NFT (Non-fungible token)
NFTS are unique cryptographic assets that are minted as an identifier data unit or a data token, on the blockchain. The token can represent physical assets such as Art, Property or Collectibles, alongside maintaining and authenticating the identity, property rights and value of individuals who mint the token on the blockchain. The unique signature of an NFT cements its ‘one of a kind status’ cuts it apart from regular digital assets that can be reproduced incessantly.
Individuals generally associate NFTs with identity management at first glance, but the tokens are popularly traded with transactional efficiency, no intermediaries and minimal fraud (unlike FIAT and Crypto exchanges) on the blockchain through various NFT marketplaces. Buyers are connected to artists or individuals who mint to sell. Although the cryptographic asset could be transferred between addresses on the blockchain, the ownership of the asset (first person to mint the asset) remains constant. Because identity in collaboration with ‘graphics’ equates to cryptographic value. A value that cannot be subdivided, duplicated or distributed, which is also the inherent nature of the token itself that defines its non-fungibility.
Ironically, this non-fungible decentralised asset’s financial value is backed by a fungible asset such as cryptocurrency. The cryptocurrency facilitates the ecosystem on which NFTs are traded, stored and authenticated, Ethereum is a popular blockchain on which NFTs are minted aggressively. Any blockchain technology like Cardano or Solano can issue their own NFT.
Understanding Non-Fungibility
The tokens are constructed using unique cryptographic encryption and metadata that gives the unique identity, permanence on the blockchain. The identity embedded in an NFT is absolute, it cannot be transferred or equate to another identity unlike how a bitcoin would always be equitable to another one. In a nutshell the unique identity properties of NFTs make them immune to interchangeability. This unique construction and design of the NFT paves way for a plethora of use case scenarios.
Ownership details, information about attributes and custom metadata make the bulk of cryptographic encryption on the token. The last supper could be signed by Leo with his own signature in the metadata instead of on the real painting or a graphic designer could have graphic art shown with a ‘protest’ attribute to it. Nothing can undo ownership of the painting nor transfer it, although the painting itself could be physically transported and stored at an auction house. And nothing can change the nature of the artwork as it is attributed with protestation.
Technology
Any interactions on the blockchain garner expenses for the energy-intensive astronomical computational requirement to solve complex mathematical calculations that create blocks. There are periods on the Ethereum network where an NFT worth $0.01 would cost $80.00 in gas fees (gas is the expenditure on the blockchain for transactions).
NFTs are executed by Smart Contracts (contracts whose execution requires predetermined terms to happen) on the Ethereum blockchain. ERC 20 Smart Contract tokens are fungible cryptocurrency tokens like DAI and LINK on the Ethereum blockchain, NFTs are based on the ERC 721 standard, which defines identification, ownership details, security and metadata of the NFT. NFT gas fees for trading and storing are minimised by batching several NFTS into one single smart contract, defined by Smart Contracts that implement the ERC 1155 standard.
When an NFT is minted, code stored in Smart Contract standards (like the ERC 721 standard), is executed on the blockchain. The minting process includes block creation, authentication of information and recording the token on the shared public ledger of the blockchain for everyone to see and validate the token.
Scarcity
Passes, rare collectibles and other assets are always finite in supply and have supply exhaustion limits governing their value, circulation and transferability. Individuals who mint an NFT get to determine scarcity of the NFT, meaning how many replicas of the token can exist or not. The individual who mints the NFT can also define rarity by restricting supply to only 1 unit, thus maximising scarcity to seal the overall rare and collectible nature associated with the asset. There can only be 1 owner at a time of any given NFT.
DeFi, Gaming, Trading and other use case scenarios
NFTs are traded on the Ethereum network and are valued in Ethereum cryptocurrency, this is the same case for other blockchain technologies too like Solana and MATIC. Content developers and artists stand to gain enormous financial value from the sale of these tokens while they usually have earning percentages gifted to platforms, publishers and intermediaries if looking at the centralised markets. Because the decentralised nature of NFTs and cryptocurrencies eliminates third party intervention in the peer to peer purchase mechanism. Another interesting facet of NFT trading is the non-necessity of transferring original ownership when trading NFTs. Individuals to first mint the NFT enjoy immortal royalty over each successful trade or auction of the NFTs. The royalty process is guaranteed and automated as the maker’s identity is part of the NFT metadata.
NFT gaming is another entire world of possibilities for artists and gaming connoisseurs. Weapons, costumes and other internal game entities, credits to unlock game experiences and collectible characters are few things which make up the NFT gaming economy. Items belonging to a game when issued as NFTs by the game developers eventually outlive the game itself in a scenario where the developers do not maintain the game anymore. The tokens which become digital memorabilia are still valuable in the open market outside the game.
NFTs can be synchronised with Decentralised Finance (DeFi) blocks for being used as collateral against loans while also being used to implement the lending and borrowing of other tokens. ‘NFTfi’ is a platform that functions in this model. An illustration which shows the collaboration of NFT and DeFi is ‘Aavegotchi’ a game where the characters represent collateral used on ‘Aave’ the lending platform.
Axie Infinity is the most popular game on the blockchain which rewards users with Axies as NFTs that can be traded on an NFT marketplace like opensea.io, Axies are in-game units (creatures) that gamers can breed and raise. Axie Infinity is a strategic game of war in which two players fight each other using teams of creatures called Axies. The revenue from this trading has overtaken minimum wages in several countries, where gamers earn more than $5/hour. There is a Decentralised Autonomous Organization (DAO) called Yield Games which lends Axies to people who want to get started with the game but lack resources and funding.
A Proposed Commercial Ecosystem for NFTs
With the advent of fractional ownership of NFTs, virtual ownership of assets in the Metaverse and the adoption of smart contracts among various blockchain technologies, NFTs are riding the trend wave with great timing.
Commercial Ecosystems would mint and or also help in NFT creation for brands that want to take advantage of the phenomenon to tokenize their content assets. Absolute tamper proof security is ensured with the decentralised network and on chain verification. NFTs would be programmed in a manner where the original creator would partake in all royalties of secondary sales generated on the NFTs; this is a largely extinct mechanism outside the blockchain realm.
Security and the tamper proof nature of the NFT is ensured by Commercial Ecosystem as the ecosystem is based on a secure decentralised protocol. Decentralised literally translates to, public information pools that are interspersed across various locations in the World and can be verified by anyone inside and outside the blockchain.
When Commercial Ecosystem mints NFTs the following things are ensured by Commercial Ecosystem blockchain miners:
- Asset confirmation on the blockchain
- Account balance update of the owner in order to validate and facilitate trading of the asset.
- Transactions in line with the above mentioned points are added into a smart contract implemented on the blockchain.
- A consensus protocol ensures the network acknowledges and confirms the asset with appropriate ownership and on chain digital signature verification.
The above tasks are executed constantly by miners on the blockchain with a good computational power, considerable amount of mining difficulty and a large number of blocks to secure the chain.
NFT Art
Among countless possibilities, Art is a major asset category within the NFT world which has the highest financial transactional value in the history of NFT trade. The highest sale being The Merge by Pak which sold for $91.8 million.
For NFT Artists
Tokenizing Art on the NFT marketplace platform authenticates ownership and copyright of the asset on the blockchain and captures the journey of the art piece from minting to current ownership location of the asset. No forgeries, no fraud. One of the most popular sayings, quoted by nay-sayers, no coiners and non-believers, is that ‘NFT is a fraudulent ponzi scheme with no real value because anybody can just screenshot or copy-paste media without actually paying ridiculous amounts of Ethereum’. Alas, these people have very little understanding of what it means to really own an art piece.
Ownership is defined by cryptographic encryption of metadata, maker information, digital signature and attribute information as code to be executed in a smart contract on the blockchain. All this is with a lot of fiscal value and intrinsic worth while a copy pasted or screenshotted image is just as the names suggest without any intrinsic value apart from the visual aesthetic abstraction, still miles away from the real deal.
Eventually, owning the real has value directly proportional to what the market makes of it. The more a piece of content is screen-grabbed, shared, and generally used, more increase is seen in its value.
Owning the verifiable real thing always has more value than the prospect of not owning it. Besides that, NFT sales are propelled by individuals wanting to express their social status, line of tastes and status symbolization.
Most NFT marketplaces are free from the plague of censorship and the futile ranking system. Artists can also create anonymous accounts to create NFTs and sell them while those who prefer to reveal identity to attract off-chain supporters and art collectors who would love to support their favourite artists.
It is a kind of plug-n-play auction or fixed price sale and trade format platform with no downtime which maximises ease and efficiency in artist earning as well as enhancing buyer/collector experience.
The NFT marketplace platforms strive to propagate an internet of assets and create seamless interactions of exchange and inter-transferability on the blockchain. Off chain digital items are limited to their product boundaries and function to that extent only, for example a song bought on an iTunes store cannot be sold back, although a market exists for that sort of a commodity. An illustration towards the Internet of Assets would be the purchase of an NFT artwork and its utility as collateral for securing a loan by the buyer. Similarly NFTs can be paired with a plethora of Dapps, DeFi and Metaverse platforms while also being able to represent physical assets at any given point of time in seamless integration.
A legacy auction house like Sotheby’s or Christie’s stores information of ownership and value of assets on their private institutional servers while NFT marketplaces use a distributed shared public ledger which is accessible by everyone.
An NFT could represent:
Mostly Digital Art:
GIFs
Collectibles
Music
Videos
Maybe Real World Items:
Deeds to a car
Tickets to a real world event
Tokenized invoices
Legal documents
Signatures
Process Flow
Step 1: The user signs up on any NFT marketplace say Opensea.io as an abstract illustration.
Step 2: The user sets up a crypto wallet on Opensea.io to facilitate NFT storage and cryptocurrency over trades
Step 3: The user creates an NFT. Attributes are tuned in the metadata of the NFT.
Step 4: A collection is made with either an auction, fixed price or ‘ready to bid’ parameters in place.
Step 5: The platform facilitates the smart contract and cryptography before finally minting the token.
Step 6: NFTs appear as collections or auctions on the platform’s catalogue.
Step 7: Buyers place bids, purchase tokens for fixed price and also give offers to unpriced and non-auctioned tokens on Opensea.io.
Step 8: Notifications of highest bidders are sent to buyers and artists upon the closure of auctions.
Step 9: Tokens and Funds are exchanged. Opensea.io facilitates this process.
Value
Rarity + Utility + Tangibility = Value per NFT
Marketing
No NFT sale would ever occur unless casually, without extensive marketing. A great story, unique nature of the art and the artist make up the bulk of non-cryptographic value associated with the NFT while price history, trends and timing make up the remainder of value for any token on the blockchain. There is no one-size-fits-all solution to the ever progressive and metamorphosing non-fungible marketplace.
Collaboration with niche influencers sharing the NFT details on multiple social media channels associates higher perceived value and greatly increases the number of bids.
A Greener NFT Culture
Complexity in mathematical calculations that govern the formation of blocks is being done via mining but is being developed to adopt staking methodologies as part of the proof of stake program which would significantly lower the carbon footprint generated as a result of using astronomic computational power to secure the blockchain. Staking is a phenomenon on the blockchain where individual funds replace computational power to secure the decentralised blockchain network.
100,000 Visa transactions use 149kWh of energy. In a proof-of-stake model, that same number of transactions would cost 17.4kWh of energy or 11% of the total energy.
The Polygon formerly Matic Network
Polygoing is a layer 2 network on the Ethereum blockchain which acts as a sidechain for Ethereum. It was introduced to solve the astronomic gas fees and slow block formation problems in order to make transactions faster and economical. Polygon is the scaling solution for the Ethereum ecosystem to add security, modularity, scalability and interoperability for users.
Benefits:
-The Polygon network ensures security thanks to the first layer Ethereum blockchain.
-It offers ease of accessibility for users. Allowing the connection of Ethereum compatible blockchains.
-Less congestion = Cheaper overall cost
-Lower gas prices and quicker transaction times
-Interoperability ensures it connects with other side chains facilitating multi-currency and token trading.
-Eco-friendly alternatives such as Proof-of-stake (PoS) transactions are less demanding (like by 99.99% less), yet just as secure.
That folks was a slightly boresome yet comprehensive story of the NFT saga until last year.
