Introduction to Non-Fungible Tokens (NFTs)
Crypto Basics

Introduction to Non-Fungible Tokens (NFTs)

9 Minuten
1 year ago

This guide will help you become even more knowledgeable in the intricacies of NFTs — from beginners to experts.

Introduction to Non-Fungible Tokens (NFTs)

Inhaltsverzeichnis

Are you interested in exploring the world of non-fungible tokens (NFTs) and don't know where to begin? Or maybe you already know one or two things about this technology and hope to level up? Irrespective of your level of experience in the NFT world, this guide will help you become even more knowledgeable in the intricacies of NFTs.

Since this guide is designed to cater to readers with varying degrees of exposure to the concept of NFT, we have decided to split it into three segments:

  • NFT Newbie
  • NFT Intermediate
  • NFT Expert

With this structure, it is easy to build on previously acquired information on your journey to becoming an NFT expert. Additionally, we will highlight the skills and terms you need to hone at each level. We will also include links to resources that further expand on these skills and terminologies.

Without any further ado, here is everything you need to know about non-fungible tokens.

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NFT Novice

What Are Non-Fungible Tokens?

In their most basic form, non-fungible tokens are representations of unique items, stored on the blockchain. That means that not only could a digital drawing that you whipped up on Microsoft Paint become an NFT, but putting it on the blockchain means that it would be stored there, forever a unique representation of the day that you doodled in Paint.

You might have heard that one of the things that makes Bitcoin work as a currency is that it is “scarce” — there will only ever be 21 million Bitcoin. In that same way, the unique quality of NFTs, the fact that they are “non-fungible” (aka, one does not equal the other, like one dollar equals another dollar!) adds to their value.

How Are NFTs Different From Digital Currencies?

Like we wrote above, unlike digital currencies like Bitcoin and Ether, one NFT does not equal another.

In the case of Bitcoin, 1 BTC is indifferentiable from another unit of BTC. When you borrow 1 BTC from a lender, you don’t have to worry about returning that very exact Bitcoin. Any Bitcoin will do — 1 BTC always equals 1 BTC.

How Do You Use Non-Fungible Tokens?

Since NFTs are always unique and often rare, they can be used in basically any industry that’s interested in trying something different.

Here are just some of the different ways that you can use NFTs.

Games

It is no coincidence that the concept of NFT had its first breakthrough in the gaming world, thanks to the unprecedented success of CryptoKitties — a blockchain game that allows players to create, breed and trade virtual cats. The possibility of using NFTs (which have real world value) in games has helped democratize the gaming world. With this, players can monetize and have more control over purchased or unlocked gaming assets like skins, characters, weapons and much more — just imagine that playing Neopets brought you points that you could actually sell for dolalrs!

Digital Art

Much of the NFT boom has centered around the impressive appeal of digital art. Artists are increasingly creating blockchain representations of their artworks, videos or music on the blockchain.

Identity

Another way we can harness the power of NFT is to bring identification and verification systems to the blockchain. By issuing different and immutable identifiers to each individual, it is possible to verify identities seamlessly.

Collectibles

The scarcity that non-fungible tokens provide is fast becoming an enabler of the current digital collectible trend. Notably, collectors have begun to identify the advantage of establishing the rareness of their digital collectibles. Pokémon on the blockchain, anyone?

Fashion

Non-fungible tokens are also ideal for establishing and preserving the authenticity of products in the fashion industry.

What Are the Pros and Cons of NFTs?

One of the benefits of NFTs is that it allows you to digitize a real-world asset without losing any of its uniqueness. It also gives control over art (for example) directly to the creator — there is no middleman, you own your NFT creation yourself.

On the otherhand, NFTs are still pretty new, and the concept of decentralized, digital art can be pretty hard to grasp at first. There is still a lot of work to be done regarding the user-friendliness of NFT platforms, especially those allowing users to have complete control over their assets.

There are also blockchain-specific problems that are currently plaguing some NFT platforms, like scalibility.

For example, the Ethereum blockchain, which has arguably the most active and largest NFT market, has problems meeting the sheer demands of its users. This traffic congestion can lead to expensive fees to create and send NFTs.

NFT Terms to Know

Below are some of the terminologies that will help on your journey from being an NFT Novice to an NFT Intermediate.

Blockchain: The technology underpinning non-fungible and cryptocurrencies as a whole.
Token: Digital assets that have specific use cases on blockchain apps.
Token Standard: Frameworks governing the design and characteristics of tokens.
Smart Contracts: Programmable and self-initiating conditions that govern the transactions and activities between two or more blockchain users.
Digital Art: Simply put, this is art in digital form.
Non-Fungible Tokens: Rare and unique digital assets on the blockchain.

Scaling Problem: This refers to limitations regarding the transactional throughput of blockchains.

Further Reading:

What is a non-fungible token?

NFT Intermediate

How Does Blockchain Technology Enable Non-Fungibility?

From the explanation above, you will notice that blockchain plays a critical role in the formation and establishment of the core components of NFTs. And so, it is imperative to touch on the fundamental principles of blockchain that deliver scarcity.

It is common knowledge that blockchain is the technology that underpins all decentralized cryptocurrencies. Blockchain can successfully implement the creation and ownership of digital assets, because it functions like a public ledger where all the activities executed via its infrastructure are recorded.

Everyone connected to the blockchain network can track the ledger and collectively ensure that it is not susceptible to manipulations. Thanks to a series of cryptographic and consensus-based processes, blockchain records are tamper-proof. When you create and launch a token on the blockchain, the process that generated this token and its ownership are verifiable and immutable, significantly reducing fraud.

So, when you represent real-world or digital assets on the blockchain in the form of non-fungible tokens, you are ultimately capitalizing on the immutable, transparent and secure features of blockchain. You trust the blockchain to preserve the uniqueness of your asset, meaning that it cannot be duplicated or counterfeited. Blockchain allows you to permanently input unique identifiers or additional information that sets your assets apart and establishes ownership.
These identifiers separate non-fungible tokens from your regular digital assets. And to ensure that all non-fungible tokens come with additional information, smart contract blockchains come up with standards that govern the creation and transfer of such tokens. These standards are what we call token standards.

For example, Ethereum uses an ERC-721 token standard for non-fungible tokens launched on its blockchain. Apart from ERC-721, the Ethereum ecosystem also utilizes the ERC-1155. This framework allows users to bundle multiple non-fungible tokens together. In essence, you can ship more than one NFTs in a single transaction and evade multiple transaction fees. On the other hand, BNB Chain, which is the second most active NFT ecosystem, has its native version of token standards called BEP-721 and BEP-1155.

These standards essentially establish a framework which developers can use to create platforms like wallets that can interact seamlessly with non-fungible tokens. Note that not every wallet supports these standards. So, even though you might have a crypto wallet, compatibility with NFT token standards is not guaranteed unless the wallet provider has gone all out to integrate the infrastructure required to interact with NFTs. Therefore, you may want to research the compatibility of your wallet with NFTs beforehand.

What Are Non-Custodial and Custodial NFT Wallets?

Once you confirm the NFT status of your wallet, you should go a step further to understand how they work. The first main differentiator you may want to consider is the level of autonomy that the wallet provides. On the one hand, we have non-custodial wallets that let you store your private keys on your personal device. On the other, custodial wallet providers take up the responsibility of securing your private keys on your behalf. As you can see, the difference lies in the security setup of the wallet. One requires you to have sole custody of your private key, while the other entails that you trust the security system of third parties.

When it comes to NFT wallets, there are several options that you can choose from. For most new crypto users, custodial wallets may seem a lot easier to navigate since they do not come with the technicalities associated with the personal management of private keys. While this is a given, it is advisable to opt for non-custodial options so that you can have complete control over your asset. Another important detail you need to consider is the range of blockchains the wallet supports. Some of the popular options are MetaMask and Trust wallet.

More NFT Terms to Know

Here are some crucial terminologies that could help you grasp the topics discussed in this guide:

ERC-721:  The NFT token standard for the Ethereum ecosystem.
Custodial: A term used to connote services that require users to deposit their assets in third-party wallets.
Non-custodial: Sservices that let users have autonomy over their assets.
Wallet: Digital devices or platforms designed to store crypto assets and provide blockchain interfaces for sending and receiving crypto transactions.
Public Address: A set of alphanumeric characters that allows you to receive digital assets.
Private Keys: Think of this as a secret passcode that you need to sign transactions.
Digital Signature: This is a cryptographic process for validating the sources of messages or transactions via encryption.

Further Reading:

What Is a Blockchain

Why Nobody Can Hack a Blockchain

What Is BNB Chain?

NFT Expert

It is time to take all that you have learned in this guide and put it to use!

In this section, we will explore the process of minting, buying and selling of NFTs. But first, you need to decide on the blockchain where you want to execute all your NFT-related activities. Some of the options available are Ethereum, BNB Chain, Polkadot, Tron and Tezos

Note that the blockchain you eventually choose will end up limiting the NFT marketplace you can use. For starters, it is advisable to opt for established NFT blockchains like Ethereum and BNB Chain. Both ecosystems currently account for a large share of the NFT market. Ethereum, in particular, is home to some of the most popular and successful NFT projects, including CryptoPunks, Axie Infinitya and Decentraland.

What Is an NFT Marketplace?

NFT marketplaces are platforms that facilitate the minting and trading of NFTs. Like digital asset wallets, these marketplaces either run a custodial system or a non-custodial framework. It is up to you to decide the model that best suits you.

Likewise, the NFT marketplace available to you would probably limit you to a handful of payment options. For instance, an Ethereum-based NFT marketplace would adopt ETH as its base currency. Therefore, you need to do some digging before settling for a marketplace.

Below are some of the reputable NFT marketplaces available on Ethereum and BSC.

  • OpenSea - Ethereum
  • Nifty Gateway - Ethereum
  • Rarible - Ethereum
  • BakerySwap - BSC
  • Juggerworld - BSC
  • Treasureland - BSC

How to Mint an NFT

Regardless of your preferred blockchain, you will need to link your wallet to the NFT marketplace of your choice. Also remember that you will need to use the base currency of the marketplace to pay the minting fees.

For example, you will have to pay ETH-denominated fees before you can mint NFTs on a platform like OpenSea. Once you have connected your wallet, you can go ahead to upload your song, art, meme, or any other supported file you plan to mint. Next, you have to set a description and add a banner image.

After adding the required information, you can set customizable traits like the uniqueness and rarity of the NFT. Then, you can finally pay the associated minting fee on your connected wallet. This payment validates the creation of your NFT on the blockchain. You can view your newly minted NFT on either your wallet or the blockchain.

As soon as your NFT appears on the blockchain, you can put it up for sale. Depending on the marketplace you are using, you could put the digital asset for auction.

Note that the processes of sending and receiving of NFTs involve the same steps you would ordinarily initiate when transferring or receiving regular digital assets, including Bitcoin and Ethereum.

Even More NFT Terms to Know

Nifty Gateway: An Ethereum-focused NFT marketplace.
Browser Extensions: Plugins for internet browsers.
MetaMask: Ane of the most popular NFT-compatible wallets.
OpenSea: A peer-to-peer Ethereum-based NFT marketplace.

Further Reading:

What Is MetaMask?

How to Mint an NFT

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