So what are NFTs?
Let's start with Bitcoin...
Non-fungible tokens differ from cryptocurrencies (think Bitcoin) in a number of ways. Most explanations start with an understanding of the word 'fungible'. Bitcoin or fiat currency (money; not backed by gold) is fungible. These assets are mutually interchangeable which means one coin is essentially much like any other. The amount of that currency is essentially all that matters. It doesn't matter which particular crypto, coin or note you have as long as they equate in economic value.
...and move to Ethereum
ERC-20 is an Ethereum protocol for things that work like money. ETH tokens are interchangeable (fungible). ERC-721, an interface protocol published in September 2017, is for non-fungible tokens. It's the most widely used protocol for Non-Fungible Tokens (though not the only one). NFTs... finally!
The important point here that differentiates NFTs from money-like cryptocurrencies is that each NFT has a unique token ID. Non-Fungible Tokens are unique and this uniqueness is the main difference between NFTs and cryptocurrencies (which are mutually interchangeable).
ERC-20 tokens are fungible. This is the «money-like» standard.
ERC-721 tokens are non-fungible. This is the «things-like» standard.
Some NFT History
Before the ERC-721 standard was introduced, there were other NFT protocols. In 2013 a paper was written (with Vitalik Buterin among its authors) regarding so-called colored coins running on Bitcoin. This was an attempt at tracking a subset of Bitcoins on the network. The paper reads...
...they can open the way for the decentralized exchange of things that are not possible by traditional methods.
Tracking colored coins didn't really work but the above quote suggests the NFT project in a nutshell.
Counterparty was a protocol that wrote code in the Bitcoin margins. It worked. Spells of Genesis was the first trading card game to run on Counterparty. It also introduced in-game assets to the blockchain. Regular trading-card game Force of Will joined Spells of Genesis on the Counterparty blockchain in August 2016. The Rare Pepe meme began circulating on Counterparty and the market for these memes (as unique digital assets) surged.
CryptoPunks was next, written in and out of the margins of the ERC-20 Ethereum standard. The release of the ERC-721 protocol for trading unique, non-fungible tokens followed. ERC-721 works by tracking the history of transactions, thus verifying the uniqueness of each token. CryptoKitties was wildly successful on ERC-721, thereby bringing NFTs to popular attention.
CryptoKitties is a game where you breed digital cats. Each cat brings a unique set of traits into the gene pool, if you like, and the aim of the game is to breed unique cats with a fabulous pedigree and (most probably) sell them. While it's pretty limited in terms of game-play it fits very well with the NFT protocol, the coding of 'genetic' traits emphasising individual differences and generating a (cat's) uniqueness, thus pretty nicely suited to the NFT format. A downside of the craze for CryptoKitties was the pressure it placed on the Ethereum blockchain and the corresponding increase in Ethereum gas fees.
Trading of NFTs
We've seen here some early examples of the most common forms of digital assets that are still traded today. The Rare Pepe memes and CryptoPunks could be classified as digital collectibles or digital art while digital trading cards and CryptoKitties are early examples of blockchain gaming. In the first half of 2020, gaming and collectibles made up 70% of NFT transactions by number. Digital art and virtual real estate have seen exceptional growth in recent times, together accounting for 70% of transactions by market volume (in USD) for the same period.
Decentraland is a virtual reality world. It raised $26 million with its ICO in 2017 and went live earlier this year. MANA is an ERC20 crypto token which is used to purchase LAND parcels in Decentraland. Once you have some LAND you can earn MANA by renting out space and charging for entry to events. Cryptovoxels is a VR world where users often exhibit and sell digital art on the blockchain in virtual galleries. The Sandbox, MegaCryptoPolis and Somnium Space are other VR worlds for which you can buy space on the blockchain if you have the crypto, but parcels of VR land don't come cheap!
OpenSea prides itself as being 'the largest marketplace for rare items' and is a good place to develop your knowledge of NFT trade. It's a well presented website with clear, detailed and extensive documentation. Bestsellers on the site are trading cards, digital collectibles and in-game assets (avatars, potions, level-ups etc) but you can also purchase virtual reality land, domain names and numerous other kinds of NFTs here. To buy and sell on OpenSea you need an Ethereum wallet (such as MetaMask or similar).
Axie Infinity is a hugely popular game which has 'adopted' the breeding concept from CryptoKitties and introduces some fighting alongside. GodsUnchained and CryptoSpells are popular blockchain trading card games that retail on OpenSea. MyCryptoHeroes is a virtual role-playing game from Japan that has been hugely popular in the Far East. Sports collectibles have taken off with Sorare (fantasy football), F1 Delta Time (Formula One) and MLB Champions (baseball).
Rarible and SuperRare are important sites for trade of digital art and are already focusing on different customer bases. SuperRare appears to have established itself as the top-end showroom where digital art commands the highest prices. Rarible is more of a make your own and join in exchange, billed as the “community-owned NFT marketplace”. Creating your own digital art or collectible and selling (or storing) it on the blockchain, a process known as 'minting', is possible on marketplaces such as Rarible and OpenSea. Why not create your own range of collectibles?
The NFT protocol may have much to offer the art world in terms of tracking the provenance of physical artworks. Christies recently sold a blockchain-related artwork (including an NFT) for $130,000. Digital art is more commonly traded on the blockchain. Owners can house and showcase collections of digital art in virtual reality art galleries which you can have a look around on sites such as Cryptovoxels. Async Art is a leading company in what it calls 'programmable art,' ostensibly where owners have cryptographic access to the code to affect aspects of the art's presentation.
2020 has seen growth and expansion in the NFT market after a slightly muted 2019. Real world assets are increasingly being represented by non-fungible tokens. In 2017 a $60,000 flat in Kiev was sold on the blockchain while properties have been tokenised in New York (the non-fungible tokens here representing shares in a building).
With the release of the ERC-1155 Multi-Token standard protocol in 2019, enabling the pooling of non-fungible (ERC-721) and fungible (ERC-20) assets, fractional tokenisation is now a possibility, potentially enabling people to own shares in assets. NFTs can provide proof of ownership, provenance and authenticy, concepts that are of crucial importance to many blockchain-based projects focused upon digital identity and data ownership.
Perhaps the awkward appellation 'Non-Fungible Tokens' won't last but this is an exciting and fast-developing sector of blockchain technology for crypto traders, artists and developers alike.
These are some really good reads I'd suggest if you want to explore the worlds of NFTs some more.
The Non-Fungible Token Bible
Published by OpenSea in January 2020, this is the go-to reading on the subject. It provides a detailed explanation of the workings of the ERC-721 protocol with an extensive history on the development of NFTs.
Nonfungible Tokens: The Quick Guide
Coin Telegraph's streamlined, accurate and incisive introduction to NFTs and developments in the market. Rated.
A Guide to Crypto Collectibles and Non-fungible Tokens (NFTs)
Binance's guide is a little dry in places but it explains NFTs from the ground up, starting with non-fungibility and moving on to decentralized applications and popular projects using NFTs. It's carefully explained.
Into The Metaverse: Non-Fungible Tokens in 2020
A readable article on NFTs with an emphasis on digital art and virtual reality.
What are NFTs?
Decentraland's sensible guide to making sense of it all.
The History of Non-Fungible Tokens (NFTs)
Andrew Steinwold's blog has many interesting articles on NFTs. I found this article really helpful on understanding the development of NFT applications and protocols.
Into the Metaverse
Andrew Steinwold again, this time exploring the possibilities of VR and the blockchain.
What Can Be Tokenised? The Tokenisation of Everything
This article from August 2019 doesn't mention NFTs but its remit of the potential of real-world assets tokenised on the blockchain has much of relevance to the NFT sector.
OpenSea has 'built a set of robust marketplace tools' and they've made them openly available for developers. Could this be your next exciting venture?
A Brief Guide to Trading Collectibles on OpenSea
A clear guide to how to buy and sell collectibles on OpenSea. You'll need an ETH wallet.
Complete Guide to NFTs: How to Create & Collect the Next Wave of Digital Assets
Likeable, short guide to the field; good on other examples of tokenisation.
ERC721 Tokens (Non-Fungible Tokens) Explained
Clarity on the ERC-721 standard protocol.
What is Rarible - The Ultimate Guide to Rarible and RARI
A detailed guide to the Rarible marketplace and RARI token
Top NFTs by All-Time Trading Volume
The most successful NFT games and projects by all-time trading volume.
Five of the Most Expensive NFTs Sold in 2019
Specific one-off crypto-gaming sales from 2019.
How to make money in crypto gaming
Axie Infinity is the current market leader in crypto gaming. Ryan Sean Adams of Bankless gives you some good tips.
Delphi Digital Buys Five Ethereum NFTs for $162,000
This pretty extraordinary investment is worth reading about.
The My Crypto Heroes Playbook - Episode 1: Game Ecosystem Design
A series of articles on the behind-the-scenes development of My Crypto Heroes, one of the most played blockchain games in the world.
How to launch an NFT Sale on WAX: A Complete Guide
ERC-721 is not the only protocol for NFTs. WAX is one of the alternatives.
Which are the most profitable cryptoart on SuperRare?
The most successful art investments and turnovers on SuperRare as calculated from the accessible blockchain ledger.
DeFi Arts Intelligencer
Detailed weekly guide to 'key happenings around Ethereum art, collectibles, games, finance, and more.'
WhaleShark's blog on Cent
Reknowned collector and investor in digital art's interesting blog and discursive comment on Cent.
And on Publish0x:
I got hypnotized by the amazing NFTs world by PVMihalache
From Cypherpunks to CryptoPunks: Blockchain Collectibles and NFTs by CryptoMarketeer
How to manage NFTs with the MetaMask mobile app by PVMihalache
Beginner's Guide to The Sandbox by CryptoWordsmith
Hope you enjoyed this article. Thank you for reading.