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Crypto Basics

What Is a Non-Fungible Token (NFT)?

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Published on:
January 30, 2021

NFTs, or non-fungible tokens, have tons of use cases: gaming, art, even yield farming. What exactly are they?

What Is a Non-Fungible Token (NFT)?

Table of Contents

A NFT (non-fungible token) is a special cryptographically-generated token that uses blockchain technology to link with a unique digital asset that cannot be replicated. 


Non-fungible tokens differ from popular cryptocurrencies such as Ether (ETH), Bitcoin (BTC) and Monero (XMR), which are fungible; for example, you can exchange one Bitcoin for any other Bitcoin.


Although the usage of NFTs has spread in various industries, they're synonymously associated with the gaming and digital collectibles sectors and are most commonly found as a specific Ethereum token built on the ERC-721 standard. However, in 2021, their use is starting to spread to other blockchains like Binance Smart Chain’s BEP-721 protocol. 


What Is Fungibility?

Fungibility refers to an asset's ability to be exchanged with a similar asset without sacrificing its value. Fungibility also defines an asset's characteristics, such as divisibility and value.


For example, one $10 dollar bill is identical to another $10 dollar bill in terms of value. As such, when you borrow a $10 dollar bill from someone, you don't have to return the exact same note, since another of its kind has the same value.


In the cryptocurrency sector, one BTC has the same value as any other BTC. However, the game changes when we cross over to non-fungible tokens. An NFT crypto token has a distinct value from any other similar token. Individual characteristics dictate their uniqueness, hence, they are non-fungible, much like real-world assets like rare stones, works of art and collector luxury items.


What Are Fungible Tokens?

Fungible tokens are tokens that are tradable for each other, and their value remains constant. In the above example, Bitcoin is a fungible token because it has the same value regardless of its owner or history.


Characteristics of Non-Fungible Tokens

  1. Rare – The value of NFTs comes from their scarcity. Although NFT developers can create any amount of non-fungible tokens, they often limit the tokens to increase rarity.
  2. Indivisible – Although not set in stone, most non-fungible tokens are indivisible into smaller units. You either purchase the entire amount of, say, a digital art piece, or purchase no art at all.
  3. Unique – This is perhaps the most significant characteristic of them all. NFTs have a permanent information tab that records their uniqueness. Think of this information as a certificate of authenticity.


Advantages of NFTs

Non-fungible tokens bring a new dimension to digital interactions.

The three leading advantages of NFTs are:


  1. They're transferable – Unlike exchange-traded fungible tokens, NFTs are bought or sold on special marketplaces. However, their value depends on their uniqueness.
  2. They're authenticBlockchain technology powers non-fungible tokens. Therefore, you know that your NFT is genuine, since it’s nearly impossible to create counterfeits with a decentralized immutable ledger.
  3. They preserve ownership rights – Again, this refers to an NFT’s use of decentralized platforms where no owner can alter the data once committed.


Non-Fungible Token Use Cases

Gaming

NFTs are popular in the gaming industry since these tokens solve some of its inherent problems. For example, top games such as Fortnite prohibit the sale of rare traits and accessories such as weapons and skins. 


However, with NFTs, these features can easily be transferred and used in different games. As such, non-fungible tokens can help drive in-game economies.


Digital Assets

Think of Decentraland. Here, participants can buy virtual land. Another example that is closer to home is ENS (Ethereum Name Service), which uses NFTs for its .ETH domains to facilitate buying and selling.


Identity

NFTs are ideal for fighting identity theft. Examples of things that can be digitized to represent identity include academic qualifications, medical records and even our appearances. 


Furthermore, digital artists can turn their work into NFTs for copyright purposes.

NFT’s use to prove identity includes converting physical game tickets into non-fungible tokens to weed out counterfeits.


Collectibles

NFTs bring a new dawn to the collectible world. Consequently, conventional collectors are now onto digital assets.


What Are ERC-721 tokens?

An ERC-721 token is a term used loosely to describe non-fungible tokens. Breaking down the term, ERC-721 refers to guiding standards when creating NFTs atop the Ethereum blockchain. Therefore, this is a token type that is built based on Ethereum’s ERC-721 standard.


Apart from Ethereum, NFTs can live on other decentralized networks such as EOS and NEO. However, these platforms must have smart contract-capability and a box full of NFT tools. Smart contracts, in this case, enable the inclusion of detailed descriptions such as metadata.


Two Things That Have Brought NFTs Into the limelight

NFT Art

Digital art artists have embraced non-fungible tokens to create NFT art. However, one thing that has made this NFT niche gain so much traction is the amount the artists are fetching on NFT marketplaces.


Data from CryptoArt, an analytics platform focusing on cryptocurrency art, indicates that the total volume of NFT-based artworks reached $8.2 million in the last month of 2020. This was a significant increase considering the volume was only $2.6 million a month prior.


However, the entire collectibles’ market size is currently worth more than $130 billion. The increasing market value depicts a shift from viewing collectibles as a mere hobby to a large financial move.


CryptoArt's founder, Richard Chen, attributed the rise in trading volume to an increase in understanding of what non-fungible tokens can do to maintain authenticity.


Notably, the last half of 2020 saw digital artwork artists sell their products at some of the highest prices. For example, in September 2020, an NFT digital artwork that changed along with Bitcoin’s price fetched 262 ETH ($101,100 at the time).


In October, another NFT artwork designer traded their piece for $131,250, which was the highest an NFT product had sold so far. Amazingly, better days were still to come for NFT artists as two months later, a collection of NFT art changed hands for $777,777.78.


What Are CryptoKitties?

CryptoKitties is a popular game on the ETH-powered decentralized protocol allowing the collection, purchase, sale and breeding of virtual cats. Since its much-publicized launch in 2017 at the height of that year’s bull run, the game, essentially a blockchain version of 1990s cult classic Tamagotchi (in that same vein, check out DeFi’s Aavegotchi!) has continued to act as an NFT bastion. 


Notably, CryptoKitties was the first mainstream use case on the second-largest blockchain that focused on leisure. In addition, the game opened the lid on the reach of decentralized applications (DApps) for recreational purposes. Upon its launch, CryptoKitties brought massive hype to Ethereum’s platform, which soon turned into a chorus of boos as the DApp’s popularity clogged the network, slowing down transaction confirmations and pushing up fees. 


Using smart contracts, Kitties' owners and breeders can trade their virtual cats. They don’t only draw attention, but also serious money on NFT marketplaces such as OpenSea.


If you are a cat lover and wondering how to buy CryptoKitties; it's easy. First, you need a Firefox or Chrome browser, a MetaMask wallet and some Ethereum (ETH) coins in the wallet. Next, access the Kitties' marketplace, choose your Kitty, pay, and it's yours.


Dapper Labs, creators of CryptoKitties, has recently followed up their success with NBA TopShot, a digital collectibles marketplace for NBA fans. 


What Are CryptoPunks?

An obscure CryptoPunks “Alien” NFT made headlines in January 2021 when it was sold for a staggering $760,000 at the time, or 605 Ethereum. CryptoPunks are considered the original NFT series and its groundbreaking project predates both the ERC-721 standard and CryptoKitties. This has made it increasingly rare, with the average selling price for one in 2020 exceeding $6,000. 


The “Punk” in question, number 2890, is one of only nine existing “alien” collectibles made by Larva Labs and was last sold in July 2017 for only 8 ETH (around $1,500 at the time). A spokesperson for the investment consortium, which includes several prominent DeFi industry members, justified the cost, saying that a new market of younger collectors will increasingly be attracted to digital art that will continue to appreciate over time and mature into “iconic” digital works. 

CoinMarketCap x The Sandbox: CMC Heroes

In January 2021, CoinMarketCap and The Sandbox partnered to release their own line of CoinMarketCap Hero NFTs. There are six CMC Heroes available in total: Brawler, Sage, Liquifier, Hothead, Protector and CoinMarketCaptain. In the interest of scarcity, CoinMarketCaptain is only available those that have all five other heroes.

What Else Can Be Turned into an NFT?

Yield Farming in DeFi

NFTs are starting to converge with decentralized finance (DeFi), specifically yield farming strategies.


It wasn't until 2020 when this new pairing started bearing fruit. For example, Yearn Finance, a DeFi protocol, developed an insurance product, Y.Insure, for any virtual currency asset.


Y.Insure utilizes NFT mechanisms (ERC-721) to represent the unique properties of insurance policies. Basically, normal ERC-20 tokens "didn't make sense" when defining the unique characteristics of an insurance policy. 


Other DeFi projects with an NFT bearing include MEME, Bancor and Enjin.


Individual Skills

Non-fungible tokens can represent a person's skill or time for monetization purposes. For example, a person can use an NFT for newsletters, podcasts and videos.

Problems with NFTs

Despite bringing sweeping changes to various industries, non-fungible tokens aren't without their shortcomings. Unfortunately, their problems come from the very same rock they sit on: blockchain.


Decentralized networks are not 100% user-friendly; a hurdle developers are working hard to overcome. For instance, verifying authenticity, selling, purchasing and storing an NFT needs at least a basic understanding of blockchain technology.


The problem sets in when the majority of the targeted individuals are only interested in the product, not the underlying technology, which is true for NFTs relative to other crypto subsectors.


Beeple, an NFT creator who sold some of their works for a cool $66,666 (as well as that record-breaking over $777,777,777 purchase), observes that massive adoption of NFTs will only happen if "the necessary infrastructure is in place," which would enable a seamless experience for users. 


In other words, we need blockchain to be as mainstream as a “smartphone” or the “internet.” Most people don’t know how those two work technically, yet billions use them every day. We need the same level of sophistication in blockchain for NFT’ to truly capture the world.

Top NFT Projects

Since the NFT subspace is growing exponentially, NFT-focused products and projects have also increased. They range from gaming networks to NTF marketplaces. Below are five of the top NFT projects today.


  1. OpenSea – This is the leading marketplace for NFT art and collectibles. Listed items range from ENS to virtual pets and plots of land. Notably, the marketplace allows purchases using several virtual currencies such as ETH and DAI.

  2. Async.Art - Async is another non-fungible token artwork marketplace that allows you to not only buy and sell your NFT but also to create one. That's not all. The platform has some programming features that enable art creators to easily define their artwork's appearance and behavior. In fact, it even allows buyers to buy sections or "layers" of a given artwork and customize them.

  3. CryptoKitties – Although we've discussed this project above, it still deserves to be on the list of top NFT projects considering it brought the whole NFT game to the limelight.

  4. Ethereum Name Service (ENS) – This is a domain name service project that came to life in mid-2017. The .ETH domain names are NFTs using Ethereum's ERC-721 standards and are tradable on NFT marketplaces.

  5. Decentraland – Decentraland is a top NFT project focusing on a distributed virtual world. Here, participants can buy virtual land. Furthermore, each “inhabitant” has a special identifying digital passport.

Where to Buy NFTs

It's possible to buy NFTs at NFT marketplaces. For example, OpenSea, Rarible and Nifty Gateways are some of the most well-known NFT marketplaces as of April 2021. Most NFT marketplaces work in an auction format with Ethereum as the underlying currency, so make sure that you have Ethereum in your crypto wallet and that you are ready to participate in an auction-style buying format.

Nifty Gateway is the NFT marketplace founded by twins Duncan and Griffin Cock Foster, later acquired by Gemini. On Nifty Gateway, interested users can purchase NFT artwork with tokens.

OpenSea is an NFT marketplace that includes digital art, collectibles and gaming items — all blockchain-based. You are also able to mint an NFT on OpenSea.

SuperRare is a more exclusive NFT platform, which also accepts Ethereum as a payment method. Artists that want to be on SuperRare need to submit a profile in order to be considered.

As for where to buy NFTs on Rarible, you can both purchase and issue NFTs on this marketplace, which allows anyone to be listed on its portal.

It is possible to buy NFTs on marketplaces besides the ones listed above — for example, the popular NBA Top Shot NFTs are available on their own site.


Are We Ready for an NFT Bull Run?

Not yet. The current NFT hype has signs of fading away very soon. since most of it sits on artificial prices. Furthermore, there are concerns that wash trading is at play. For instance, a virtual cat from CryptoKitties had a selling price of 600 ETH coins, even though it had no rare traits to justify the high cost.


But despite all that, even if you aren’t interested in NFTs right now, don't turn your nose up quite yet — the ecosystem is changing, and just like DeFi, NFTs may become the next big thing in crypto. Besides, there are phenomenal investment opportunities in NFTs right now.


However, the uptake of these tokens lies in whether the next generation of millennials will see their worth. Why? Because by the end of this decade, millennials will have a lot of idle income. And if they are previously predisposed to NFTs, they may consider investing in them. Furthermore, millennials are shifting from collecting physical goods like fine wine to virtual assets such as Bitcoin (BTC).

Conclusion 

It’s important to note that the NFT space is still in its infancy. Therefore, expect to see new platforms edge out the current batch of top NFT projects in 2021.


As of now, the term NFT is slowly moving away from visions of gaming and CryptoKitties to the painting, DeFi, ticketing, digital identity and other use cases.


In fact, its application scope is only limited to the imagination of the cryptocurrency community and developers.

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Author(s)

Werner Vermaak

I'm a technical writer and marketer who has been in crypto since 2017.

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