NFT: what is it and how it works
Scholastic definitions can hardly convey with due depth all aspects related to the new technology of non-interchangeable tokens – NFT. For this reason, it is necessary to consider some of the most important issues concerning their world before moving on to more complex topics and even possible practical and commercial applications.
Non-interchangeable and interchangeable
The first thing to understand is already embedded in the very name of this technology. NFT – Non Fungible Tokens, according to Coinmarketrate.com, are contrasted with fungible tokens, tokens that have no specific identity and can be exchanged for other tokens of the same kind. The most striking example of this quality can be found outside the blockchain categories.
Money, even money in the form of banknotes in our wallets, is interchangeable by definition. If we gave 100 rubles, dollars or euros, and the same amount was returned to us, then there would be no difference in the total amount of our fortune. Each bill with a value of 100 rubles, dollars or euros represents an identical value. And for this reason, money can be considered interchangeable.
But let’s now consider, for example, the picture: this is a unique work, there is nothing identical in the world. It can be sold for money, but it cannot be exchanged for an identical painting of equal value. By definition, a work of art cannot be traded, since it cannot be exchanged for an identical product in value.
In our example, NFTs are works of art, and classic cryptocurrencies such as Bitcoin or even Litecoin (for example) are money. If we exchange one BTC for another BTC, nothing will change in the composition of our assets, because BTC is always identical to BTC. In case we have an NFT token instead, we will get our hands on a unique thing.
About blockchain
Like classic cryptocurrency tokens, NFTs are also exchanged via blockchain. As you know, the blockchain that currently supports them the most is Ethereum, which offers two different ERC standards for their creation. As we will see later, there are projects and blockchains that allow people to create their own NFTs and exchange them.
Blockchain offers advantages for this type of tokens: they are registered and everyone can get acquainted with them, they have reliable transaction confirmation mechanisms and, above all, they are freely available. This means that it is very easy to verify the ownership of this token.
The problem of algorithms for NFT validation
The environmental issue seems to be one of the levers most often used by opponents of blockchain and cryptocurrencies to attack this type of system. The same controversy has been used to point out the environmental impact that systems such as NFT based on the PoW blockchain will have. That is, the old way of checking new blocks of the blockchain, which requires large computational and electrical costs.
The fact is that after upgrading to version 2.0, even the main blockchain, which today supports NFT, will switch to a fully PoS system within a year, capable of consuming 1/100 of the energy and providing the same level of security. Even the environmentalists’ attack, which is actually already very poorly justified today (one NFT transaction does not have such a big impact), will be forced to give up in the face of the progressive NFT technology.
Metadata
NFT includes meta data that accompanies an image token, file, audio track, or any other type of data. The data is always freely available, at least on the most popular blockchains for this type of tokens. Nothing prohibits including data of any type as a representation of a value. For example, history will include the fact that Jack Dorsey, the founder of Twitter, sold his first tweet, which was properly transformed directly into NFT.
Within the metadata, there can be any kind of digital representation:
- Represent ownership
Most often, NFTs are used to represent digital property. Most systems that support NFT today allow you to tokenize a digital work of art, whether it’s an image, or a song, or a video. Although the video is quite reproducible, like an image or a song, the NFT represents ownership of it.
- For artists (NFT Art)
Among the first to take advantage of this technology are artists who have found a relatively simple way to support their creativity: fans will finally be able to finance works that, among other things, will remain accessible to everyone. Many artists, both digital and non-digital, rely on this type of technology to distribute their work and find supporters. Does this solve the problem of the need for patrons even for lesser-known artists? Absolutely not, but the prospects that NFT opens up are certainly significant.
How do non-interchangeable tokens work?
You have understood in general terms what NFTs can be used for, but what does this have to do with the blockchain and how exactly do these types of tokens work at the technical level? In order to understand how they work, we will need to introduce some additional concepts.
- ERC Standards
Although the Ethereum blockchain is not the only one capable of supporting NFT today, we will have to start with it for an example of as general a nature as possible in order to understand how NFT tokens work. The most important of the standards used today is ERC 721, which provides relatively simple rules for creating a unique token on the Ethereum blockchain. The standard in question is the same as, for example, used by projects such as Decentraland, CryptoKitties, and CryptoBeasties.
- Creating an NFT token
The token is created on the blockchain, includes a unique identifier that represents it and the metadata that it includes. It is at this stage that a unique token is created, which differs from all other NFTs and has a unique identification. When creating this token, it is also assigned to a wallet capable of storing ERC 721 tokens, or an alternative standard that you have decided to use.
The principle of operation of NFT is simple and clear
Since they are independent cryptocurrency tokens supported by a real blockchain, they can be exchanged either using a smart contract or manually. In fact, they are assets that we can buy and sell, and for this, many market platforms have emerged that allow auctions or private transactions.
What is a token?
- Ownership
Although in some jurisdictions it is not yet clear how these rights can be implemented. It is important, at least for the moment, that the blockchain can guarantee a good level of security for both storing NFT tokens and for exchange. Those who have been following the world of cryptocurrencies for some time now know that these systems are among the most reliable for making permanent transfers. This concept, applied to the world of NFT, reveals the huge potential that this technology can have in the future, even in economically important markets such as art.
- Application for ownership
NFT definitely translates the concept of ownership and ownership into an entirely new field. If we look at the auctions that have been the most successful recently, it is the transfer of ownership rights to digital objects that are actually available to everyone. Everyone can still read the first Twitter account in history, just as anyone can technically copy Beepsy’s works that ended up at Christie’s auction indefinitely.
What did those who bought these tokens actually gain? Ownership, in the full sense of the word, which in this case does not offer exclusive use of an asset that remains digital and accessible to everyone, is considered by some commentators as a simple ownership right to the property itself.
In fact, there are many other levels involved in using NFT. Remember such cases as Decentraland, where NFT LAND tokens give the opportunity for exclusive use and privileges over the virtual zone of the game. In this case, one of the fundamental attributes of ownership is fully preserved, namely the ability to exclude someone.
The same can be said about systems such as fan tokens, where the possession of certain NFTs gives special privileges and access to merchandising. In this case, the NFT does give the owner an exclusive right that non-owners do not have.
To avoid useless explanations, we suggest that everyone focus, at least for now, on the purely technological side of the issue. NFTs offer a safe, fast and inexpensive way to tokenize works of human ingenuity and transfer them safely to others. Whether a person relies on the Ethereum network or on Decimal Chain, or even on numerous niche systems, it does not matter much.
Similarly, it matters little what the current and future applications of this technology will be. Indeed, fashion has created auctions with locks that are almost impossible for a sane mind to comprehend. But it is no less true that in fact these are full-fledged advertising operations that have nothing to do with the real future of this technology.
How can NFTs enter into everyday life?
NFTs, although very popular, have not yet become part of the daily life of the general population. Rather, they are gradually becoming such, including thanks to projects that already involve the world of sports, cinema, collectibles and video games. In addition, in the future, NFTs can be used to track supply chains and verify the originality of clothing, which already exists in a very popular sportswear brand.
While it is true that NFTs are still something of a niche, it is also true that there are already many projects using them. Here we will mention some of the most interesting projects that are already under implementation and have shown, if there was still a need for it, that in reality the world of these tokens can offer a lot to other industries besides speculating on art.
- Decentralization and video games
We have already talked about this in the section dedicated to the best NFT systems on the market. Decentraland can be a pilot example that can be revised and improved by more commercially structured projects. There is no certainty that in the future we will not be able to see the use of such systems in more popular games, such as World of Warcraft and all other very successful MMORPGs.
- NBA Top Shot
The world of fantasy basketball has already moved, at least partially, to NFT. The NFT Top Shots project is proof of that. It runs on the Flow infrastructure-which we’ve already talked about in this guide-and distributes digital stickers of the best NBA players for a fee. And top players like LeBron James were auctioned off for six-figure sums.
- UFC: Collectibles
Even the hugely popular MMA will soon make its debut on the Flow network, offering digital collectibles using NFT technology. Another huge franchise is choosing the digital path of the future, realizing how much good such a system can offer to sports collectors.
- Sorare: Global Fantasy Football
Another very interesting project using NFT technology today is Sorare, which offers a kind of fantasy football game on a global scale, which also relies on the world of NFT. Again, this is a very futuristic project that relies on the best possible technology to manage numerous and even unique maps. Cristiano Ronaldo’s card was sold for just over $290,000.
- Nike and CryptoKicks
One of the most popular brands in the world of sports has long been thinking about how to use the incredible passion of NFT. And he did it through the CryptoKicks project, a shoe tokenized in the Ethereum blockchain. In the future, the system can also be used to certify the scarcity of certain collectible models and their originality.
Summarizing
NFT tokens are partly a fad, partly a very interesting technological solution that can really change the situation in the management of digital and non-digital real estate. Even for those who are interested in this sector, there are now two ways: to bet on exclusive works of art, and thus speculate on their possible revaluation, or to bet on tokens of projects that place them. Two completely different paths that intersect with NFT: tokens, which we will continue to hear about even when the hype in the non-specialized press finally subsides.
Noise that does not allow everyone to understand the real functioning of these circuits and this technology. The noise that we decided to eliminate with the help of this in-depth study with technical and financial analysis of one of the most interesting realities, along with decentralized finance, in the world of blockchain and cryptocurrencies.