A non-fungible token is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable. NFTs can be used to represent items such as photos, videos, audio, and other types of digital files.
NFTs are currently taking the digital art and collectibles world by storm. Digital artists are seeing their lives change thanks to huge sales to a new crypto-audience. And celebrities are joining in as they spot a new opportunity to connect with fans. But digital art is only one way to use NFTs. Really they can be used to represent ownership of any unique asset, like a deed for an item in the digital or physical realm.
NFTs are tokens that we can use to represent ownership of unique items. They let us tokenise things like art, collectibles, even real estate. They can only have one official owner at a time and they're secured by the Ethereum blockchain – no one can modify the record of ownership or copy/paste a new NFT into existence.
NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like your furniture, a song file, or your computer. These things are not interchangeable for other items because they have unique properties.
NFTs and Ethereum solve some of the problems that exist in the internet today. As everything becomes more digital, there's a need to replicate the properties of physical items like scarcity, uniqueness, and proof of ownership. Not to mention that digital items often only work in the context of their product. For example you can't re-sell an iTunes mp3 you've purchased, or you can't exchange one company's loyalty points for another platform's credit even if there's a market for it.
Fungible items, on the other hand, can be exchanged because their value defines them rather than their unique properties. For example, ETH or dollars are fungible because 1 ETH / $1 USD is exchangeable for another 1 ETH / $1 USD.
NFTs are going to be big. Over the last few months, non-fungible tokens (NFTs) have exploded in popularity and piqued general attention. These interactive objects retail for millions of dollars and range from paintings and music to food to toilet paper. It’s time to delve further into the more predictable working reality of NFTs now that the initial hype has died down.
An NFT is a digital artifact that represents real-world objects like art, in-game pieces, songs, collectibles, and images, among other things. These properties are bought and sold over the internet, often through cryptocurrencies. Several crypto assets are normally encoded with the same underlying program as NFTs.
Non-fungible tokens have been available since 2014, but they are now gaining worldwide recognition as a way to sell and purchase digital artwork. Since November 2017, a staggering $174 million has been invested in NFTs. While certain NFTs are small and one-of-a-kind, the majority of digital inventions have an almost limitless availability.
NFTs are transforming the way we talk about cryptocurrency and innovation by injecting economic economies and long-term models that don’t depend on advertisements and instead rely on authentic, active societies.
Differentiating NFTs with the everyday things on the internet:
NFTs can also be given as proof for attending events or could be conversely used as tickets. It depends how you execute them!
How do NFTs work?
NFTs have some special properties:
Each token minted has a unique identifier.
They're not directly interchangeable with other tokens 1:1. For example 1 ETH is exactly the same as another ETH. This isn't the case with NFTs.
Each token has an owner and this information is easily verifiable.
They live on Ethereum and can be bought and sold on any Ethereum-based NFT market.
In other words, if you own an NFT:
You can easily prove you own it.
No one can manipulate it in any way.
You can sell it, and in some cases this will earn the original creator resale royalties.
Or, you can hold it forever, resting comfortably knowing your asset is secured by your wallet on Ethereum.
And if you create an NFT:
You can easily prove you're the creator.
You determine the scarcity.
You can earn royalties every time it's sold.
You can sell it on any NFT market or peer-to-peer. You're not locked in to any platform and you don't need anyone to intermediate.
The creator of an NFT gets to decide the scarcity of their asset.
For example, consider a ticket to a sporting event. Just as an organizer of an event can choose how many tickets to sell, the creator of an NFT can decide how many replicas exist. Sometimes these are exact replicas, such as 5000 General Admission tickets. Sometimes several are minted that are very similar, but each slightly different, such as a ticket with an assigned seat. In another case, the creator may want to create an NFT where only one is minted as a special rare collectible.
In these cases, each NFT would still have a unique identifier (like a bar code on a traditional "ticket"), with only one owner. The intended scarcity of the NFT matters, and is up to the creator. A creator may intend to make each NFT completely unique to create scarcity, or have reasons to produce several thousand replicas. Remember, this information is all public.
Some NFTs will automatically pay out royalties to their creators when they're sold. This is still a developing concept but it's one of the most powerful. Original owners of EulerBeats Originals earn an 8% royalty every time the NFT is sold on. And some platforms, like Foundation and Zora, support royalties for their artists.
This is completely automatic so creators can just sit back and earn royalties as their work is sold from person to person. At the moment, figuring out royalties is very manual and lacks accuracy – a lot of creators don't get paid what they deserve. If your NFT has a royalty programmed into it, you'll never miss out.
What are NFTs used for?
Here's more information of some of the better developed use-cases and visions for NFTs on Ethereum.
Investments and collateral
Maximising earnings for creators
The biggest use of NFTs today is in the digital content realm. That's because that industry today is broken. Content creators see their profits and earning potential swallowed by platforms.
An artist publishing work on a social network makes money for the platform who sell ads to the artists followers. They get exposure in return, but exposure doesn't pay the bills.
NFTs power a new creator economy where creators don't hand ownership of their content over to the platforms they use to publicise it. Ownership is baked into the content itself.
When they sell their content, funds go directly to them. If the new owner then sells the NFT, the original creator can even automatically receive royalties. This is guaranteed every time it's sold because the creator's address is part of the token's metadata – metadata which can't be modified.
The copy/paste problem
Naysayers often bring up the fact that NFTs "are dumb" usually alongside a picture of them screenshotting an NFT artwork. "Look, now I have that image for free!" they say smugly.
Well, yes. But does googling an image of Picasso's Guernica make you the proud new owner of a multi-million dollar piece of art history?
Ultimately owning the real thing is as valuable as the market makes it. The more a piece of content is screen-grabbed, shared, and generally used the more value it gains.
Owning the verifiably real thing will always have more value than not.
Boosting gaming potential
NFTs have seen a lot of interest from game developers. NFTs can provide records of ownership for in-game items, fuel in-game economies, and bring a host of benefits to the players.
In a lot of regular games you can buy items for you to use in your game. But if that item was an NFT you could recoup your money by selling it on when you're done with the game. You might even make a profit if that item becomes more desirable.
For game developers – as issuers of the NFT – they could earn a royalty every time an item is re-sold in the open marketplace. This creates a more mutually-beneficial business model where both players and developers earn from the secondary NFT market.
This also means that if a game is no longer maintained by the developers, the items you've collected remain yours.
Ultimately the items you grind for in-game can outlive the games themselves. Even if a game is no longer maintained, your items will always be under your control. This means in-game items become digital memorabilia and have a value outside of the game.
Decentraland, a virtual reality game, even lets you buy NFTs representing virtual parcels of land that you can use as you see fit.
Making Ethereum addresses more memorable
The Ethereum Name Service uses NFTs to provide your Ethereum address with an easier-to-remember name like mywallet.eth. This means you could ask someone to send you ETH via mywallet.eth rather than 0x123456789......
This works in a similar way to a website domain name which makes an IP address more memorable. And like domains, ENS names have value, usually based on length and relevance. With ENS you don't need a domain registry to facilitate the transfer of ownership. Instead, you can trade your ENS names on an NFT marketplace.
Your ENS name can:
Receive cryptocurrency and other NFTs.
Point to a decentralized website, like ethereum.eth. More on decentralizing your website
Store any arbitrary information, including profile information like email addresses and Twitter handles.
The tokenisation of physical items isn't yet as developed as their digital counterparts. But there are plenty of projects exploring the tokenisation of real estate, one-of-a-kind fashion items, and more.
As NFTs are essentially deeds, one day you could buy a car or home using ETH and receive the deed as an NFT in return (in the same transaction). As things become increasingly high-tech, it's not hard to imagine a world where your Ethereum wallet becomes the key to your car or home – your door being unlocked by the cryptographic proof of ownership.
With valuable assets like cars and property representable on Ethereum, you can use NFTs as collateral in decentralized loans. This is particularly helpful if you're not cash or crypto-rich but own physical items of value. More on DeFi
NFTs and DeFi
The NFT world and the decentralized finance (DeFi) world are starting to work together in a number of interesting ways.
There are DeFi applications that let you borrow money by using collateral. For example you collateralise 10 ETH so you can borrow 5000 DAI (a stablecoin). This guarantees that the lender gets paid back – if the borrower doesn't pay back the DAI, the collateral is sent to the lender. However not everyone has enough crypto to use as collateral.
Projects are beginning to explore using NFTs as collateral instead. Imagine you bought a rare CryptoPunk NFT back in the day – they can fetch $1000s at today's prices. By putting this up as collateral, you can access a loan with the same rule set. If you don't pay back the DAI, your CryptoPunk will be sent to the lender as collateral. This could eventually work with anything you tokenise as an NFT.
And this isn't hard on Ethereum, because both worlds (NFT and DeFi) share the same infrastructure.
NFT creators can also create "shares" for their NFT. This gives investors and fans the opportunity to own a part of an NFT without having to buy the whole thing. This adds even more opportunities for NFT minters and collectors alike.
Fractionalised NFTs can be traded on DEXs like Uniswap, not just NFT marketplaces. That means more buyers and sellers.
An NFT's overall price can be defined by the price of its fractions.
You have more of an opportunity to own and profit from items you care about. It's harder to be priced out of owning NFTs.
This is still experimental but you can learn more about fractional NFT ownership at the following exchanges:
In theory, this would unlock the possibility to do things like own a piece of a Picasso. You would become a shareholder in a Picasso NFT, meaning you would have a say in things like revenue sharing. It's very likely that one day soon owning a fraction of an NFT will enter you into a decentralised autonomous organisation (DAO) for managing that asset.
These are Ethereum-powered organisations that allow strangers, like global shareholders of an asset, to coordinate securely without necessarily having to trust the other people. That's because not a single penny can be spent without group approval.
As we mentioned, this is an emerging space. NFTs, DAOs, fractionalised tokens are all developing at different paces. But all their infrastructure exists and can work together easily because they all speak the same language: Ethereum. So watch this space.
Ethereum and NFTs
Ethereum makes it possible for NFTs to work for a number of reasons:
Transaction history and token metadata is publicly verifiable – it's simple to prove ownership history.
Once a transaction is confirmed, it's nearly impossible to manipulate that data to "steal" ownership.
Trading NFTs can happen peer-to-peer without needing platforms that can take large cuts as compensation.
All Ethereum products share the same "backend". Put another way, all Ethereum products can easily understand each other – this makes NFTs portable across products. You can buy an NFT on one product and sell it on another easily. As a creator you can list your NFTs on multiple products at the same time – every product will have the most up-to-date ownership information.
Ethereum never goes down, meaning your tokens will always be available to sell.
The environmental impact of NFTs
NFTs are growing in popularity which means they're also coming under increased scrutiny – especially over their carbon footprint.
To clarify a few things:
NFTs aren't directly increasing the carbon footprint of Ethereum.
The way Ethereum keeps your funds and assets secure is currently energy-intensive but it's about to improve.
Once improved, Ethereum's carbon footprint will be 99.98% better, making it more energy efficient than many existing industries.
To explain further we're going to have to get a little more technical so bear with us.
Don't blame it on the NFTs
The whole NFT ecosystem works because Ethereum is decentralized and secure.
Decentralized meaning you and everyone else can verify you own something. All without trusting or granting custody to a third party who can impose their own rules at will. It also means your NFT is portable across many different products and markets.
Secure meaning no one can copy/paste your NFT or steal it.
These qualities of Ethereum makes digitally owning unique items and getting a fair price for your content possible. But it comes at a cost. Blockchains like Bitcoin and Ethereum are energy intensive right now because it takes a lot of energy to preserve these qualities. If it was easy to rewrite Ethereum's history to steal NFTs or cryptocurrency, the system collapses.
The work in minting your NFT
When you mint an NFT, a few things have to happen:
It needs to be confirmed as an asset on the blockchain.
The owner's account balance must be updated to include that asset. This makes it possible for it to then be traded or verifiably "owned".
The transactions that confirm the above need to be added to a block and "immortalised" on the chain.
The block needs to be confirmed by everyone in the network as "correct". This consensus removes the need for intermediaries because the network agrees that your NFT exists and belongs to you. And it's on chain so anyone can check it. This is one of the ways Ethereum helps NFT creators to maximise their earnings.
All these tasks are done by miners. And they let the rest of the network know about your NFT and who owns it. This means mining needs to be sufficiently difficult, otherwise anyone could just claim that they own the NFT you just minted and fraudulently transfer ownership. There are lots of incentives in place to make sure miners are acting honestly.
Securing your NFT with mining
Mining difficulty comes from the fact that it takes a lot of computing power to create new blocks in the chain. Importantly, blocks are created consistently, not just when they're needed. They're created every 12 seconds or so.
This is important for making Ethereum tamper-proof, one of the qualities that makes NFTs possible. The more blocks the more secure the chain. If your NFT was created in block #600 and a hacker were to try and steal your NFT by modifying its data, the digital fingerprint of all subsequent blocks would change. That means anyone running Ethereum software would immediately be able to detect and prevent it from happening.
However this means that computing power needs to be used constantly. It also means that a block that contains 0 NFT transactions will still have roughly the same carbon footprint, because computing power will still be consumed to create it. Other non-NFT transactions will fill the blocks.
Blockchains are energy intensive, right now
So yes, there is a carbon footprint associated with creating blocks by mining – and this is a problem for chains like Bitcoin too – but it's not directly the fault of NFTs.
A lot of mining uses renewable energy sources or untapped energy in remote locations. And there is the argument that the industries that NFTs and cryptocurrencies are disrupting have huge carbon footprints too. But just because existing industries are bad, doesn't mean we shouldn't strive to be better.
And we are. Ethereum is evolving to make using Ethereum (and by virtue, NFTs) more energy efficient. And that's always been the plan.
We're not here to defend the environmental footprint of mining, instead we want to explain how things are changing for the better.
Now that we’ve spoken about NFTs, let’s look into how long they’ve been in service. What would the scaling industry look like in the coming years? The top five NFT developments to keep an eye on are listed below.
Enterprise IP networks and emerging media
When the token market collapsed in 2018, a considerable majority of the crypto community shifted its focus to institutional enablement models. This meant providing proprietary, permissioned protocols and networks to make it easier for large industrial, financial, or governmental institutions to use them. As a result, digital assets and consultancy programs such as IBM, R3, IBM, Digital Asset, and others were developed. These efforts aimed to turn the conventional economic operation into a blockchain-controlled version.
The same thing is also going to happen in traditional media. Many publishers of media properties in the fields of film, music, and art would work together to investigate the NFT space.
Unlike financial institutions, which are bound by rules and laws, media companies are by their very nature innovative. Their engagement with blockchain technologies is expected to result in fresh interpretations of what NFTs are and how they can add value to a brand’s overall experience. The reach of blockchain technologies will be broadened by media campaigns.
Generative Art and Blockchain as a Medium
The medium in which creative performance and art are represented is a representation of the medium in which they are expressed. What the artist may display and render is determined by the tools, devices, and palettes he or she uses.
Today’s blockchain-based digital objects can be thought of as economically scarce Web 2.0 image and video data. These graphical artifacts are reminiscent of the early smartphone’s skeuomorphic architecture, which resembled images of bookshelves or paper notepads. These images were eventually replaced by simple, easy-to-understand icons that made software apps more user-friendly.
The Metaverse, DAOs, and Digital Museums
At the periphery of the economy, digitizing the communal considerations is getting easier. Decentralized autonomous organizations (DAO) are software-defined investment collectives that can form in days and bid thousands or even millions of dollars on the acquisition of well-known artistic expressions.
Financial structuring can be achieved rapidly and conveniently thanks to Ethereum’s interoperability. Users can send and lock NFTs to individual addresses. New tokens may also be created and collateralized, with the possibility of being redeemed for NFTs. In the fiat universe, this is very difficult to do. This has been done in a matter of months by B20, Metakovan’s tokenized Beeple project, NFTX, the CryptoPunks fund makers, and others.
IPFS and multi-chain help for NFT ownership
When anyone buys an NFT, they always ask what exactly they can get. To put it another way, you will own a key to a file that was kept somewhere else. The file and the reference will be extremely encrypted and distributed. It appears complicated at first glance because each Ethereum-based platform can handle minting, burning, and exchange in slightly different ways.
These platforms then code their smart contracts to conform with industry requirements, but execution will vary. NFTs usually have a connection to the file’s location on IPFS, a decentralized file storage protocol. Essentially, this ensures that even though the website provider goes out of business, the NFT file will still be accessible on the internet.
Decentralized Finance and Portfolio Management Integration
It’s important to note that virtual objects are still a type of cultural capital in terms of economics. Financial returns are produced and plugged into financial reporting by a piece of physical art or the mechanical rights to a music file.
Traditional and emerging art is expected to be integrated into emerging financial frameworks such as blockchain. The financial world is currently constructing bridges to enable consumers to on-ramp into crypto assets such as Bitcoin. This may be done by exchange-traded funds, PayPal accounts focused on Paxos or financial advisers.
By Siddharth Dalmia, the Startup Sherpa