The last couple of years has been a roller coaster ride for the cryptocurrency market. For example, the third halving of Bitcoin took place in 2020, which saw a huge surge in the cryptocurrency’s price. This type of halving takes place every four years.
After this, large-scale investors and corporates started investing rapidly in Bitcoin and many other crypto coins as well. 2020 was also the year when the crypto world appreciated and accepted the idea of Decentralized Finance (DeFi) on a large scale.
If you have even the slightest idea of blockchain and cryptocurrency, you might be aware of the term NFTs or Non-Fungible Tokens. However, you might not have any idea of the concept behind the creation of NFTs and their uses.
The popularity of NFTs started back in 2020, but they started getting a lot of traction at the start of 2021, and the NFT market exploded.
I’m this detailed guide, we’ll go through everything your need to know about NFTs in-depth.
Introduction to Non-Fungible Tokens
A NFT is powered by an ERC-721 smart contract based on Ethereum. Every intellectual property has its own representative NFT, which can be used to trace the property and can help in transferring it from one person to the other.
These tokens have smart contracts as their base, and they are immutable. Moreover, no one can replicate an NFT since every NFT is related to a specific and unique property.
When it comes to the unique value of NFTs, you can’t trade one NFT for the other, as each NFT acts like a unique collectible item with its unique value.
When compared to NFTs, cryptocurrencies are interchangeable. For example, millions of Bitcoins are currently in circulation, and every Bitcoin has the same value and can be traded for another Bitcoin. However, this isn’t possible with NFTs, as each NFT has its unique value. That’s why NFTs aren’t interchangeable.
Moreover, NFTs can’t be divided as well. For example, the smallest unit of an NFT is the single NFT itself. Many people regard NFTs as the digital equivalent of artworks. Just like art, NFTs and hard to create and are scarce. This fuels their value and keeps them unique in the long run.
For example, the NFT collection cryptokitties are one of the most valuable NFT collections. Despite being in the same collection, every NFT is unique. That’s why each cryptokitty NFT sells for a lot of money.
If you have one cryptokitty, you can’t divide it into smaller portions and sell them separately. However, this can be easily done with Bitcoin or any other cryptocurrency, for that matter. So, the least you can buy is one cryptokitty NFT.
Blockchain technology can be used to easily authenticate the originality of an NFT. Since NFTs are protected by the blockchain technology behind their back, their ownership can easily be changed, and they can be easily traded on the blockchain without getting compromised.
As we mentioned earlier, a huge portion of the NFT market is based on the Ethereum blockchain. Moreover, there are other blockchains like NEO and TRON which support NFT creation as well.
Buying An NFT
Currently, there are lots of marketplaces that sport buying and selling of NFTs. OpenSea is one of the biggest marketplaces you can visit in this regard. If you are looking to buy an NFT based on the Ethereum blockchain, you will have to pay with Ethereum coins (ETH). Moreover, you can use other cryptocurrencies in the case of NFTs created on other blockchains.
Let’s take a look at some of the unique characteristics of NFTs to sum up this portion.
Due to the ERC-721 smart contracts used in their creation, every NFT is unique and different from others. The same Ethereum token creates a universal standard for NFTs which must be met for an NFT to be created on any blockchain.
The main reason behind the value of an NFT is its scarcity. However, since every NFT is unique in itself, the developers can keep generating unlimited NFTs without affecting the price of already existing NFTs in the market.
In the case of most NFTs, it is impossible to divide them into smaller portions, and the smaller unit of an NFT is the single NFT itself.
Introduction to Fungible Tokens
As the name already suggests, fungible tokens are those tokens that are created equal. For example, cryptocurrency tokens are fungible, and any fungible token can be exchanged with another fungible token of the same type. Since the value and identity of a fungible token are equal to other fungible tokens of the same type, they are interchangeable.
One of the main reasons behind the popularity and high value of cryptocurrencies is their fungibility. While not every cryptocurrency is fungible, some of the biggest ones, like Bitcoin and Ethereum, are fungible.
If you either have one Bitcoin or even a timing portion of it, you can exchange it with another person who has the same amount of Bitcoin. The same is the case with Ethereum and every other fungible cryptocurrency, for that matter.
Fungible tokens, which are used in cryptocurrencies, are divisible and non-unique. However, this helps every cryptocurrency streamline its trade and making it a lot easier for every person on the same blockchain. This is all possible due to the identical value of every token within the same cryptocurrency.
In contrast to ERC-721 tokens used in the case of NFTs, crypto tokens use ERC-20 tokens as their standard.
Fungible vs Non-Fungible Tokens
For a novice person, understanding the difference between fungible and non-fungible tokens might be a bit difficult. However, you can easily understand the basics to cover the key concepts.
Interchangeable tokens are called fungible. This means one fungible item has the same value as the other fungible item. This mutual interchange is possible only because of the same value of these tokens.
Example of a Fungible Token
Let’s take a look at an easy example. Let’s set someone owned you a dollar. You’ll ask them to back you back exactly one dollar. However, they may use any one-dollar bill to pay you back. They can even pay you back four quarters, and you’ll happily accept that, as your main focus is the value of one dollar and not the specific one-dollar bill you gave them.
This means that the dollar is fungible. So, any type of asset which can be exchanged with other assets of the same type will be considered fungible. Gold and Oil are good examples of fungible commodities.
Example of a Non-Fungible Token
Non-Fungible tokens are not interchangeable. A non-fungible token can’t be traded or exchanged with another non-fungible token. That’s because each non-fungible token as it’s a unique value, and no other asset can replicate its exact value.
Non-Fungible tokens are like collector’s items. For example, you can take your car as a non-fungible item. Let’s say your car breaks down, and you send it to a repair shop to get it going once again. In return, the repair shop sends you back a car that is more valuable than your car. In this case, you’ll be happy, as you’ve benefitted from the transaction.
On the other hand, if the car you’ve received is in bad condition, you won’t be happy, as you’ve incurred a loss from the transaction. Moreover, in both cases, you can’t take the mechanic’s car as the equivalent of your car, and hence your car is non-fungible.
Use Cases of Non-Fungible Tokens
In addition to digital assets like intellectual property, real-world items can also be represented with the help of NFTs. This way, any type of physical artwork can be represented with NFTs. Tokenized physical assets can be easily traded on a blockchain without the fear of theft and forgery.
Let’s take a detailed look at some of the best use cases for non-fungible tokens.
While NFTs can also be used to represent physical artwork, the latest technological advancement allows the creation of programmable artwork, which enhances the value of an NFT, and helps create unique artwork as well. You can now buy lots of digital artwork pieces which are sold in the form of NFTs and are unique pieces that are not available anywhere else.
This type of technologically advanced artwork also allows the owner to program the artwork and introduce changes according to the circumstances. This has opened a new universe of opportunities for digital artists and has given a boost to the NFT marketplace as well.
Both physical and digital certificates can be created and verified with the help of NFTs as well. Just like any type of degree or license, certifications are issued upon successful completion of a course by a student.
These certificates can either be physical or digital, depending on the institution and the type of course. Whenever the candidate applies to a university or an institute based on a specific skill, that institute might want to verify the originality of the certification before letting the candidate in.
NFTs can be implemented in this use case to accelerate the process of certificate registration and verification. This can save institutes and admins a lot of time. It also makes it a lot easier for the candidate to manage all of the certifications and licenses they have accumulated over the years, with the fear of them getting lost.
Cryptocurrency games are the ones in which the players are rewarded in the form of cryptocurrency or NFTs. NFTs have transformed the whole gaming industry and are introducing new and better changes for the advancement of the community and to provide experienced gamers with incentives.
A good example of this use case is Cryptokitties. The owners can interact with their NFT and also sell it to someone else on the blockchain. Back in 2017, when this concept was originally introduced, the whole Ethereum blockchain got clogged with a boatload of transactions related to crypto gaming.
These days, gamers can successfully participate in crypto-related games and get in-game items as a reward in the form of NFTs. After they stop playing the game, they get to keep the in-game items and can either save them in their collection or sell them on the NFT marketplace according to their value.
The NFT and gaming crossover was an instant hit and caused lots of game developers to partner with NFT developers to develop games with cryptocurrency and NFT transactions enabled in them.
Because of the trust issues in the supply chain, the concept of NFT implementation has also worked well in the fashion industry. With the help of NFTs connected with fashion items, buyers can easily check the ownership proof of the items they buy without encountering any risk of buying counterfeit products.
Moreover, NFTs attached to fashion items can tell us a lot more about the supply chain and how the materials were sourced to start with.
The sports industry suffers the same danger as the fashion industry. That is the selling of counterfeit tickets and sports goods around the globe.
Blockchain technology can also be used in the sports industry to help us verify the ownership proof of sports goods and tickets, and NFTs attached to sports goods can help us identify fake and original items. Since NFTs and immutable, they can easily prevent the sale of fake sports goods.
Differences Between NFTs, Cryptocurrency and Fiat Currency
The whole concept of NFTs depends on their non-fungible nature to make and keep them valuable. This makes NFTs completely different from cryptocurrencies. So, NFTs and cryptocurrencies are two completely different things. Each NFT has its unique attributes, which make it unique and scarce and different from every other NFT in existence. This is why an NFT can’t be interchanged with another NFT or even any cryptocurrency.
Cryptocurrency, on the other hand, is fungible, at least most of it is. A good example of a fungible cryptocurrency is Bitcoin. Let’s say one person has 1 BTC, and he exchanges it with another 1 BTC from another person. In this case, nothing will change. Both you and the other person would be left with the same amount of Bitcoin in your wallet.
Fiat currencies are fungible. For example, currencies like USD and EUR are fungible. As we’ve already given a relevant example above, one USD bill is interchangeable with any other USD bill.
In this case, the serial number and other characteristics of the bill won’t be taken into consideration, and one USD bill reflects the same value no matter who possesses it. However, a unique one USD bill (associated with a unique serial number or a bill with a rate defect) won’t be fungible, as it’ll hold its unique value.
Any physical collectible item which holds unique value will also be considered non-fungible. That’s because one collectible item can’t be replaced and exchanged with any other collectible because of its unique attributes.
Since NFT technology is publicly accessible, anyone can use it to tokenize their work or art and sell it online. However, NFTs have exploded in popularity lately, and some have even sold for millions of dollars.
Large-scale art-creating companies like Grimes have successfully experimented with NFTs and have sold their artwork for millions of dollars. Following this trend, many other things are being tokenized, and NFTs and selling like hotcakes.
NFTs, just like any other asset, have their advantages and drawbacks. Let’s cover some of the pros and cons of NFTs.
Benefits of Non-Fungible Tokens
Since NFTs have no barrier to entry, they are providing more people with a platform to help them enter the world of blockchain and cryptocurrency.
NFTs, when attached to physical or digital assets, can simplify the trading process of those collectibles. NFTs can be easily traded without any fears of duplication or fraud.
Some NFT platforms can be used to monetize digital creation platforms. So, monetizing your work has become easier than ever with the advent of NFTs.
Since NFTs are immutable and transparent because of being on the blockchain, they can be used to verify the authenticity of different assets. This makes NFTs even more valuable.
Drawbacks of Non-Fungible Tokens
Creating new platforms on top of NFTs can be a very lengthy and complex process. Just like cryptocurrency, NFT trade can get you into losses as well. For example, if you buy an NFT and hold to it in hopes of selling it for a higher amount, you’ll incur a loss if the market shrinks.
The NFT marketplace is still relatively newer as compared to the crypto market. That’s why there still are some liquidity issues, and you might not be able to utilize your NFTs and even sell them if you need your money urgently.
We can conclude that the concept of NFTs is still relatively new, and even though the market is still relatively new, NFTs hold a lot of potential in them.