What are Non-Fungible Tokens (NFT)? Quick Guide 2021

Non-fungible tokens (NFTs) are undeniably one of the most discussed topics in the blockchain industry in 2021, right up there with DeFi and the outstanding Bitcoin rally. So, what exactly are these NFTs? Why are they so important?

And how do you get them if you’re interested in them? This easy to understand guide will answer all those questions – and if you’re a total beginner in the realm of digital tokens and would like to get up to speed, then we urge you to stick to the end.

With that in mind, let’s start with the basics!


What are Non-Fungible Tokens?

Think of non-fungible tokens as digital collectibles, like trading cards. NFTs are similar to cryptocurrencies in the sense that they trade on a blockchain and have a monetary value attached to them. The only difference between non-fungible tokens and cryptocurrencies is that NFTs have certain characteristics that make them different from their fellow NFTs (even when two NFTs look totally similar.) Confused? Let’s jump into an example:

If you trade one Ethereum for another Ethereum, then you will have traded one identical thing for another. None of the parties involved in the transaction will lose anything, because they’ll both end up with one Ethereum.

If you trade one NFT for another NFT, however, the two can be significantly different regardless of whether they look similar or not. This is because non-fungible tokens include deeper layers of characteristics that make them different from one another.

These characteristics might include serial numbers, visuals, metadata, etc. How these affect the NFT’s value will depend on the characteristics that buyers value most.

As you may have noticed after the explanation above, non-fungible tokens present exhilarating monetization opportunities for collectors and brands alike, mainly because they are safe to trade, provably authentic, and can include all distinct sorts of branding and artwork opportunities.

Non-fungible tokens are also at times referred to as Crypto Collectibles or Niftys. Even most importantly, these Non-fungible tokens trade on a wide array of different blockchains, and we’ll touch on those a few topics later in this guide.


Non-fungible token standards

For now, let’s look at the three main non-fungible token standards:

ERC 721

ERC 721 is the less-famous cousin of the ERC 20, but a no less essential part of the Ethereum network. ERC 721 is first and foremost, a type of standard – and a standard in the realm of non-fungible tokens is simply a format or template that other developers agree to use and follow.

Developers choose to follow these same standards because it makes writing code more predictable, easier, and reusable. Note though: even though following a widely adopted standard means compatibility with a wide array of applications including wallets, Dapps, and exchanges, these standards are completely voluntary.

Before the arrival of ERC 721, most (if not all) tokens on blockchains functioned either as a sort of equity, stock, currency, or a store of value... Right, like gold. With the inception of ERC 721, it has become easier to create unique tokens that are digital collectibles like cats that can be used to represent something like real living cats or digital art.

ERC 1155

ERC 1155 is the new official Ethereum token standard for coining both fungible and non-fungible assets. The standard allows Ethereum’s development community to build applications that integrate ERC 1155 assets with utter confidence that the standard is future proof.

ERC 1155 is the only non-fungible token standard that enables its users to create every type of asset, from real estate and currency to gaming items and digital art. With all that in mind, I think it’s safe to state that ERC 1155 is here to stay.

Non-Ethereum NFT Standards

Of course, no one is denying the fact that the Ethereum network is currently the most developed and convenient platform when it comes to the creation of non-fungible tokens. That said, this doesn’t mean that other chains can’t come in handy.

Let’s take a look at DGoods, for instance. This open-source and free standard has been working on the implementation of a feature-rich cross-chain. For the newbies, a cross-chain simply refers to the interoperability between two relatively independent blockchains. In other words, the feature permits different blockchains to communicate with one another since they’re built in a standardized way.

Another standard worth looking at is COSMOS, whose development team is dedicating its efforts to creating an independent NFT module, which will be a major part of COSMOS SDK.

Last but not least is FLOW. Even though it's one of the newest blockchains, Flow is open to NFT projects and has even partnered with UFC, NBA, and other huge names to create joint exclusive NFTs for fans of the brands.


Key features of NFTs

Standardization

The strict standardization of NFT token data implies that if, for instance, you integrate an ERC721 token from one project into your app or game, no additional effort will be required on your part to integrate tokens from other ERC721 projects as well. This, in turn, enables projects to create high-volume NFTs that can offer perks across a wide array of platforms.

Interoperability

Due to the standardization of NFTs as noted above, a higher degree of interoperability is allowed in the realm of NFTs, which means you can transfer unique digital assets between applications with relative ease. This, in turn, ushers in additional NFT use cases.

Tradeability

The ability to be traded freely on open marketplaces is arguably the most compelling feature of NFTs. For the first time in history, you and I can move items outside of our original environments and into marketplaces where we can take advantage of refined trading capabilities, such as eBay-style bundling, bidding, auctions, and the ability to sell products in any currency, including application-specific currencies and stable coins.

Liquidity

NFTs offer investors additional liquidity over their assets when they need it. Here is a great example. Let’s say a virtual landowner opts to rent out his/her virtual property to influencers or advertisers for a specific fee, while still retaining proprietorship over the land. In this case, the virtual land still belongs to the original owner, even though a portion of it has been liquefied as rent.

Immutability

NFTs not only create value for tokenized digital assets but also ensure immutability. NFTs create mediums where physical objects such as artworks can be tokenized, which in turn, limits ownership to the artist by eliminating the possibility of duplication of such artwork. This is what eventually creates scarcity for the art and hence, value for it.

Programmability

Like every conventional digital token and asset built on smart contract Blockchains, NFTs are fully programmable. Axie Infinity and CryptoKitties boast breeding mechanics coded directly into their tokens, which in turn, ensures even more functionality.


How do non-fungible tokens work?

Perhaps the best way to explain how non-fungible tokens work and the problems that they solve is to review a few examples.

Identity of Things

Thanks to NFTs, machines, devices, and objects can have their own digital identities. Identity of things (IDoT) is a significant step toward blockchain-based smart cities, IoT applications, and supply chains.

Let’s take a future city with autonomous cars, for example. These vehicles need to have the ability to make decisions and navigate around the city on their own, particularly when there are no commuters inside the car to dictate the journey. IDoT can enable a systematic and database optimization of parking, traffic, passengers, and cars.

Digital Identity

Similar to machines, devices, and objects, digital identity presents another area that could benefit from NFTs. While you will not be able to trade your identity tokens, you will be able to share the unspent transaction output (UTXO) of their reassurance with anybody who needs to verify your identity. Here is an example:

Let’s say you receive your birth certificate, national ID, high school/university diploma, and driver’s license in form of digital tokens. While these tokens will exist digitally on a universal blockchain, they will belong only to you. This further implies that your entire identity could exist on a blockchain and you could choose and pick what to share with who and when.

Certification

Another valuable (and arguably the biggest potential) application of non-fungible tokens is certification. We can use digital tokens to prove the origins of a piece of data, document, or even physical objects in the real world.

Even better, since blockchain tokens cannot be double-spent or duplicated, we can rest assured that a token won't ever be counterfeited.


Virtual Worlds & NFTs — A Perfect Match

Taking into account the multiple NFT applications mentioned above, it's only natural to think of these as a great match to regulate identity and ownership rights on virtual worlds.

Sensorium Galaxy — a next-generation social VR platform — consists of multiple worlds that act as content hubs, where professional performers and users can share their love for music, dances, fashion, and many other art forms. That said, it is vital to understand which mechanisms will be in place to regulate the digital identity of users, artists, and even AI-driven NPCs. Moreover, NFTs can equally secure copyrights of both professional and user-generated content in these virtual worlds.


Where can I buy NFT tokens?

Owning and buying NFTs is not like typical cryptocurrency trading. To acquire digital tokenized or collectible assets, you will first need a digital currency such as Ether (Note though that while uncommon, some sellers might accept trade or cash.)

You’ll also need a second party to do business with. But since each non-fungible token out there is unique, you won’t find exchanges for NFTs like you will find for cryptocurrencies like Bitcoin and Ethereum. Instead, NFTs have marketplaces that connect individual sellers with individual buyers.

After logging into one of these marketplaces, you will have to negotiate a price with the individual selling the token, after which you can directly acquire it from them. Some of these marketplaces you can join to buy and sell NFTs include:

  • Rarible
  • Terra Virtua
  • Enjin
  • Mintbase
  • Opensea
  • MarkersPlace
  • Known Origin
  • Async Art
  • Nifty Gateway
  • Superrare
  • Cryptograph
  • Crypto Kitties
  • Handshake Domains

If you acquire an ERC 721 or ERC 1155 token, it’ll go straight to your Ethereum wallet address (just as it would have if you had acquired an ERC 20 token.) That said, when you view the token in your wallet, the network will not tell you anything about the token’s value – only that you’re the current owner.

The value of the token you acquired will be determined by whatever system the non-fungible token is a part of. For instance, CryptoKitty NFTs are linked to drawings of kitties with certain attributes, and if you own one of these and would like to know its value, you’ll have to post it on one of the open markets mentioned above and choose to sell.


The Bottom Line

Just like with most novice technologies, the application or overall adoption of NFTS isn’t clear at the moment. That said, the fact that these tokens have been causing some stir in the crypto realm is undeniable – and when you couple that with the unique opportunity to digitize assets that NFTs offer, you’ll notice that possible use cases of NFTs’ are quite unlimited.

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