NFT tokens are non-fungible tokens (NFT) that are usually created using the same type of programming that is used to create cryptocurrencies. Tokens are cryptographic assets based on blockchain technology that can be exchanged and traded. These can be NFT pictures, songs, tweets, text posted on a website, physical objects, and various other digital items.
Blockchain NFT
To understand how NFT works and what it is for, you first need to understand how blockchains work. At its core, a blockchain is a distributed database containing an ever-growing list of sequential records or blocks. Interestingly, since blocks are immutable, traditional database management systems cannot be used to store them. Each block has a cryptographic hash that describes the contents of the previous block in the chain, the timestamp, and transaction data.
Cryptocurrency
Cryptocurrency is a digital or virtual currency that is protected by cryptography, which makes it almost impossible to counterfeit or use multiple times in a row. It was created thanks to blockchain technology.
A distinctive feature of cryptocurrencies is that they cannot be controlled by the government.
History of NFTs
Although most of us learned about the NFT in 2021, its history actually began much earlier. Below we have compiled a timeline of the development of this technology.
It all started with the first NFT called Quantum. It was created by Kevin McCoy on Namecoin in 2014 and was the first ever blockchain based game. Later, in 2016, an NFT called Rare Pepes was released, which launched the first crypto art market.
However, these projects did not reach wide popularity. They remained largely unknown to everyone except those who were well versed in cryptocurrencies and blockchain technologies.
For people who are unfamiliar with NFTs, they only became more popular in 2017. Around the same time, the first collections of NFTs were launched on the Ethereum blockchain. Previous blockchains made it much more difficult to trade and transfer ownership. The Ethereum network and its smart contracts made it possible to generate, program, store and sell tokens embedded directly in the block chain itself. These new features have simplified the onboarding process and expanded access to the use of NFTs.
One such early project on the Ethereum blockchain is a collection of NFT paintings called CryptoPunks, which was released by Larva Labs. As a result, many of his works have been sold for millions.
Until 2021, two catalysts helped increase interest in NFTs. The first was the COVID-19 pandemic, which forced many people to digitalize and connect with each other on platforms like Twitter and Clubhouse, where the NFT community is firmly established.
The second was digital artist Mike Winkelmann, better known under the pseudonym Beeple. He pioneered the NFT and was the first artist to sell a painting for $69 million.
The news made headlines around the world and more sales soon followed. Edward Snowden’s “Stay Free” sold for $5 million in April. In June, CryptoPunk was sold for $11 million.
Then it became mainstream, and market giants of various niches began to use NFT technologies in their projects. For example, Coca-Cola created an NFT for their products, Hot Wheels and Adidas made an NFT that was related to their line of toys and things. Even a fashion house like Gucci has created its own NFT collection.
How NFT works
There are various blockchain systems in the world, and Ethereum is one of the most popular. On the basis of blockchains, such as Ethereum, it is possible to create a digital asset that consists of a smart contract (token). NFT is a type of token based on the Ethereum ERC-721 standard.
Here is a quick overview of the ERC-721 standard to help you understand how NFT works:
Ethereum Request for Comments 721 or ERC-721 is a standard introduced in 2018 that implements an application programming interface (API) for tokens based on smart contracts. This allows tokens to be transferred from one account to another, which is a key feature of NFTs.
The API also supports various other functions, such as transactions with third-party accounts, checking account balances, calculating the total number of tokens, and so on. Using a standard algorithm, anyone can use the application binary interface to connect to the token. This makes NFTs widely available even to users who do not have a technical background. When creating an NFT, a unique asset is created with a distinguishable set of metadata and identifiers, after which a smart contract is installed on the blockchain in accordance with the ERC-721 standard. The value of an NFT depends on how unique it is, not necessarily on the amount of effort put into its creation.
Once an NFT artist has created a digital asset, they can enter any NFT marketplace, the largest of which is OpenSea.
An NFT artist can list an asset on the marketplace and sell it. This opens up new opportunities for generating income from works of art.
Applications and examples of NFTs
- Support for Play-to-Earn (P2E) gaming model
Digital collectibles are the most popular when using NFT tokens, as they allow you not to duplicate game assets. As they progress through levels, players can earn assets with intrinsic value and then trade or sell them. The value of unique in-game items can increase over time, helping players make a profit. Even when players stop playing, they continue to own NFTs and can profit from them in the future.
- Ensuring Authentic Ownership of Digital Art
Traditionally, digital and physical art have had differences, as the former could be easily copied and distributed. For example, piracy of digital images or files in digital media formats is almost impossible to control. As a result, digital art could never have the same value as even a beginner artist’s basic watercolor.
NFTs have turned this model upside down. Artists from all over the world can turn their graphic designs, digital images or photos into NFTs that can be bought and sold. The blockchain keeps a record of all transactions without the risk of forgery, and artists can even receive royalties when an image or media file is used for commercial purposes.
- Confirmation of belonging to the community with the help of “digital tickets”.
NFTs can also be used as digital tickets to validate membership in an online community, paid video game, or any other digital forum with paywalls. Online, users do not identify an individual as they do in the real world. As the demand for online spaces such as the Metaverse platforms continues to grow, validating membership is a major business challenge. It is possible to display NFTs as proof of membership, or even turn your avatars into NFTs, demonstrating the authenticity of your identity.
- Fighting Fraud in the Music Industry
NFT tokens allow artists to connect directly with their audience by selling digital music files. The NFT can be programmed to limit the distribution of income to a certain point and no more, ensuring that the artist’s rights are not violated. Companies like Autograph.io even let you tokenize autographs.
- Buying Digital Real Estate in the Metaverse
Digital real estate is another popular use case for NFTs. Individuals and companies can create virtual offices in the Metaverse to communicate more with different customer segments, both offline and online. Investors can buy and sell these plots at a profit or rent them out. These lots can be worth millions of dollars, so establishing ownership is essential.
- Adding Ownership of Physical Assets
Sometimes buyers of real assets may purchase NFTs in order to prove the ownership history and authenticity of the asset. This use case is essentially enabled by the fact that smart contracts are more secure than physical contracts, and NFTs can make trading easier if the buyer wants to sell the asset later.
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