Non-fungible tokens became a trending topic after witnessing immense popularity in 2021. In light of this newfound sector fame, several projects, including pictures of penguins and apes flooded the market. This created an endless supply of NFT projects.
As with any emerging sector, this increased popularity led to million-dollar hacks and cash grabs as most investors prioritized profits over long-term value. To many neutrals and market participants, these events raised a question: What are NFTs? Is it only art or more?
While digital arts have become the most talked-about niche, NFTs have various potential utilities and applications. This article discusses the concept of NFTsl including its definition and use cases.
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What Is a Non-Fungible Token (NFT)?
A non-fungible token (NFT) is any art, real estate, or collectible tokenized on a blockchain. Simply put, NFTs are digital representations of online or real-world assets that use blockchain technology to verify ownership and authenticity. In this blockchain, each NFT is assigned and encrypted with distinctive metadata, making them unique.
This means that no NFT can exist twice and the individual who possesses the private keys owns exclusive rights to the asset. Moreover, these tokens reside in a blockchain while the corresponding assets are stored in a different location.
Non-fungible tokens can be traded for other NFTs, digital assets or cash. For instance, a Pokémon card NFT owner can exchange it for another NFT, trade it for a cryptocurrency or sell it for real money. However the price of an NFT depends on the market worth and owner valuation.
Like NFTs, cryptocurrencies are tokens. But a key difference exists: crypto assets are fungible. Hence two tokens within the same blockchain can be interchanged. On the other hand, identical NFT tokens on a blockchain cannot be interchanged.
History of Non-Fungible Tokens (NFTs)
NFTs existed long before they became popular among crypto mutuals. As far back as 2014, Kevin McKoy reportedly created the first NFT, Quantum, on the Namecoin blockchain. In 2021, McKoy minted and sold Quantum on the Ethereum network for a reported fee of $1.47 million.
Non-fungible tokens are created using the ERC-72 standard, which provides guidelines for creation, ownership, and transfer. Months later, the ERC-1155 multi-token standard was launched to improve the ERC-721. ERC-1155 allows for creating and managing multiple NFTs using a single smart contract, thus improving efficiency and affordable transaction costs.
How NFTs Work
An NFT is created through a process known as minting in which an asset’s information is encrypted and recorded on a blockchain. In this process, a new NFT block is created, validated, and closed. Additionally, smart contracts are used to designate ownership and carry out transfers.
After minting, a distinct identifier attached to a blockchain address is allocated to the token. This identifier contains information such as token owner and ownership details, which are made public.
Non-fungible tokens can be called different names based on the blockchain on which they are hosted. For example, NFTs built on the Bitcoin network are called Ordinals. However, Bitcoin Ordinals and Ethereum-based NFTs have different creation processes. ETH creates unique asset tokens, while Bitcoin creates Ordinals by inscribing data onto satoshi’s.
What are NFTs used for?
The NFT market exists outside the boundaries of digital art. Gaming platforms like Axie Infinity as well as The Sandbox enable players to acquire virtual assets that they can trade on their platforms creating economic wealth independent of game servers.
The entertainment industry has also taken NFTs as an important element with musical bands like Kings of Leon having distributed their NFT album versions and various artists offer exclusive concert opportunities through NFT technology.
Additionally, the concept of tokenized real estate has gained traction, with platforms such as Decentraland enabling users to purchase virtual land as NFTs. Various projects now use NFTs to connect physical real estate deeds and luxury products to the digital world.
Here are some ways NFTs can be utilized:
1. Digital Collectibles
Most individuals define NFTs as owning digital collectibles, virtual art, and online games. The asset creator can tokenize the collectible by minting it on a blockchain. The most common digital collectibles include:
- Art
- Comic books
- Avatars
- Music
- Trading cards
- Clothing
- Literature
- Domain names
Rarible, OpenSea, and Crypto.com are the most well-known digital collectible marketplaces. Some of the most talked-about digital collectibles are Bored Ape Yacht Club and CryptoPunks.
2. Property Ownership
Non-fungible tokens could be used to establish ownership for a piece of property, including real estate, cars, and yachts. For example, a property owner may mint an NFT to represent the paperwork instead of going through lengthy legal work. This NFT can then be transferred to a potential buyer.
Tokenizing a property cuts out middlemen and makes the acquisition process faster, more transparent, and potentially cheaper. Popular NTF property platforms are Masterworks, Maecenas, and ArtSquare.io.
3. Fractional Investments
Through NTFs, investors could also own shares in tokenized assets representing real-world properties. Each investor can retain ownership rights of the NFT based on the number of shares purchased. Fractional investment may appeal to investors who prefer a multiparty ownership model.
4. Contracts and Agreements
NFTs may also change the approach to contracts and agreements. For instance, insurance companies may tokenize and publish the terms and conditions on a blockchain. Banks can also mint loan agreements as NFTs and publish them on a network. Furthermore, NFT collectibles can be used as collateral for debts.
Benefits of NFTs
Non-fungible tokens are easy to own due to the streamlined ownership process and the elimination of middlemen. Buyers can easily connect with the owner of a digital asset and make purchases quickly.
NFTs also offer asset security. Personal information stored on a blockchain can only be accessed by the private key owner tied to the NFT. Other benefits include revenue Streams, royalties, and investment opportunities.
Concerns About Non-Fungible Tokens
Investing in NFTs can come with some challenges:
Lack of Market Regulation
Given that it is a relatively new asset class, most countries have yet to implement regulations and consumer protection laws. This lack of regulation means market manipulation and misinformation and is largely unchecked.
Fraud and Scam Risks
Due to the unregulated market, several cases of NFT fraud and scams have been recorded. Instances include malicious actors posing as an original NFT store and selling imitated NFTs to unsuspecting buyers. Some also sell fake NFTs by impersonating popular celebrities or institutions. Other NFT fraud cases include false airdrops/NFT rewards and copyright theft.
Limited Legal Rights and CFT Challenges
While NFT documents can support ownership claims and provenance, they don’t grant patents, trademarks, or copyrights. Third parties may exploit this loophole by duplicating an asset and putting the replica on the market. Digital collectibles are most vulnerable to this intellectual property theft because they can be easily downloaded or copied with a few button clicks.
Meanwhile, financial institutions have expressed concern over AML (Anti-Money Laundering) compliance with NFTs due to minimal regulatory oversight. Money launderers and terrorist financiers can take advantage of the weak AML/CFT systems to fund their members, which could pose a threat to global security and foreign trade.
What Is the Point of Having NFTs?
People own non-fungible tokens for various reasons. An investor might see an NFT as a financial investment, while a collector might own one as part of a collection. A realtor may view an NFT as a piece of legal paperwork, yet it could serve as a contract for an insurance firm.
The Bottom Line
NFTs have evolved over the years, changing how investors view digital finance and asset ownership. However, the sector is relatively new, and the lack of regulation remains a concern. As such, it is important to research and stay informed about the risks and potential benefits of owning an NFT.
