NFTS

    NFTS

  What Is a Non-Fungible Token (NFT)?

Non-fungible tokens (NFTs) are assets like artworks, digital content, or videos that have been tokenized via a blockchain. Tokens are unique identification codes created from metadata via an encryption function. These tokens are then stored on a digital ledger, while the assets themselves are stored in other places. The connection between the token and the asset is what makes them unique.

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 draw a smiley face on a banana, take a picture of it (which has metadata attached to it), and tokenize it on a blockchain. Whoever has the private keys to that token owns whatever rights you have assigned to it.

Cryptocurrencies are similar to NFTs, in that both are secured on blockchain networks. The key difference is cryptocurrencies are fungible, or interchangeable. While there's no significant difference between one bitcoin and another, no two NFTs are identical.

Key Takeaways fts (non-fungible tokens) are unique cryptographic tokens that exist on a blockchain and cannot be replicated.

NFTs can represent digital collectibles or real-world items like artwork and real estate.

"Tokenizing" these real-world tangible assets makes buying, selling, and trading them more efficient and makes counterfeiting more difficult.

NFTs can also represent individuals' identities, property rights, and more.

Collectors and investors initially sought NFTs after the public became more aware of them, but their popularity has since waned.

Non-Fungible Token (NFT)

Investopedia / Julie Bang

History of Non-Fungible Tokens (NFTs)

NFTs 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), later minted on Ethereum and sold in 2021.

Most NFTs on the Ethereum blockchain are built following the ERC-721 (Ethereum Request for Comment #721) standard, which 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.

One of the earliest popular NFTs was CryptoKitties, a digital collectible game launched in November 2017. Each CryptoKitty is a digital representation of a cat with unique "attributes" determined from the cat's unique identifier on the Ethereum blockchain. Some features are more rare than others, leading collectors to place higher prices on them. They "reproduce" among themselves and create new offspring with other attributes and valuations compared to their "parents."

Within a few short weeks of their launch, CryptoKitties racked up a fan base that spent millions in ether to purchase and breed them.

Also launched in 2017, Decentraland is a type of blockchain-based open world where participants can buy and sell plots of virtual real estate. Each "parcel" of Decentraland is associated with its geographical coordinates, with some plots commanding a higher value because of their premium location.

Following the success of early NFTs on Ethereum, other blockchains adopted their own NFT protocols.

Fast Fact

In early March 2021, a group of NFTs by digital artist Beeple sold for over $69 million. The sale set a precedent and record for the most expensive digital art sold at the time. The artwork was a collage comprised of Sleepless first 5,000 days of work.

How NFTs Work

NFTs are created through a process called minting, in which the asset's information is encrypted and recorded on a blockchain. At a high level, the minting process entails a new block being created, NFT information being validated by a validator, and the block being closed. This minting process often entails incorporating smart contracts that assign ownership and manage NFT transfers.

As tokens are minted, they are assigned a unique identifier directly linked to one blockchain address. Each token has an owner, and the ownership information (i.e., the address in which the minted token resides) is publicly available. Even if 5,000 NFTs of the same exact item are minted (similar to general admission tickets to a movie), each token has a unique identifier and can be distinguished from the others.

Many blockchains can create NFTs, but they might be called something different. For instance, on the Bitcoin blockchain, they are called Ordinals. Like an Ethereum-based NFT, a Bitcoin Ordinal can be bought, sold, and traded. The difference is Ethereum creates tokens for the asset, while Ordinals have serial numbers (called identifiers) assigned to satoshis—the smallest bitcoin denomination.