The Ultimate Guide To Non-Fungible Tokens (NFTs)

The Ultimate Guide To Non-Fungible Tokens (NFTs)

With the Bitcoin creation, the world experienced the concept of trust less, digital scarcity. Before the advent of Bitcoin, the cost of transforming the financial world digitally was next to impossible. Blockchain technology has made the programmable digital scarcity possible. 

Non-fungible tokens (NFTs) are also built on the same idea. In cryptocurrencies, all tokens are created equally. While non-fungible tokens are each unique and limited in quantity. NFTs are being used in various industries like gaming, digital identity, licensing, certificates, and fine art. 

In this article, let’s understand more about these Non-fungible tokens. 

What are NFTs?

Before we dive in to understand what are non-fungible tokens, let’s begin to understand what fungibility is. Fungibility means that the digital asset’s individual units are interchangeable and indistinguishable from each other. For instance, fiat currencies are fungible in nature. A $10 bill is fungible as it is interchangeable with any other equivalent individual unit.

A non-fungible token is a cryptographic token that represents a unique token. Unlike Bitcoins, NFTs have individual characteristics that make them unique. These are:

Unique: The metadata in NFTs describes what makes this asset unique. 

Rare: Developers have all the freedom to generate an infinite supply of tokens and also to limit the number of tokens in existence.

Indivisible: It is impossible to divide or split the tokens. All you can do is buy, sell, and hold the tokens as a whole. 

Non-fungible tokens are quite exciting to use. With the use of blockchain technology, NFTs help you enshrine your ownership rights. The non-fungible tokens can be freely traded on specialist markets. NFTs also provide good authenticity. 

In terms of the market capitalization of NFTs, the industry grew 17% in 2019 and it is predicted to grow 50% by the end of 2020.

The dollar value of NFTs transferred reached $159 million in 2018, fell to $152 million in 2019. Now, it is predicted that the dollar value of NFTs transferred will rise by 64% in 2020.

How does NFT Work?

Cryptocurrencies like Bitcoin and Ethereum-based ERC-20 tokens are fungible. ERC-721 which is used by CryptoKitties and Decentraland is the non-fungible token. The most recent NFT is the ERC-1155 token. 

Non-fungible tokens can also be created on other smart-contract-enabled blockchains with non-fungible token tools and support. ERC-1155 allows a single contract to handle both fungible and non-fungible tokens. The issuance of NFTs benefits the users by offering a higher degree of interoperability. It means the unique assets can be transmitted between applications easily. 

You can use the Trust Wallet to store the non-fungible tokens. Similar to other blockchain tokens, NFTs will also have an address. NFTs cannot be transferred or replicated without the permission of the owner of the issuer. You can trade NFTs in open marketplaces that connect the buyers with sellers and the token value is unique. 

The protocol and smart contracts in the non-fungible tokens are still under development. Also, creating decentralized applications and platforms for non-fungible tokens is still complicated. But, many expert developers are working on their own projects. To be successful, the development of NFTs may require unified protocols and interoperability, 

NFT Use Cases

Now, let’s understand the use cases of NFTs.

Collectibles

The collectibles market is widespread in all directions. Art collecting is one of the major avenues. In the case of paintings and sculptures, when the owner wants to sell their art, they just have to list the NFT on an auction to prove their ownership and the asset is real. Hence, it prevents forgery and any kind of fraud in the art world. The same is applicable for baseball cards, stamps, jewelry, autographed guitars, or any collectible items. 

Online Gaming

NFTs are transforming the gaming world. Decentraland is one of the best examples of in-game blockchain economies. Along with this project, traditional multiplayer video games and casinos are also entering the NFT craze. 

Tickets

The tickets to the different events have different values and they are not transferable. It is because of an NFT. It standardizes the ownership of a certain category of assets, but they vary in the market values. 

Identity & Certification

Your birth certificate, passport, and your driving license can act as a nontradable digital token. Although you cannot use them for trading, you can interact and verify them with proper authorities.

The story of CryptoKitties

CryptoKitties is one of the popular NFT projects that has gained significant traction. CryptoKitties is a game built on the Ethereum platform where the players can collect, breed, and exchange virtual cats. Each CryptpoKittty will have different properties like age, breed, or color. Each of these is unique and is not interchangeable. Also, they are indivisible, meaning that a CryptoKitty token cannot be divided into divisible parts. 

As of February 2020, the All-Time High (ATH) of the number of daily Ethereum blockchain transactions is still higher in case of CryptoKitties. Hence, the game has a greater impact on the Ethereum network. CryptoKitties is an early example of a blockchain use case for recreation and leisure. 

How to trade NFTs?

Trading NFTs is not similar to trading cryptocurrencies. To buy a digital collectible or tokenized asset, you need a digital currency like Ether. Also, you require someone to transact with. As NFTs are unique, there are no exchanges that allow trading NFTs. Instead, you will find marketplaces that connect you with individual buyers and sellers. It helps you to trade NFTs directly with them. 

If you purchase an ERC-721 token it will go to your Ethereum wallet address. Viewing it in a wallet, the client will not tell you anything about its value. The token value comes from the system that the token is a part of. 

Non-Fungible Token Standards

Standards make the non-fungible tokens powerful. Developers will get a guarantee of the way assets will behave. 

ERC-721

CryptoKitties established the ERC-721 token for representing the non-fungible digital assets. ERC-721 is an inheritable Solidity smart contract standard. It means that the developers can create new ERC-721-compliant contracts by importing it from the OpenZeppelin library.

ERC-721 offers to map unique identifiers to addresses. ERC-721 uses a transferFrom method to transfer these assets in a permissioned way. 

interface ERC721 {

  function ownerOf(uint256 _tokenId) external view returns (address);

  function transferFrom(address _from, address _to, uint256 _tokenId) external payable;

}

These two methods will help you understand who owns what and a way to move things around.

ERC-1155

The Enjin team established the ERC-1155 token. This token brings about the idea of semi-fungibility to the NFT world. The IDs in the ERC-1155 tokens represent classes of assets. For instance, an ID might represent “swords” and a wallet consists of 1,000 swords. In such a case, the balanceOf method will return the number of swords owned by a wallet. To transfer any number of these swords, you should call the transferFrom function with the “sword” ID.

interface ERC1155 {

  function balanceOf(address _owner, uint256 _id) external view returns (address);

  function transferFrom(address _from, address _to, uint256 _id, uint256 quantity) external payable;

}

The difference between the ERC20, ERC721, and ERC1155 is that ERC20 maps addresses to amounts, ERC721 maps unique IDs to owners, and ERC1155 have a nested mapping of IDs to owners to amounts.

Popular NFT Projects

There are many projects that use NFTs as collectibles and tradable items. Let’s have a look at some popular NFT projects.

Decentraland

Decentraland is a decentralized virtual reality world that allows players to own and exchange parts of virtual land and other in-game NFT items. Similarly, Cryptovoxels is a game that allows players to build, develop, and exchange virtual property. 

Gods Unchained

Gods Unchained is a digital collectible card that allows you to issue NFTs as cards on the blockchain. Each digital card is unique, so players can own and trade the cards with the same level of ownership as the physical cards.

My Crypto Heroes

My Crypto Heroes is a multiplayer role-playing game (RPG) that allows players to level up heroes using quests and battles. The players can issue heroes and in-game items as tokens on the Ethereum blockchain.

Crypto Stamps

The Australian Postal Service issues crypto stamps that connect the digital world to the real world. These stamps will help you transport mails like any other stamps. These stamps are also saved as digital images on the Ethereum blockchain to make them tradable digital collectible.

Must Read: Top 5 Low Market Cap DeFi Tokens

Future of NFT

The non-fungible tokens have good potential as it is difficult to find a theoretical limit to the things that NFTs can digitize. Your identity, qualifications, real-world property, and digital collectibles can all exist on the blockchain. You can use them as tokens to keep, show, share, or sell. 

With the help of digital tokens, you can do instant business with anyone in the world. Also, companies can manage entire inventories using the NFTs. NFTs have the potential to build the future economy. 

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