Talking about the first true example of digitally verifiable and transferable Non-Fungible Tokens (NFTs), in 2017, Dapper Labs launched a decentralized Ethereum blockchain application called CryptoKitties. These non-fungible tokens, or NFTs, are examples of collectible game characters with randomly assigned attributes that make each CryptoKitty more or less rare.
Using the native digital signature scheme on the blockchain, it is easy to verify the authenticity of each CryptoKitty, its unique attributes, and owner. Furthermore, the friction and risk of fraud in transferring these assets to a new owner are drastically reduced. Today, the foundational invention of NFTs made famous by CryptoKitties is applied to a broad set of consumers.
From digital art and in-game items to digital identity credentials and land titling. Verifying the ownership of physical and digital assets is integral to most businesses and systems. Furthermore, individuals have collected scarce and valuable assets such as art, jewelry, and land throughout history. Today that trend has extended into a variety of NFT assets and collectibles.
They include autographed memorabilia, trading cards, and more.
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Traditionally, the ownership and authenticity of these assets have been facilitated by paper-based or centralized digital systems, which are often inefficient, present friction in the transfer of asset tokens, and leave room for fraud. Let’s learn more about how the Non-Fungible Tokens (NFTs) marketplace works.
Understanding What Non-Fungible Tokens (NFTs) Marketplace Entails
Non-Fungible Tokens (NFTs) are assets that have been tokenized via a blockchain. They are assigned unique identification codes and metadata that distinguish them from other tokens. NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs—it all depends on the value the market and owners have placed on them. For instance, you could use an exchange.
Particularly to create a token for an image of a banana. Some pay millions for the NFT, while others think it is not very helpful. Cryptocurrencies are tokens as well; however, the critical difference is that two Cryptocurrencies from an identical blockchain are interchangeable—they are fungible. Two NFTs from identical blockchains can look similar but are not interchangeable.
Non-Fungible Tokens were created long before they became popular in the mainstream. Reportedly, the first NFT sold was “Quantum,” designed and tokenized by Kevin McKoy in 2014 on one blockchain (Namecoin), then minted and sold in 2021 on Ethereum. NFTs are built following the ERC-721 (Ethereum Request for Comment #721) standard, which dictates ownership.
For instance, the ERC-721 standard dictates how ownership is transferred, methods for confirming transactions, and how applications handle safe transfers (among other requirements). The ERC-1155 standard, approved six months after ERC-721, improves upon ERC-721 by batching multiple non-fungible tokens into a single contract, reducing transaction costs.
What Is The Difference Between A Fungible And Non-Fungible Asset?
The concept of fungibility refers to the ability for an asset to be exchanged equivalently with another investment of like kind. A practical example of a fungible asset is the US Dollar, where you can trade one dollar for another, knowing the value is the same regardless of your dollar. In contrast to fungible assets, non-fungible assets are valued differently. Learn more below:
In particular, NFTs are based on their unique attributes and scarcity. One example is baseball cards, where each is assigned an exceptional value depending on its attributes, such as edition number, design, player, and rarity. Baseball cards are not fungible because every card is valued differently and thus cannot be exchanged directly for any other baseball card.
For your information, NFTs are created through minting, in which the data is recorded on a blockchain. At a high level, the minting process entails creating a new block, validating NFT information by a validator, and closing the NFT block. This minting process often entails incorporating smart contracts that assign ownership and manage the transferability of the NFT.
According to Wikipedia, a smart contract is a computer program or transaction protocol intended to automatically execute, control or document events and actions according to a contract’s or an agreement’s terms. In other words, a smart contract is a code executed deterministically in the context of a blockchain network; each participant in the network verifies the process.
How NFTs Work Plus The Basic Blockchain And Fungibility Principles
Smart contracts verify the state-changing operations that a code makes. Smart contracts are the primary means by which developers can create and manage tokens on a blockchain. Most can eventually store small amounts of data in standard data structures—a critical component of tokenization use cases that map token identifiers to track who owns which token.
As tokens are minted, they are assigned a unique identifier directly linked to one blockchain address. Each NFT token has an owner, and the ownership information (i.e., the address where the minted token resides) is publicly available. Even if 5,000 NFTs of the same item are minted (similar to general admission tickets to a movie), each NFT token has a unique identifier.
Resource Reference: NFT Marketing | What It Is And How To Invest In Its Strategy
But what about Blockchain and Fungibility? Like physical money, cryptocurrencies are usually fungible from a financial perspective, meaning that they can be traded or exchanged, one for another. For example, one Bitcoin is always equal in value to another on a given exchange, similar to how every dollar bill of U.S. currency has an implicit exchange value of $1.
This fungibility characteristic makes cryptocurrencies suitable as a secure transaction medium in the digital economy. For this reason, NFTs shift the crypto paradigm by making each token unique and irreplaceable, making it impossible for one non-fungible token (NFT) to be “equal” to another. They are digital representations of assets likened to digital passports.
The Most Common NFT Examples In The Marketplace Trading Centres
It’s important to realize that NFTs are an evolution of the relatively simple concept of Cryptocurrencies. Modern finance systems consist of sophisticated trading and loan systems for different asset types, from real estate to lending contracts to artwork. By enabling digital representations of assets, NFTs are a step forward in the reinvention of this infrastructure.
To be sure, the idea of digital representations of physical assets is not novel, nor is the use of unique identification. However, when these concepts are combined with the benefits of a tamper-resistant blockchain with smart contracts and automation, they become a potent force for change. Perhaps the most famous use case for NFTs is that of Cryptokitties.
Launched in 2017, CryptoKitties are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitty is special and has a different price. They “reproduce” among themselves and create new offspring with other attributes and valuations compared to their “parents.” Learn The Inside Story of the CryptoKitties Congestion Crisis in detail.
Within a few short weeks of their launch, Cryptokitties racked up a fan base that spent million worth of ether to purchase, feed, and nurture them.
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Some even spent upward of $100,000 on the effort. More recently, the Bored Ape Yacht Club has garnered controversial attention for its high prices, celebrity following, and high-profile thefts of some of its 10,000 NFTs.
Smart Contracts allow you to automate payments and revenue sharing, which can help you earn revenue from your dApp without manually managing transactions. Another unique opportunity is using Decentralized Finance (DeFi) protocols. A blockchain provides transparent and verifiable access to data while eliminating middlemen and making systems efficient.
The most popular marketplace offers:
- Photography: Photographers can tokenize their work and offer total or partial ownership. For example, OpenSea user erubes1 has an “Ocean Intersection” collection of beautiful ocean and surfing photos with several sales and owners.
- Sports: Collections of digital art based on celebrities and sports personalities.
- Trading cards: Tokenized digital trading cards. Some are collectibles, while others can be traded in video games.
- Utility: NFTs that can represent the membership or unlock benefits.
- Virtual worlds: VIrtual world NFTs grant you ownership of anything from avatar wearables to digital property.
- Art: A generalized category of NFTs that includes everything from pixel to abstract art.
- Collectibles: Bored Ape Yacht Club, Crypto Punks, and Pudgy Panda are some examples of NFTs in this category.
- Domain names: NFTs representing ownership of domain names for your website(s).
- Music: Artists can tokenize their pieces of music, granting buyers the rights the artist wants them to have.
Many NFTs can only be purchased with ether (ETH), so owning some of this cryptocurrency—and storing it in a digital wallet—is usually the first step. You can purchase NFTs through any online NFT marketplaces, including OpenSea, Rarible, and SuperRare. Much of the earlier market for NFTs was centered around digital art and collectibles, but it has evolved into much more.
The Most Common Characteristics Of Non-Fungible Tokens (NFTs)
As mentioned, Non-Fungible Tokens (NFTs) are blockchain-based tokens representing a unique asset like a piece of art, digital content, or media. An NFT can be considered an irrevocable digital certificate of ownership and authenticity for a digital or physical asset. They are (i) cryptographically verifiable, (ii) unique or scarce, and (iii) easily transferable.
Leveraging Cryptographic signatures native to the blockchain on which an NFT is issued, one can quickly determine the asset’s origin and current owner in question in seconds. A non-fungible token is created by an artist, creator, or license holder through minting. Minting is a process that involves signing a blockchain transaction that outlines the basic token details.
Eventually, which is then broadcasted to the blockchain to trigger NFT smart contracts function that creates the token and assigns it to its owner; under the hood, non-fungible token assets consist of a unique token identifier, or token ID, mapped to an owner identifier and stored inside a smart contract. Let’s say the owner of a given token ID wishes to transfer it to another user.
In that case, verifying ownership and reassigning the token to a new owner is easy. What types of assets can Non-Fungible Tokens (NFTs) be used for? Non-fungible tokens can represent virtually any physical, digital, or metaphysical asset. However, the most common NFT assets are digital art, digital collectible items, pieces of content like video or audio, and event tickets.
The types of use cases non-fungible tokens are being utilized:
- NFT event tickets — companies can distribute and sell tickets to events using NFTs, reducing friction for verification of ownership and authenticity and helping to eliminate fraud. Furthermore, there are infinite possibilities for post-purchase collectability of tickets through exclusive experiences and digital art.
- Fan/customer engagement – brands or organizations can issue or sell NFTs that represent exclusive collectibles, products, experiences, or voting rights for the future development of a product or service to deepen customer/fans’ engagement with the brand/organization.
- In-game items – video games are walled gardens today, players do not own digital content, and secondary markets are hard to implement. NFTs can create a widely varied ecosystem of in-game digital items that can be bought, sold, and exchanged on open secondary markets and used across a broader gaming ecosystem rather than anchored to one game.
- Digital collectibles – organizations or individuals with a well-defined brand can create NFTs that can be sold to fans or brand-loyal customers as collectibles on the open market. Think of a company like Disney with huge brands of licensed universes like Star Wars and Marvel.
Credentialing–identity credentials like driver’s licenses or professional certifications like AWS’ wide range of cloud certificates can be issued as NFTs to reduce the burden of proof for these credentials and eliminate the siloed nature of credentials today. Also, regarding Royalties, NFTs can track fractional ownership or royalty entitlement for a piece of music, content, or art.
The Challenges That Exist When Adopting Non-Fungible Tokens (NFTs)
As mentioned, NFTs are digital tokens representing a unique piece of digital content, such as an image, video, audio, or game item. Unlike fungible tokens, such as cryptocurrencies, Non-Fungible Tokens (NFTs) cannot be exchanged for another of the same kind. They have their own identity and history, which can be traced and verified on the blockchain system.
Using smart contracts and cryptocurrencies, NFTs can be created, bought, and sold on platforms like OpenSea, Rarible, or SuperRare. NFTs, in some cases, can therefore create ‘digital scarcity.’ Usually, this is why you may see some people willing to pay more for an NFT with rare traits, for example. Thus, they may be sold for a higher price on an NFT marketplace.
This is just one small (and starting to be outdated) use case for NFTs, with many utilities and ideas for how they can be used continuously being added as the technology grows. In layman’s language, Non-Fungible Tokens (NFTs) are a new way of creating and selling digital art on the blockchain. They are unique, scarce, and verifiable, which makes them attractive.
Especially to artists and collectors. But they also pose challenges like environmental impact, legal issues, and market volatility. Some various challenges and risks may affect the adoption of non-fungible tokens in the marketplace,
Including but not limited to:
- Applications Complexity: The technology and tooling behind non-fungible tokens and the decentralized applications (dApps) that underpin them are still nascent despite the increasing adoption amongst startups and enterprises alike; Many of the complexities associated with building NFT-related solutions are not yet abstracted by quality tooling.
- Regulatory/Legal Implications: With the introduction of new and innovative technologies, particularly ones that involve speculative or high-value assets, come distinct regulatory and legal considerations, including but not limited to knowing your customer procedures, anti-money laundering mechanisms, and securities law compliance.
- Rapid Innovation: The rapid pace of innovation in the NFT ecosystem and the blockchain networks on which they are issued presents challenges for those adopting the technology in the form of consistent change; agility and modularity are critical.
- Ecological Impact: Controversy continues regarding the impact of energy-intensive blockchain networks that utilize the Proof-of-Work consensus mechanism on climate change. NFT-focused products have been a target for such criticism.
Fortunately, solutions exist to ameliorate most of these concerns, such as adopting less energy-intensive consensus mechanisms and using “Layer 2” or L2 networks where transactions that mint NFTs can be validated more rapidly and efficiently outside the leading blockchain network. For example, the Ethereum blockchain network is well on its way to becoming a green stack.
In particular, by shifting towards the more energy-efficient Proof-of-Stake consensus mechanism in its Ethereum 2.0 launch, Layer 2 solutions like Polygon and ImmutableX are already helping reduce the load today. You can learn more about the Ethereum Improvement Proposals from this “ERC-1155: Multi-Token Standard” guide to gathering more information.
Takeaway Notes:
In early March 2021, a group of NFTs by digital artist Beeple sold for over $69 million. On the one hand, the sale set a precedent and record for the most expensive digital art sold then. On the other hand, the artwork was a collage of Beeple’s first 5,000 days of work. If you have an NFT use case, build your NFT application on AWS and leverage its many services.
From Amazon Managed Blockchain to deploy and interact with your smart contracts to CloudFront, where you can serve NFT metadata content to your users worldwide. AWS proudly supports open-source, public Ethereum networks in its Amazon Managed Blockchain offering. At the same time, it allows customers to deploy full Ethereum nodes in a matter of minutes.
With the reliability and scalability of AWS services in mind also. Amazon Managed Blockchain reduces the overhead required to create and manage full nodes for the public Ethereum mainnet and the Ropsten and Rinkeby testnets. With that in mind, you can learn about Ethereum on Amazon Managed Blockchain and how to implement and deploy it effectively.
Remember, each NFT token contains a unique, non-transferable identity to distinguish it from other NFT tokens. But they are also extensible—meaning you can combine one NFT with another to create a third, unique NFT. That’s it! Do you think that there is something else that we can add to this guideline on NFTs review? Please let us know in our comments section below.
Frequently Asked Questions Answered
1. What do non-fungible tokens or NFTs mean?
Non-fungible tokens are blockchain-based tokens representing a unique asset like a piece of art, digital content, or media. An NFT can be considered an irrevocable digital certificate of ownership and authenticity for a given cloud-based digital or physical asset. In other words, NFTs are digital files. They can be a jpeg of a piece of art, real estate, or a video. Turning files into NFTs helps secure them through blockchain, making buying, selling, and trading efficient and reducing fraud considerably.
2. Are non-fungible tokens (NFTs) Trading assets safe?
NFTs, which use blockchain technology like Cryptocurrency, are generally impossible to hack. However, the weak link in all blockchains is the key to your NFT. The software that stores the keys can be hacked, and the devices you hold the keys on can be lost or destroyed—so the blockchain mantra “not your keys, not your coin” applies to NFTs and cryptocurrency. NFTs are safe as long as your keys are properly secured.
3. What does non-fungible mean in the trading sense?
Fungibility describes the interchangeability of goods. For example, say you had three notes with identical smiley faces drawn on them. When you tokenize one of them, that note becomes distinguishable from the others—non-fungible. The other two letters are indistinguishable so that they can replace each other.
4. Is Bitcoin (BTC, XBT) a non-fungible token?
Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They’re also equal in value—one dollar is always worth another; one Bitcoin is always similar. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.
5. What is a smart contract with an example?
As mentioned, a smart contract is an agreement between two people or entities in the form of computer code programmed to execute automatically. The idea was proposed in the 1990s by Nick Szabo, a pioneer of modern computer science, who defined them as a set of virtual promises with associated protocols to enforce them. In a nutshell, it’s a self-executing program based on if-then logic. For example, vending machines are a ubiquitous presence in everyday life. It’s also a simple model of a smart contract: If someone inserts $2 and then presses B4, then the machine dispenses the package of cookies held in the B4 slot.
