With the creation of Bitcoin, the concept of “trustless” digital scarcity was introduced (that is, in which no intermediaries are required). Before Bitcoin, the cost of replicating something in the digital world was close to zero. The emergence of blockchain technology has made programmable digital scarcity possible – and it is being used to make the digital world emulate the real one.
Non-fungible tokens (NFTs), also often called crypto collectibles, extend this idea. Unlike cryptocurrencies, where all tokens are created equal, each non-fungible token is unique and limited in quantity.
NFTs are one of the building blocks of a new digital economy powered by blockchain. Several projects are experimenting with NFTs for different use cases, such as gaming, digital identity, licenses, certificates, and fine arts. Additionally, they may even allow fractional ownership of high-value items.
As the issuance of NFTs becomes easier, more and more assets of this type are created every day.
What is a Non-Fungible Token (NFT)?
A non-fungible token (NFT) is a type of cryptographic token on a blockchain that represents a single asset. These can be fully digital assets or tokenized versions of real-world assets. Since NFTs are not interchangeable with each other, they can function as proof of authenticity and ownership within the digital realm.
Fungibility means that the individual units of an asset are interchangeable and essentially indistinguishable from each other. For example, a ten dollar bill is interchangeable with any other authentic ten dollar bill. This is an imperative feature for any asset that is intended to act as a medium of exchange.
Fungibility is a desirable property for money because it allows free exchanges, and there is theoretically no way to know the history of each individual unit. However, this is not an attribute that is beneficial for collectible items.
But what if we could create digital assets similar to Bitcoin, but adding a unique identifier to each unit? This would make each of the units different from the rest (ie not expendable). Basically, that's an NFT.
How do NFTs work?
There are various schemes for the creation and issuance of NFTs. The most prominent of these is ERC-721, a standard for the issuance and trading of non-fungible assets on the Ethereum blockchain.
A more recent and improved standard is ERC-1155. This allows a single contract to contain both fungible and non-fungible tokens, opening up a whole range of new possibilities. Standardization in the issuance of NFTs allows for a higher degree of interoperability, which ultimately benefits users. Basically, it means that unique assets can be transferred between different applications with relative ease.
To store and view your own NFTs, you can use Trust Wallet. As with tokens on other blockchains, NFTs will exist at one address. It should be noted that NFTs cannot be replicated or transferred without the permission of the owner – not even the issuer of said NFTs.
NFTs can be traded on open marketplaces, such as OpenSea. Such markets connect buyers and sellers, and the value of each token is unique. Naturally, NFTs are prone to price changes in response to market supply and demand.
But how can things like this have a value? As with any other valuable object, the value is not something inherent to it, but a quality assigned by people. Basically, value is a shared belief. It doesn't matter if it's precious metals or a vehicle – all of these things have value because people believe they do. If this is how all valuables become valuable, why should digital collectibles be any different?
What can NTFs be used for?
NFTs can be used by decentralized applications (DApps) to issue unique digital items and crypto-collectibles. These tokens can be a collectible, an investment product, or something else.
Gaming economies are nothing new. And since many online games have already had their own economies, using blockchain to tokenize game assets only goes one step further. In fact, the use of NFTs could solve or mitigate the common problem of inflation that many games have.
While virtual worlds are already flourishing, another exciting use of NFTs is the tokenization of real-world assets. These NFTs can represent fractions of real-world assets that can be stored and traded as tokens on a blockchain. This could introduce some much-needed liquidity into many markets that might not otherwise have much, such as fine art, real estate, rare collectibles, and many more.
Digital identity is also a sector that can benefit from the properties of NFTs. Storing identification and ownership data on the blockchain would increase data privacy and integrity for many people around the world. At the same time, easy and trustless transfers of these assets could reduce friction in the global economy.
The history of CryptoKitties and Ethereum
One of the first NFT projects to gain significant traction was CryptoKitties, a game built on Ethereum that allows players to collect, breed, and trade virtual cats. The success of this initiative led to congestion on the Ethereum network at the end of 2017.
Each CryptoKitty can have a combination of several different properties, such as age, race, or color. As such, each of them is unique and cannot be interchanged with each other. Also, they are indivisible, meaning there is no way to split a CryptoKitty token into divisible parts (like the gwei for ether).
CryptoKitties gained some notoriety after it has congested the Ethereum blockchain due to the high activity it has caused on the network. As of February 2020, the all-time high (ATH) for the number of daily transactions on the Ethereum blockchain is still at the peak of CryptoKitties popularity. It is clear that the game made a huge impact on the Ethereum network, but other factors also contributed, including the rise of the Initial Coin Offering (ICO).
While a subject of controversy, CryptoKitties is an amusing early example of a blockchain use case that is not a currency, but rather something used for recreation and leisure. Collectively, these virtual cats moved millions of dollars, with some of the rare units selling for hundreds of thousands of dollars each.
Conclusion
Digital collectibles open blockchain technology to new avenues, outside of conventional financial applications. By representing physical assets in the digital world, NFTs have the potential to be a vital part of not only the blockchain ecosystem, but the economy as a whole.
The use cases are huge and it is very likely that many developers will come up with new and exciting innovations for this promising technology.
