What is a non-fungible token (NFT)?
Non-fungible tokens or NFTs are crypto assets on blockchain with unique identification codes and metadata that distinguish them from one another. contrary to crypto-currencies, they cannot be traded or traded for equivalence. This differs from fungible tokens like cryptocurrencies, which are identical to each other and therefore can be used as a medium for business transactions.
What would you like to know
- NFTs are unique crypto tokens that exist on a blockchain and cannot be replicated.
- NFTs can be used to represent real world objects such as works of art and real estate.
- “Tokeninzing” these tangible real-world assets allows them to be bought, sold and traded more efficiently while reducing the likelihood of fraud.
- NFTs can also be used to represent peoples’ identities, property rights, etc.
The separate construction of each NFT has the potential for multiple use cases. For example, they are an ideal vehicle for digitally representing physical assets such as real estate and works of art. Because they are blockchain-based, NFTs can also be used to cut out middlemen and connect artists with audiences or for identity management. NFTs can cut out middlemen, simplify transactions and create new markets.
- In early March, a group of Beeple NFTs were sold for over $ 69 million.
- The sale set a precedent and a record for the most expensive digital artwork sold so far.
- The work was a collage comprising the first 5,000 days of Beeple’s work.
Much of the current NFT market is focused on collectibles, such as digital artwork, sports cards, and rarities. Perhaps the most fashionable space is NBA Top Shot, a place to collect non-fungible tokenized NBA moments in digital card form. Some of these cards have sold for millions of dollars. Recently, Twitter CEO Jack Dorsey tweeted a connect to a tokenized version of the first tweet ever written where he wrote “just setting up my twttr”. The NFT version of the very first tweet has already been auctioned for $ 2.5 million.
Much like physical money, cryptocurrencies are fungible, meaning that they can be traded or traded against each other. For example, a Bitcoin always has the same value as another Bitcoin. Likewise, a single unit of Ether is always equal to another unit. This feature of fungibility makes cryptocurrencies suitable for use as a secure medium of transaction in the digital economy.
NFTs change the cryptographic paradigm by making each token unique and irreplaceable, thus making it impossible for one non-fungible token to be equal to another. These are digital representations of assets and have been compared to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also expandable, which means that you can combine one NFT with another to “create” a unique third NFT.
Just like Bitcoin, NFTs also contain ownership details for easy identification and transfer between token holders. Owners can also add metadata or attributes related to the asset in NFTs. For example, tokens representing coffee beans can be classified as fair trade. Artists can also sign their digital artwork with their own signature in the metadata.
NFTs have evolved from the ERC-721 standard. Developed by some of the same people responsible for the ERC-20 smart contract, ERC-721 defines the minimum interface – ownership details, security and metadata – required for the exchange and distribution of gaming tokens. The ERC-1155 standard goes further into the concept by reducing the transaction and storage costs required for NFTs and by consolidating multiple types of non-fungible tokens into a single contract.
Perhaps the most well-known use case for NFTs is that of cryptokitties. Launched in November 2017, cryptokitties are digital representations of cats with unique identifications on the Ethereum blockchain. Each kitty is unique and has an ether price. They reproduce with each other and produce new offspring, which have different attributes and ratings than their parents. Just weeks after their launch, cryptocurrencies built up a fan base who spent $ 20 million buying ether, feeding them, and feeding them. Some enthusiasts even spent over $ 100,000 for the effort.
While the use case for cryptokitties may seem trivial, the following have more serious business implications. For example, NFTs have been used in private equity transactions as well as in real estate transactions. One of the implications of activating multiple types of tokens in a contract is the ability to provide escrow for different types of NFTs, from artwork to real estate, in a single financial transaction.
Why are non-fungible tokens important?
Non-fungible tokens are an evolution from the relatively simple concept of cryptocurrencies. Modern financial systems consist of sophisticated trading and lending systems for different types of assets, ranging from real estate and loan contracts to works of art. By enabling digital representations of physical assets, NFTs represent a step forward in the reinvention of this infrastructure.
Of course, the idea of digital representations of physical assets is neither new nor the use of a unique identification. However, when these concepts are combined with the benefits of a tamper-proof smart contract blockchain, they become a powerful force for change.
Perhaps the most obvious benefit of NFTs is market efficiency. Converting a physical asset to a digital asset streamlines processes and removes intermediaries. NFTs representing digital or physical artwork on a blockchain remove the need for agents and allow artists to connect directly with their audiences. They can also improve business processes. For example, an NFT for a bottle of wine will make it easier for different actors in a supply chain to interact with it and help track its provenance, production and sale throughout the process. The consultancy firm Ernst & Young has already developed such a solution for one of its clients.
Non-fungible tokens are also great for identity management. Take the case of physical passports that must be produced at each point of entry and exit. By converting individual passports to NFTs, each with their own unique identifying characteristics, it is possible to streamline entry and exit processes for jurisdictions. By expanding this use case, NFTs can also be used for identity management in the digital realm.
NFTs can also democratize investing by splitting up physical assets like real estate. It is much easier to divide a digital real estate asset among multiple owners than a physical asset. This ethic of tokenization does not need to be limited to real estate; it can be extended to other elements, such as illustrations. Thus, a table does not always need a single owner. Its digital equivalent can have multiple owners, each responsible for a fraction of the painting. Such arrangements could increase its value and income.
The most attractive possibility for NFTs lies in the creation of new markets and forms of investment. Consider a property divided into several divisions, each containing different characteristics and types of properties. One of the divisions could be next to a beach while another is an entertainment complex and yet another a residential area. Depending on its characteristics, each land is unique, evaluated differently and represented by an NFT. Real estate trading, a complex and bureaucratic affair, can be simplified by incorporating relevant metadata into every unique NFT.
Decentraland, a virtual reality platform on the Ethereum blockchain, has already implemented such a concept. As NFTs become more sophisticated and are integrated into the financial infrastructure, it may become possible to implement the same concept of symbolized plots of land, of different value and location, in the physical world.