The potential of blockchain now goes far beyond cryptocurrencies. Beyond settling transactions, blockchains allow to store documents, prove one’s identity or give value to digital objects. For all these uses, it is necessary to use non-fungible tokens (NFT). Discover what NFTs are and how they work.
What is an NFT?
An NFT, or non-fungible token, is a unique token that certifies to its holder the ownership of a digital asset (collectible, video game item, digital artwork, etc.) or physical asset (artwork, real estate and many others).
The acronym NFT stands for non fungible token and is therefore dissociated into two terms: token and non fungible. First of all, an NFT is a token because it is issued on a blockchain, mainly Ethereum (ETH). However, it differs from other crypto-currencies in that it is non-fungible.
To understand this concept properly, it is necessary to define fungibility. An asset is fungible if :
- It is not unique;
- It is interchangeable against an asset of the same type.
The currencies we use in our daily lives are the most obvious example: Euros are fungible assets. A one-euro coin is not unique, so you will have no problem exchanging it for another one-euro coin, which has the same value.
Similarly, most crypto-currencies such as Bitcoin (BTC) or Ether (ETH) are fungible and interchangeable. Moreover, they are divisible: 1 bitcoin can be divided into up to 100 million satoshis (the smallest unit of account in bitcoin).
Conversely, Non-Fungible Tokens (NFTs) are specific in the cryptocurrency world, as they are unique, indivisible and identifiable. Thus, no two NFTs created will be exactly the same and interchangeable, each will have specific characteristics to define it, as well as an identifier of its own.
In other words, an NFT is unique because of the characteristic associated with it. In comparison, Pokémon cards can be considered NFTs because the rarest card in the collection is not as valuable as a very basic card.
The origin of NFTs
Historically, non-fungible tokens were created on the Ethereum blockchain. They were introduced in 2018 through the proposal of the ERC-721 standard, which acts as a standard for this type of token. An NFT is therefore in most cases an ERC-721 token, while a classic token follows the ERC-20 standard. There are other standards for NFT tokens, but these are reserved for very specific uses.
However, before they were clearly defined, NFTs went through a period of infancy. In 2012, colored coins were already emerging on the Bitcoin blockchain, allowing certain tokens to be recognized through the addition of a metadata overlay to associate with a physical asset.
Launched in 2016, the Bitcoin-based project Rare Pepe is a series of collectibles based on the character Pepe the frog that have achieved considerable success. It is considered by some to be the precursor to NFT collections as we know them today.
The year 2021 was marked by the growth of the NFT market. Many collections have seen their prices explode, just like CryptoPunks or Bored Ape. Today, NFTs are no longer limited to Ethereum and have been popularized on other blockchains as well, such as Solana, Polygon, Tezos or Avalanche for example.
What are the use cases of NFTs?
We briefly touched on this, non-fungible tokens or NFTs can support a multitude of uses. They really exploded in 2021 as collectibles, but of course they are not limited to that. Here are some of the big areas where they are being used:
- The “collectibles”;
- Video games;
- Real Estate ;
- Decentralized finance;
- And many others.
Collectibles” are the collectible series of NFT. Simply put, they are collections containing a limited number of designs on a specific theme, with various attributes and rarities. Usually, collectors buy such an NFT in order to use it as a profile picture on social networks, although other uses have gradually developed.
CryptoPunks propelled the NFT market and started the collectibles trend. This collection of 10,000 pixelated characters was randomly generated by an algorithm and generated a total volume of over one million Ether (ETH).
The second most famous collection is the Bored Ape Yacht Club (BAYC). Also consisting of 10,000 copies, these virtual monkeys with various attributes are traded for several dozen ETH and have attracted well-known personalities such as Jimmy Fallon, Justin Bieber and Stephen Curry.
In 2022, collectibles will account for approximately 60% of NFT-related trading volumes. However, this sector of the market is often criticized as the interest is currently very low and can easily amount to speculation.
NFT and video games
NFTs first attracted attention in the field of video games, especially collectible games. The “historical” game remains, of course, CryptoKitties. Launched in 2017, the decentralized Ethereum-based app allows you to collect virtual cats, much like you would collect Pokémon cards.
Other trading card games followed, in particular games inspired by Magic: The Gathering or Hearthstone. They allow you to make your cards fight and earn rewards in cryptocurrencies. One of the best known is Gods Unchained.
NFTs are also used in a variety of games. They are sometimes created to represent equipment, such as armor or weapons, to be stored and traded freely by players. One of the main advantages of NFT in this case is that the item belongs to the player and the game publisher has no control over it, so it cannot be arbitrarily taken away from you.
One of the most well-known blockchain games to date is Sorare. The French startup uses NFT technology to create unique soccer cards. These earn points based on players’ performances in real matches and allow players to compose teams and compete against each other.
The NFT and digital art
The first area that comes to mind when talking about NFT is art. Indeed, this technology allows to store any digital object on the blockchain: image, video, GIF, etc. However, NFT adds a dimension of digital certificate of ownership of this asset, inscribed forever in the blockchain.
Thus, many artists have been able to take advantage of the trend to sell their work as digital art, and thus as NFT. In March 2021, the Kings of Leon released the first NFT music album in history. Other musicians have offered career highlights in the form of non-fungible tokens, such as Eminem.
Of course, this type of token is also used especially by digital artists. The most famous is probably Beeple’s, which was sold for $69 million in March 2021
Moreover, some artists specialized in the production of digital works have been able to emerge thanks to the explosion of the NFT sector. This is notably the case of generative art via algorithms using emerging technologies such as artificial intelligence. The best known are Art Blocks or Fidenza.
It is sometimes difficult to understand the enthusiasm and price of some NFT. However, art is an enigmatic, unique and complex world that everyone interprets in their own way. In other words, the price of a work is simply determined by what everyone is willing to spend to acquire it.
NFTs and real estate
Halfway between video games and theme parks, there is also the digital real estate sector. Metaverses such as Decentraland or The Sandbox offer users 3D universes with plots. Everyone is free to buy a plot of land and then build what they want.
Each parcel is represented by a non-fungible token, which is purchasable with a cryptocurrency. The plots vary in price depending on their attractiveness and location, just like “real” real estate. Real estate developers have even shown interest in it already.
NFTs and decentralized finance (DeFi)
The porosity between the NFT market and decentralized finance is growing. In the DeFi world, users wishing to borrow money need to deposit an asset of a certain value as collateral. Now it is possible to use an NFT as collateral.
However, the NFT market is still very illiquid and the DeFi mechanisms (loan liquidation, etc.) are therefore difficult to implement. In this sense, solutions are gradually being developed, such as the fractionalization of NFTs into several parts.
This is made possible by a new standard: the ERC-1155 standard. As with any financial asset, the shares can then be traded with each other or against other digital assets. As a result, this brings liquidity to an overly illiquid market, especially for very expensive NFTs.
The blockchain also allows for the “tokenization” of a wider variety of assets. One of the most telling examples is real estate – real this time. NFTs can be used to digitize particularly illiquid assets like a house or land. When these come to the blockchain, they become much more liquid. This is a use that is very limited at the moment, but is likely to come to the fore in the coming years. One of the pioneers in this sector is RealT.
Here is an example of other use cases that could be democratized in the future thanks to NFTs:
- Intellectual property: Lens Protocol allows to create decentralized social networks and to give back the ownership of personal data to the users thanks to NFTs;
- Digital Identity: It is possible to imagine digital identity cards in NFT;
- Financial vehicles: NFTs can contain assets, liabilities, positions, etc. ;
- Ticketing: a ticket or entry ticket to an event can be replaced by an NFT to limit fraud;
- Logistics: Carrefour has used NFTs to set up a traceability system from producer to retailer;
- Voting: to avoid electoral fraud, a right to vote could be symbolized by an NFT.
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