptocurrencies suitable as a secure medium of exchange in the digital economy. 5
NFTs change the crypto paradigm, making each token unique and non-fungible, making it impossible for one non-fungible token to be similar to another. They are digital representations of assets and are likened to digital passports, as each token contains a unique, non-transferable identity that distinguishes it from other tokens. They are also extensible, which means you can combine one NFT with another to “grow” a third unique NFT.
Just like Bitcoin, NFTs also contain ownership details for identification and transfer between token holders. Owners can also add metadata or properties to the content in the NFT. For example, tokens representing coffee beans can be classified as fair trade. Or artists can use their own signature in the metadata to sign their digital artwork.
NFTs evolved from the ERC-721 standard. Developed by some of the people responsible for ERC-20 smart contracts, ERC-721 defines the minimal interface required to exchange and distribute game tokens – ownership details, security, and metadata. The ERC-1155 standard furthers this concept by reducing the transaction and storage costs required for NFTs and consolidating multiple types of non-fungible tokens into a single contract.
Probably the most famous use case for NFTs is Cryptokitties. Launched in November 2017, CryptoKitties are digital representations of cats with unique identifiers on the Ethereum blockchain. Each kitten is unique and has a price of one ether. They reproduce with each other, producing new offspring with different characteristics and ranks compared to their parents.
Within weeks of its launch, Cryptokitties gained a following who spent $20 million worth of ether to buy, feed, and cultivate. Some enthusiasts have even spent over $100,000 on it. Recently, the Bored Ape Yacht Club has drawn controversial attention for its high prices, celebrity following, and the high-profile theft of some of its 10,000 NFTs.
While the Cryptokitties and Bored Ape Yacht Club use cases may sound trivial, other use cases have more serious business implications. For example, NFTs have been used in private equity transactions and real estate transactions. One of the effects of activating multiple types of tokens in one contract is the ability to provide custody services for different types of NFTs (from art to real estate) in a single financial transaction.
Why are non-fungible tokens important?
Non-fungible tokens are an evolution of the relatively simple concept of cryptocurrency. The modern financial system consists of a complex system of transactions and credit for a variety of assets, from real estate to loans, advances to art. By enabling digital representations of physical assets, NFTs take a step forward in reshaping this infrastructure.
Of course, the idea of digital representation of physical assets is not new, nor is the use of unique identifiers. However, when these concepts are combined with the tamper-proof blockchain benefits of smart contracts, they can be a powerful force for change.
Perhaps the most obvious benefit of NFTs is market efficiency. Converting physical assets to digital assets simplifies the process and eliminates intermediaries. NFTs represent digital or physical artworks on the blockchain, eliminating the need for agency and allowing artists to connect directly with their audiences. You can also improve business processes. For example, an NFT for a bottle of wine makes it easier for different actors in the supply chain to interact with it, helping to track provenance, production, and sale throughout the process. Consulting firm Ernst & Young has developed such a solution for one of its clients.
Non-fungible tokens are also great for identity management. Consider the case of physical passports that must be presented at each entry and exit point. By converting individual passports into NFTs with their own unique identifiers, immigration and exit procedures for jurisdictions can be simplified. In an extension of this use case, NFTs can also be used for identity management in the digital realm.
NFTs can also democratize investing by dividing up physical assets such as real estate. Dividing digital real estate assets among multiple owners is much easier than physical assets. This tokenized ethics need not be limited to real estate; it may extend to other assets, such as B. art. A painting doesn’t always have only one owner. Its digital equivalent can have multiple owners, each responsible for a small portion of the painting. This arrangement can increase its value and income.
The most exciting opportunity for NFTs lies in the creation of new markets and investment vehicles. Imagine an attribute divided into multiple areas, each containing a different attribute and attribute type. One of the departments might be next to the beach, while another is in a recreation center, and another is a residential area. Depending on its condition, each property is unique, priced differently and represented as an NFT. Real estate transactions are a complex and bureaucratic affair that can be simplified by incorporating relevant metadata into each individual NFT.
Decentraland, a virtual reality platform on the Ethereum blockchain, has implemented such a concept. As NFTs become more complex and integrated with financial infrastructure, it becomes possible to implement tokenized batches of the same concept (with different values and locations) in the physical world.
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