A novel concept bridging the digital world of crypto and the real world. Think NFTs, think digital user signature ownership.
Introduction to NFTs
Virtually in today’s digital world, the topic “NFTs” is widely talked about, either in passing or technically, with many people having no informed or sufficient knowledge let alone a proper understanding of what it is all about. The puzzling question then is: what are NFTs? How are they made and designed to work?
NFTs are simply an acronym for non-fungible tokens. Non-Fungible Tokens (NFTs) are digital assets stored on blockchain technology. Digital assets in their generic form are electronic files that exist simply as data, stored on a computer system. These data are recorded in smart contracts that are built on blockchain technology. NFTs are not fungible by nature or design.
So, what is a fungible token? A fungible token is an asset that has the same properties as another unit of the same asset. Simply put, fungible tokens can be exchanged for an identical alternative or a sub-division of its equivalent.
They can be swapped like for like. For instance, fiat currency (like US Dollars, Euros, Naira, etc.), gold, and cryptocurrencies (Bitcoin, Ethereum, USDT, etc.) are fungible tokens.
A soiled $100 bill has the same value as a new $100 bill, regardless of the holder or anywhere in the world. 1 BTC is still 1 BTC no matter what wallet it is stored in. Also, a fungible token can be divided into its smaller units e.g., a $100 can be divided into $50, $20, and $10.
NFTs are verifiably unique and indivisible (the same way you cannot issue a friend one-half of a US dollar bill, as it cannot be utilized anywhere in the world). No two NFTs are the same by design or in worth, as the value of any NFT is assigned by the community.
NFTs cannot be duplicated or directly exchanged with another token. The basis on which NFTs are generally built, akin to cryptocurrencies, allows its users to prove and have self-custody of them through the use of a crypto wallet’s private keys without any third-party influence.
NFTs can represent anything tangible or intangible. From pictures, artworks, music, tickets, writings, real estate, deeds and licenses, to physical and digital wearables. NFTs as unique tokens have more value compared to fungible tokens. This also means that it can be a bridge between the digital world of crypto and the real world.
The Genealogy of NFTs
The need for NFTs was borne out due to the limitations of a token known as "Colored coins", launched in 2012 by Meni Rosenfield. These tokens comprise small fractions (satoshis—the smallest unit of a Bitcoin) of a Bitcoin, aimed to represent a variety of assets—both digital and physical—that exists within the framework of the Bitcoin blockchain technology.
However, these assets had limitations within the Bitcoin blockchain, as they could only represent certain values if all participants are in a consensus about their worth. Hence, colored coins were only as powerful as their weakest participant, as a single disagreement from a participant to a transaction collapses the network.
But unlike the Bitcoin blockchain, the Ethereum blockchain technology enables smart contracts that store unique digital tokens to be built on it, thereby facilitating projects like NFTs to be possible and created.
In 2014, the first known NFT “Quantum” was minted by Kevin McCoy on the NameCoin blockchain. The first-ever known NFT game “Etheria” (in which digital land is traded as an NFT), was created in 2015.
In 2016, the “Rare Pepes” tokens as digital collectible cards were minted by blockchain pioneers. In June 2017, the “CryptoPunks” NFT collection was created by product studio Larva Labs. This project was one of the earliest NFT generative art collections ever launched. These earlier digital collections used smart contracts.
In November of 2017, “CryptoKitties” (a game where users can breed and trade these digital collectibles) was the first NFT collection to be launched on the Ethereum network by Canadian studio Dapper Labs. This was facilitated by Ethereum’s new token standard ERC-721, which describes how to build NFTs on Ethereum virtual machine (EVM) compatible blockchains.
Other NFTs to follow are “Axie Infinity” (an online video game based around NFTs and Ethereum) created in 2018 by Vietnamese studio Sky Mavis; “Decentraland” (a browser-based game that allows users to trade virtual plots of land and in-game items) created by Ari Meilich and Esteban Ordano and launched in 2021; the popular PFP NFT “Bored Ape Yacht Club” created in 2020 by product studio Yuga Labs etc.
The Ethereum token standard ERC-721 (a set of rules that a smart contract is required to follow for NFTs), has facilitated and launched thousands of non-fungible tokens on the NFTs marketplace.
On other smart-contract-enabled blockchains with non-fungible token tools and support like Solana, TRON, EOS, Secret Network, etc., NFTs can also be created and launched.
What Are the Types of NFTs?
Generally, there are two types of NFTs: Static NFTs and Dynamic NFTs. Static NFTs are digital assets that cannot be changed or modified in any way once it is created.
Their forms remain immutable and permanent on the blockchain network after the minting process is complete. These NFTs are utilized for fixed assets e.g., deeds and licenses, digital identification documents, real estate, artworks, etc.
On the other hand, dynamic NFTs are digital assets that can be modified in the future. Any change to its features happens over time, as it allows the flexibility for updating or modification, even after minting them. Digital artworks, digital wearables, and NFT-based games are some examples of dynamic NFTs.
Minting NFTs and Ownerships
Another conundrum is: who can create NFTs? Basically, anyone who owns a computer can. No experience is required. As long as one can prove ownership legally, one can mint an NFT.
To own an NFT, it is necessary to have it registered with the use of a crypto wallet address—a piece of software that stores your public and private keys—a string of characters used to send and receive cryptocurrencies.
Registration is exactly what makes a given NFT verifiably unique. Anyone can have a copy of any NFT in the form of a saved picture or file, but they don’t own the original NFT as the signature of ownership lies solely with you.
This signature of ownership is exactly what you offer to sell and transfer in exchange for money, and not really the digital asset in this instance, and this is what makes the term a non-fungible token.
Trading NFTs
To buy an NFT, it is expedient to have a crypto wallet address with a cryptocurrency that is supported or token-based on the marketplace blockchain, as each blockchain has its own governing mechanism.
There are software wallets (or hot wallets which are stored on the computer server (online) like MetaMask, Enjin, Coinbase wallet, etc.) and hardware wallets (or cold wallets which are physical storage forms (offline) in a flash drive-like form like Ledger Nano X, Trevor Model T, Ledger Stax, etc.) that enables minting and transactions of NFTs.
NFT marketplaces such as OpenSea (the oldest NFT marketplace), Rarible, SuperRare, KnownOrigin, etc., facilitate the selling and buying of NFTs. These transactions can also take place on some cryptocurrency exchanges such as Binance and Coinbase.
In February 2023, the global NFT market saw over $1 billion in sales, according to data from the NFT tracking site, CryptoSlam.
Fractional NFTs (F-NFT)
One notable detail in the entirety of this article is that NFTs are verifiably unique and indivisible. If so, what are fractional NFTs? Fractional NFTs (F-NFT) are digital assets that allow for fractional ownership of the NFTs to multiple parties.
It is not the NFT itself that is divided, but the tokenized valuation of it. In essence, the value assigned to the NFT can be fractionalized and available to multiple parties but not the NFT itself.
Depending on the consensus on valuation by the signature owner(s) fractionalizing an NFT, it can be divided into many parts as necessary. This could go from only two pieces to over a thousand pieces.
This presents an opportunity for multiple parties to share rare and valuable digital assets. Fractional NFTs can simply be fractionalized versions of popular, expensive, and exclusive NFTs.
In essence, NFTs that sell for a higher price are fractionalized into more pieces so each individual fraction can be more affordable to multiple parties across the globe. This increases trading liquidity that can benefit parties to a transaction.
In February 2023, the total market cap of fractional NFTs was valued at more than $31 million. At that time, the most expensive F-NFT was “The DOGE NFT” (of the well-known doge meme), valued at $13.33 million, according to data from the NFT tracking site, DappRadar.
Pricing and Volatility of NFTs
An indisputable fact associated with the crypto market is its price volatility. Although, the NFT industry is more stable in comparison with the other traditional crypto markets.
Economically, as with all other cryptocurrencies, NFT prices are dictated by the concept of demand and supply, as it has no intrinsic value or assets backing.
What happens when there is a demand for an asset, in this case, an NFT project? There is an almost equivalent supply of that asset with an increase in value. Conversely, the same is also true.
The usefulness of NFTs will depend on the network effects that they can generate. These effects revolve around the uncertainties that mark the volatility of its prices as with other traditional cryptocurrencies.
NFTs Utilities
Due to the popularity of NFTs in recent years, enthusiasts and users in the NFT space are setting the building blocks for connecting these digital assets to real-world assets. For example:
· Traditional artists and artwork collectors, and digital artists are beginning to explore the world of NFTs and its shared utilities to provide a more direct connection and access to fans without any of the traditional third-party influences.
· Notable and influential clothing and fashion brands like Nike, Dolce and Gabbana, Tiffany, Gucci, and Adidas, have released NFTs offering unique pieces of physical clothing and collections of digital wearables. These brands have generated some of the most NFT revenue seen in the last two years.
· With the traditional music industry, electronic music producers and artists, and traditional and digital content creators coming into the world of NFTs, they are beginning to explore its potential to provide a more “fan-centric” connection without the influence of third-party traditional record labels.
· With its successful introduction to the blockchain network in 2015, the gaming industry has seen an upturn in fortune and a wider reach, as some traditional gaming franchises are now exploring this ecosystem. These digital assets are paving ways for gamers to monetize their time, thereby making gamer ownership over their achievements and unique digital assets feasible.
· Hollywood and some independent film franchises are adopting NFTs assets for a variety of reasons. While some are engaging fans for a small fee for digital collectibles, others are gamifying the experience, thus expanding their fandom across the globe.
· In the real estate sector, some are making use of NFTs as assets along with traditional engagements to facilitate faster, more secure, and relatively cheaper transactions. As a use case, NFTs are used to represent pieces of real estate.
The Future of NFTs
NFTs as a novel innovation have demonstrated that they can incorporate different concepts and ideologies from a myriad of different content creators around the world into a model that provides true and unique ownership to users.
As an innovation, it is a stepping stone for concepts like web3 to be possible and quite necessary, in a world where privacy and sharing of user data are continuously being infringed upon.
Surely it has its drawbacks like public and government skepticism, rug pulls, security breaches on NFTs marketplaces, etc. Nevertheless, NFTs present a bridge between the digital world of cryptocurrency and the real world. Think NFTs, think digital user signature ownership.
