Last year, when Non-Fungible Tokens (NFTs) seemed to have exploded out of the heavens, celebrities and big brands to regular people like me started to dig into this new world to understand what is NFT and how it can benefit the business. The biggest reason for me was that they are worth millions in many cases, and those pictures don’t look very artistic or challenging to create.
NFT stands for Non-Fungible Token. The term was first introduced by the cryptographer Ian Grigg in 1996. A non-fungible token is a token of value that is unique and cannot be replaced by another token with exactly the same characteristics.
An NFT is a unique blockchain token that can represent any asset imaginable. These tokens are perfect for items like digital art, collectibles, and even real estate. In this guide, we’ll explore the basics and definition of NFT and explain how they could revolutionize the way we use blockchain technology.
What is NFT?
Let’s talk about fungibility before Non-Fungible token. In general terms fungibility means an asset can be replaced by another asset of the same type. In blockchain, cryptocurrencies like bitcoin are all identical in nature as well as represent the same value and can be replaced by another because it doesn’t make any difference.
An NFT is a block of data containing a Smart Contract stored in a blockchain and the smart contract is executed when a certain condition is met. On a high level the smart contract contains details like owner, author, content url, its id and address along with some rules. The blockchain ensures each smart contract is assigned a unique address and hence it becomes Non-Fungible because there is nothing like this but when another party agrees with the condition with the owner then the smart contract executes and ownership is transferred and the transaction is recorded into the ledger.
Practically you can create NFT of any digital or physical asset including but not limited to pictures, music, documents, or movies by uploading it to an online storage (IADP is most commonly used object storage) and adding the URL of that asset to a smart contract and deploying to a supported blockchain like Etherium.
Fun Fact, bitcoins are entirely fungible and can be traded while retaining their original worth even after the transaction. NFTs, unlike cryptocurrencies such as Bitcoin or Ethereum cannot be directly swapped.
History of NFT
Kevin McCoy and Anil Dash created the first known NFT, Quantum, in May 2014. It was a video recorded by McCoy’s wife, Jennifer. In Seven on Seven conference at the New Museum in New York City, McCoy registered the video on the Namecoin blockchain and sold it to Dash for $4 using on-chain metadata which is explicitly linked to a non-fungible and tradable blockchain token enabled by the blockchain. They referred to this technology as “monetized graphics”. This was the opposite of existing multi-unit, fungible and metadata-less “coloured coins” at that time.
On July 30, 2015 Vitalik Buterin and Gavin Wood launched a new blockchain platform called Ethereum. 3 months after that the first NFT project, Etheria was launched in October 2015 during Ethereum’s first developer conference DEVCON 1 in London. Etheria was a collection of 457 pictures of hexagonal tiles each hardcoded to a value of 1 ETH (US$0.43 at that time) and most of them remained unsold for more than 5 years. March 13, 2021 the entire collection of Etheria was sold within 24 hours which was total worth of $1.4 million.
NFT gained its popularity after the launch of ERC-721 standard of smart contract on Ethereum Blockchain followed by the first NFT based well-recognized game called CryptoKitties in 2017.
2021 was the year of the NFT Explosion. New blockchains like Cardano, Solana, Tezos, Flow etc. began to enter the fray with their own versions of NFTs, establishing new standards to ensure that the digital assets represented are authentically unique. Specifically, at the start of the second quarter of the year, the buying surge was so astounding that the mainstream media frequently referred to a massive bubble that was about to burst. Similarly, the fourth quarter saw a significant increase in NFT demand, particularly in the metaverse, following the announcement of Facebook renaming itself Meta and moving to the metaverse as well.
What is a smart contract?
According to Nick Szabo, an American computer scientist who devised a virtual currency called “Bit Gold” in 1998, Smart contracts are computerized transaction protocols that execute contract conditions.
Smart Contract is a small program which is compiled into bytecode, stored in a blockchain and runs in a virtual machine embedded into the blockchain. The smart contract follows a standard defined by the blockchain e.g. ERC-721. It ensures that the transaction is traceable, transparent and irreversible.
Following are the benefits of smart contract
- Efficiency, accuracy and speed – The contract is immediately executed if a condition is satisfied. Since smart contracts are digital and automated, there is no paperwork to deal with, and no time wasted correcting errors that can occur when filling out documentation manually.
- Safety and Security – Everything in a blockchain is permanent, encrypted which makes it unalterable.
- Trust and Transparency – Due to the nature of blockchain, the distributed ledger maintains the integrity of the data and since there is no third party involved, all the transactions are visible to everyone.
- Cost effective – Smart Contract doesn’t need any intermediaries, so the parties don’t have to pay extra fees to anyone else.
Why are NFTs not replaceable?
So far we have learned about NFT and Smart Contract and they reside in a blockchain. Now the smart contracts are immutable, which means once created cannot be changed by anyone under any circumstances and that makes it irreplaceable or non-interchangeable.
Why are NFTs becoming so popular ?
NFTs have been around since 2014, but their popularity has recently increased due to various reasons. The first, and possibly most obvious, is the advancement in cryptocurrencies and the underlying blockchain frameworks. Beyond the technology itself, there is the combination of fandom, royalties economics, and scarcity laws. Consumers all want to be able to own unique digital content and potentially hold it as a type of investment.
When someone buys a Non-Fungible Token, they become the owner of the asset, but it may still be used by other people over the internet. An NFT can gain popularity in this way because the more people who view it online, the more valuable it becomes. When the asset is sold, the original inventor receives a royalty which is defined in smart contract, the marketplace gets some fees and the current owner the rest. Hence, there is a huge potential for revenue generation from valuable digital assets as they are sold and traded over time.
When it comes to NFTs, authenticity is key. Because of the blockchain, digital collectibles have unique information that distinguishes them from other NFTs and makes them easily verifiable. Fake collectibles cannot be created or circulated since each item can be traced back to the original maker or issuer. They can’t be directly swapped with one another (like currency bills in real life), unlike cryptocurrency, because no two are alike.
Blockchain platforms that supports NFT
Although Etherium is the first platform that supports Smart Contract or NFT, there have been other platforms developed with exciting features.
- Solana – Solana is an open source project that develops a new, permissionless, and fast layer-1 blockchain. Solana, founded in 2017 by Anatoly Yakovenko, a former Qualcomm executive, intends to grow throughput beyond what popular blockchains normally achieve while keeping prices low.
- Zilliqa – Launched in 2017, Zilliqa is the world’s first sharding-based public blockchain. Zilliqa is built for enhanced scalability, which implies that network growth has no effect on transaction performance. The initial blockchains, such as Bitcoin and Ethereum, were known for their poor transaction times.
- Tezos – Tezos is a blockchain network that is tied to a digital token known as a tez (XTZ) or a tezzie.Tez is a open source platform which is not mining based and doesn’t reply upon proof-of-stake mechanism
- Flow – Flow is a proof of stake blockchain developed by Dapper Labs, the developers behind one of the first NFT-based games, CryptoKitties.
- Cardano – Cardano is a blockchain project developed by Charles Hoskinson, an ethereum co-founder to “provide a more balanced and sustainable ecosystem” for cryptocurrencies.
Although we have reached this far, there is a long way ahead and I am expecting immense growth and innovative implementation of NFT.
Currently we are witnessing the transition from Crypto Kitties or games in general to many other use cases in the health, finance and entertainment industry.