The NFT space has gained the enthusiasm of crypto investors, artists, gamers, digital-cat enthusiasts, and luxury consumers, and it will probably expand its reach, considering that non-fungible tokens evolve continually.
Non-fungible tokens, or as some enthusiasts call them, nifties, are scarce digital assets people can use in art, gaming, and ensuring the provenance of premium goods. The success of CryptoKitties (that emerged in 2017) triggered the growth of NFTs and has provided blockchain with new functionalities beyond cryptocurrency and finance.
However, NFTs might be the new hype in the crypto industry, but few people know exactly how they function and what makes them different from other digital assets. Established cryptocurrencies like Ethereum and Bitcoin are fungible, meaning they’re interchangeable and exchangeable in nature. Similar to traditional currency, people can exchange them without claiming ownership. However, NFTs were created to ensure that someone is the unique owner of the asset. Blockchain technology serves as a digital contract that establishes the legal ownership of the digital content and is non-fungible.
What are NFTs?
NFTs are defined as blockchain records intrinsically connected to digital or real-world assets. Smart contract technology establishes ownership, allowing people to sell, buy, transfer, or trade them. NFTs are new crypto technology that has gained popularity due to the rise of blockchain technology and cryptocurrency. Blockchain enables data transfer through a chain of records known as blocks. The data is applied to diverse use cases, like marketing, consumer data, currency systems and many more. Blockchain technology is popular among users because it uses smart contracts to record NFT operations, making them impossible to fraud or violate.
Blockchain powers two categories of digital assets:
- Fungible (interchangeable)
Fungibility is a characteristic that enables the property to be traded from one owner to another and allows one asset to stand in for another. Traditional currency is fungible, meaning one euro or dollar is the same in value as another euro or dollar.
Non-fungible assets are non-interchangeable and cannot stand in for others. Artwork and real estate lack fungibility characteristics and cannot stand for other assets. Even if NFTs function in the crypto world, they don’t have fungibility quality and resemble physical assets in this regard because they have a clear line of provenance and owners. But because they’re based on digital IT infrastructure, they can gain an extensive variety of assets.
The first NFT was created by Anil Dash and Kevin McCoy and was an octagonal animation with a smart-contract based ownership. They created the Quantum animation before the NFT term came to life to refer to digital non-fungible assets. Sotheby’s auctioned Quantum, proving that digital assets compete with traditional ones.
Non-fungible tokens are essential in the metaverse age, where the property exists in virtual worlds, and people can interact with it and their surroundings using avatars. NFTs open new opportunities for real-world economics and property ownership.
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How do non-fungible tokens work?
If you want to understand how non-fungible tokens work, it’s essential to learn more about blockchain. A blockchain is a distributed database that includes an ever-expanding list of blocks. However, the sequentially arranged blocks cannot be moved, so no database management system can impact their performance. The blocks contain a cryptographic hash that provides information about the previous record on the chain, transactional data, and the time stamp.
There are several blockchain ecosystems in the crypto sector, and Bitcoin and Ethereum are the most popular ones. People can create digital assets defined by smart contracts using the Ethereum blockchain as long as they follow the ecosystem’s rules. Non-fungible tokens are based on the Ethereum ERC-721 standard that provides information about the technical specifications behind NFTs.
When someone creates an NFT, they develop a unique asset with a special set of characteristics and metadata and create a smart contract on the blockchain, according to the ERC-721 standard. The digital asset’s value varies according to its features, not the effort required to develop it. People can even convert real-world assets into NFTs.
How can you use NFTs?
NFTs registered a sharp increase in popularity in mid-2021, and in August 2022, the total trading volume of this digital asset class reached $5 billion worldwide. The rise in demand is proof of NFTs’ versatility, as they facilitate the technology to be applied in several use cases across diverse industries. The most important uses of non-fungible tokens are:
They support the P2E gaming model
Specialists agree that digital collectables are the most popular use of NFTs because they power non-duplicable in-game assets. Players can get assets with intrinsic value when they cross levels, which they can sell or trade later.
They allow true ownership of digital art
Physical and digital art are distinct forms because the second can be copied, shared, and frauded. Therefore, digital art cannot have the same value as traditional art. However, NFTs revolutionised this model because artists create virtual assets no one can temper with because the blockchain carries records of all operations regarding them.
They enable real estate purchases in the metaverse
Well-known metaverse platforms like the Sandbox and Decentraland offer crypto users the possibility to purchase digital real estate parcels. Organisations and individuals can develop virtual property in the metaverse to gain revenue. However, before doing it, they must learn how to buy cryptocurrency because they need to use digital money to pay for these services. Once established, investors can sell the parcels for even millions of dollars. NFTs are a secure way of managing real estate rights in the metaverse.
Why do crypto specialists believe that NFTs will change the sector?
As the NFT market grows in popularity, creators are looking for innovative ways to improve the non-fungible tokens, according to the ERC-721 standard. Their goal is to offer investors more flexibility in using NFTs. They have extended their attention to how the ERC-1155 standard can diversify non-fungible tokens’ case uses because it allows for a single, smart contract to manage several kinds of tokens.
NFTs can expand the use cases of the blockchain in multiple business sectors and apply to a diverse public.
Also Read: What Are NFTs And What Are They For?