NFTs 101

NFTs explained: What they are? How do they work? And what are their benefits?

Instagram announced earlier this month that it will start supporting NFTs on its platform in a bid to “bring NFTs to a broader audience”. This marks another big milestone in the fast-growing adoption of NFTs.

And indeed, Instagram is not alone. It is joined by major brands like Nike, Louis Vuitton, Samsung, and Taco Bell that have released NFT collections on various marketplaces.

Luxury auction houses - Christie’s and Sotheby’s have curated and auctioned NFT collections.

Celebrities are buying NFTs and proudly showcasing them on their Twitter profiles.

Everyone seems to be interested in NFTs, and the best part is - everyone is invited.

But first,

What are NFTs?

The abbreviation NFT stands for non-fungible token.

A token is a cryptographic asset (or simply put computer code) that lives on a blockchain (more on this later).

The fact that it is non-fungible means that it is unique, one-of-a-kind, or non-interchangeable, as opposed to a fungible token or asset which means that the asset is interchangeable with another one of the same type.

Money is a great example of something that is fungible: one ten-dollar bill has the same value as another ten-dollar bill. The same goes for cryptocurrencies like Bitcoin: one Bitcoin has the same value as another Bitcoin.

This is not the case for non-fungible tokens (NFTs).

Each token is unique in the sense that the code that identifies it on the blockchain is unique.

Even if we have 10 NFTs that all display an identical image, there will be markers in the code that will be unique to each of the tokens. The fact that those markers are unique, makes the NFTs non-fungible (non-interchangeable).

The place these digital assets are located is blockchain.

What is blockchain?

In simple terms, a blockchain is a decentralised worldwide network of computers (called nodes) that run the blockchain’s software and their primary function is to verify and add blocks of transactions to the ledger in a cryptographically secure way. For that, nodes are rewarded in the blockchain’s native currency.

Bitcoin was the first blockchain ever created. Now, there are many more like Ethereum, Hyperledger, Stellar, and many others.

Schematic representation of blockchain

Ethereum was the first blockchain to introduce the concept of smart contracts which gave developers the possibility of creating many exciting things on the blockchain, one of those being the NFTs.

What are smart contracts?

Simply put, smart contracts are computer programs that are executed when a set of predetermined conditions are met.

Since smart contracts are executed automatically, they give assurance to all parties involved that the contract will be executed as written, instantly, and without an intermediary as soon as the conditions stipulated in the smart contract are met.

Smart contracts are at the very heart of non-fungible tokens. They identify the features of a particular NFT as well as serve as proof of ownership for the token.

Why NFTs? What problems do they solve?

When you own an asset in the physical world, be it a car, a painting, or anything else, you have a way to prove that your asset, indeed, belongs to you. This is not the case with digital assets. Since, by their very nature, they are easily copied and reproduced, ownership and authenticity have always been difficult to determine in the digital world.

This is where non-fungible tokens come in. By tokenising a digital asset, you give it a permanent and immutable identity on the blockchain. This identity can be used to prove authenticity, check transaction history as well as determine current and past owners of the token. All this information is publicly available on the blockchain.

NFTs combine the best of both worlds: a global audience and ease of distribution of the digital with the benefits of the physical world – the ability to own assets and prove their authenticity.

For example, an artist that created a digital painting can reach a wide audience by tokenizing her work and selling it on a specialised marketplace for that kind of art.

The NFT also gives the artist the opportunity to program a royalty into the smart contract, so every time the NFT is sold the artist will receive a percentage of the sale price automatically (through the execution of code in the smart contract). This way the artist is paid more fairly.

The benefit for the purchaser is that he can gain true ownership of the asset he bought (deposit it into his digital wallet). If the asset increases in value, he will be able to capture that value and resell his asset in the marketplace, if he wishes to do so.

Types of NFTs

One of the most obvious use cases for NFTs is art.

This can be non-generative or “traditional” art where an artist creates an art piece and sells it as an NFT. Digital artists like Beepl, Mad Dog Jones, and Pak have embraced the NFT world, but also established artists like Damien Hirst, Huang Heshan, Grimes and Antonio Tudisco turned to this new technology for their art pieces. Some of the marketplaces where you can buy art NFTs are Opensea, SuperRare, Rarible, and Nifty Gateway.

Generative or algorithmic art is probably what comes to mind when we think of NFTs. This art is created with the use of an algorithmic computer program. The artist draws individual traits of the characters, and the program produces unique images by randomly combining the traits.

Most of the PFPs (profile pictures) like Crypto Punks and the Bored Ape Yacht Club are algorithmic images. The main marketplaces for PFP and algorithmic art are Opensea, Looks Rare, Mintable.

Various Bored Ape Characters. Source: Wikipedia.

Music is another rising industry in the NFT space. Creators can sell their music NFTs to a worldwide audience and, of course, copyright and ownership issues are successfully solved with the tokenisation of the music. This way creators earn higher rewards for their work and their fans can enjoy additional benefits with their NFT - exclusive videos or access to events. Some of the marketplaces where you can find music NFTs are and Catalog.

Gaming is a major beneficiary of NFT technology. It allows players to own their in-game assets and characters but also trade or sell them if they wish to do so. Combining blockchain and NFT technology with gaming gave rise to GameFi and Play-to-Earn. These are new generation games where players are rewarded in cryptocurrency or NFTs for their skill or time spent playing the game. Platforms like Sandbox and Axie Infinity are pioneering in this space.

Hand in hand with gaming goes digital asset acquisition on virtual reality platforms like Decentraland, Somnium, and others. Users can buy land, real estate, wearables, and other items. You can also rent, trade, and sell items using cryptocurrency. NFT technology is central to these platforms since they give users ownership of their virtual items.

Decentraland home page. Source: Decentraland

Utility NFTs are offering their holders benefits in various forms. Many of them offer staking as a form of passive income. By locking their NFTs on a staking platform holders get paid a certain amount of the project’s native currency.

Many NFTs (and arguably all of them) serve as an access pass to the benefits that the project is offering. This can be access to a vibrant community that may include influencers and celebrities, early access to minting new interesting NFTs, early access to buying physical merch, voting rights in a DAO (Decentralised Autonomous Organisation), memberships, access to events, or any other benefits the creator wants to offer to their audience.

NFTs have strong use cases in many other sectors like real estate, decentralized finance, medical records and identity verification, supply chain, voting, ticketing, and intellectual property, with new use cases emerging every day.

The NFTs of the future will probably look different from the NFTs that we have today but it is certain that this technology will be at the core of many exciting projects in the time to come.

Categories: blockchain, crypto, nft