What are non-fungible tokens and how do they work?

Non-fungible tokens (NFT) are extremely different from regular cryptocurrency tokens. They refer to a unique type of cryptographic tokens that are designed to represent ownership of a wide array of unique entities that can be both physical and virtual. This can include real estate, digital art, rare digital resources, shares etc. An NFT typically uses a blockchain to verify its authenticity. This makes it easy to tell the difference between an original and a duplicate token

Since NFTs are so unique, it is impossible to replace one NFT with another identical token—this is a property known as non-fungibility, and it is enforced by smart contracts that prevent duplication, while publicly visible blockchains allow for provable scarcity. Non-fungible tokens are one-of-a-kind. On the other hand, cryptocurrencies like Bitcoin would be considered fungible, as you can trade it for another bitcoin and still have the same thing. NFTs are also sometimes called Niftys, non-fungible tokens, or Crypto Collectibles. They trade on various blockchains, but the WAX Blockchain is by far one of the most active blockchains for NFT transactions.

Non-Fungible Tokens
Non-fungible token

NFT can come in a variety of different forms, depending on the standard they are built on, e.g. ERC721 and ERC1155 for Ethereum NFT, and TRC721 for TRON ones. Each of these standards has its own benefits and limitations, which can affect the types of NFT that can be created. The vast majority of NFT are currently based on the ERC721 standard.

Why are non-fungible tokens important? 

NFTs are gaining increasing popularity with crypto fans enthusiasts and businesses alike. This is because they have made a gargantuan impact in the gaming and collectibles space. These tokens enable gamers and collectors to become immutable owners of unique digital items. There are also many instances where users have been able to create and monetize structures like casinos and theme parks in virtual worlds, such as The Sandbox and Decentraland. 

Along with this, NFTs have enabled artists to sell their digital artwork to a worldwide audience. Unlike in auction houses and galleries, these artists will be able to keep a greater portion of their profits by using NFTs. Royalties can also be programmed into digital artwork so that the creator receives a percentage of sale profits each time their artwork is sold to a new owner.

For example, Mike Winkelmann, also known as Beeple recently sold a JPG file for a whopping $69 million. The piece was sold as a purely digital NFT based work and broke several records, including the highest price for any lot in an online-only auction. The file consisted of 5,000 pieces of digital artworks by the artist and was called ‘Everydays: The First 5000 Days’. 

 non-fungible tokens
Non-fungible token Art

How do non-fungible tokens work?

In a nutshell, the majority of NFTs are a part of the Ethereum blockchain. Ethereum is a cryptocurrency that is similar to Bitcoin. However, its blockchain also supports NFTs, which store extra information that makes them work differently from something like an ETH coin. Other blockchains are capable of implementing their own versions of NFTs as well.

NFTs provide a certificate of ownership of a digital object for the buyer, which also protects its value for future transactions. They are often used to create verifiable artificial scarcity in the digital domain along with digital ownership. NFTs are used in several specific applications that require unique digital items like crypto art, digital collectibles, and online gaming.

Buying, storing and selling Non-Fungible Tokens

Buying and owning NFTs is very different from regular cryptocurrencies. If you are looking to purchase a digital collectible or tokenized asset, you’ll likely need a digital currency like Ether, although individual sellers may accept cash or trade.

Another important requirement is someone to transact with. As each token is unique, there aren’t exchanges for NFTs. Instead, there are marketplaces that connect individual buyers with individual sellers. You’ll have to work out a price with the person selling the token. Then, you can purchase it directly from them.

Generally, NFTs are stored in digital asset wallets. If you take an Ethereum NFT, for example, MyEtherWallet would be the most ideal choice to store it. This because it can be used to easily manage any Ethereum-based NFT, and can also be used to access NFT stored on Ledger hardware wallets. Similar to standard ether (ETH) and ERC20 tokens, NFTs can be transferred from a particular address to another. However, the transaction fee must be paid in ether as NFT tokens are generally indivisible in nature. 

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Features of non-fungible tokens

As NFTs are based on blockchain technology, we can see a few common characteristics between the two. Some of the main features of NFTs are: 

  • Standardized

Generally, digital assets do not have any unified representation online. Representing non-fungible tokens on public blockchains can enable developers to build common, reusable, inheritable standards relevant to all non-fungible tokens. These include such basic primitives as ownership, transfer, and simple access control. 

  • Interoperability

Non-fungible token standards enable non-fungible tokens to flow easily across various ecosystems. As soon as a developer launches an NFT project, these NFTs are instantly viewable inside dozens of different wallet providers, tradeable on marketplaces, and, most recently, displayable inside of virtual worlds. 

  • Liquidity

NFT marketplaces are used by a large variety of consumers. This includes experienced traders as well as novices. This promotes better exposure of the assets to a wider pool of buyers. In the same way that the ICO boom of 2017 gave birth to a new asset class driven by instantly liquid tokens, NFTs expand the market for unique digital assets.

  • Immutability and provable scarcity

Smart contracts enable developers to draw hard caps on the supply of non-fungible tokens and enforce persistent properties that cannot be modified after the NFTs are issued. They can also enforce that specific properties do not change over time by encoding them on-chain. This is particularly interesting for art, which relies heavily on the provable scarcity of an original piece.

  • Indestructible

Since NFT data is kept on a blockchain through smart contracts, each token is completely indestructible and can’t be duplicated or tampered with. Ownership of these tokens is also immutable, which means gamers and collectors actually possess their NFTs, not the companies that create them. This is extremely different from purchasing items like songs from the iTunes library as buyers don’t actually own their purchases, they’re just buying the license to listen to the music. 

  • Verifiable

Another advantage of storing historical ownership data on the blockchain is that items such as digital artwork can be traced back to the original creator, which allows pieces to be authenticated without the need for third-party verification.