Non-fungible token - NFT
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.
What Is an NFT?
NFTs signal the latest evolution in blockchain-based assets, moving beyond cryptocurrencies, stablecoins, governance tokens, and utility tokens to provide users a new kind of digital asset with innovative models of ownership and distribution.
In this article, we cover what NFTs are, the rapid growth of the NFT collectibles economy, and the different types of NFTs in industries ranging from art to gaming. We also discuss the importance of verifiable randomness for creating provably rare and dynamic digital collectibles.
Assets with fungibility mean that each unit is identical, interchangeable, and divisible. Fungible assets are used everyday like the US dollar, Bitcoin, and even company reward points. In contrast, non-fungible assets mean that each unit is entirely unique from one to another. For example, real estate is non-fungible because each property is different from one to another due to varying features like layout, size, location, zoning, utilities, and valuation.
Non-Fungible Tokens, or simply referred to as NFTs, expand upon the concept of non-fungibility by leveraging blockchain networks like Ethereum to represent unique physical and/or digital assets. NFT ownership is validated and tracked from inception using a public blockchain, allowing users to verify the provenance of any NFT all the way back to its origin. Thus, NFTs are best described as a “certificate of authenticity” issued by the original creator on the blockchain, which provides cryptographic proof that the holder of an NFT is the rightful owner of the official asset it is tied to.
NFTs provide a wide range of benefits, such as allowing artists to monetize their digital artwork, enabling games to create provably rare in-game items, fostering new ecosystems of digital collectibles, tokenizing real-world assets for increased liquidity, and much more.
Exploring the Different Types of NFTs
NFTs offer a flexible framework for tracking ownership of a wide array of digital and physical assets using a blockchain network, as well as adding utility to these assets in any number of interesting ways. The variety of use cases for NFTs is expanding, but below are a few common applications that have emerged.
Digital Art NFTs
One of the most recognized NFT use cases is tokenized ownership of digital artwork. By tokenizing their work, artists are able to monetize their craft and then tap into a global market of potential customers that only need an Internet connection to purchase it. Compared to traditional art marketplaces, which are often opaque, value-extracting, limited in discoverability, and require significant listing fees, NFTs can be listed on global, permissionless online marketplaces and can even provide creators revenue from all secondary sales.
An example of NFT art that made headlines is the famous digital artist Beeple. His piece “Everydays: The First 5000 Days,” a collage of 5,000 images that took 13 years to create, was tokenized as an NFT on Ethereum and sold for over $69M. Using the popular ERC721 token standard, Beeple was able to monetize his digital artwork and establish cryptographic proof that the specific NFT was the official copy. Beeple’s artwork is only one of thousands of different collections of digital art released and sold worldwide as NFTs.
NFTs are a foundational component of blockchain-based video games because they allow unique in-game items to be tokenized, tracked, and transferred in a non-custodial manner. With traditional online video games, centralized publishers have complete control over the distribution, ownership, and attributes of in-game items that often determine the value of certain characters and game outcomes. If the publisher shuts down, users lose access to all of the game items they potentially spent hours, days, weeks, or even longer acquiring.
NFTs not only ensure users have complete control over their game items, but they enable entirely new gaming possibilities. This includes the distribution of randomized NFT rewards in blockchain-based games and the creation of an interoperable metaverse—where the items from one game can be used and traded in another. NFTs have also furthered the growth of the play-to-earn model where users can monetize their time and effort from gaming by acquiring rare NFTs and selling them to others.
One popular blockchain-based video game leveraging NFTs is Axie Infinity, a Pokemon-inspired universe with unique fantasy creatures called “Axies.” Each in-game Axie is programmatically tied to an NFT that contains metadata regarding the creature’s attributes, appearance, and ownership. Through verifiable randomness provided by Chainlink VRF, certain Axies such as a Quad Mystic can be made provably rare through a fair and verifiable distribution process, ultimately becoming more attractive to other players in the Axie universe.
Similar to collecting physical trading cards or mail stamps, NFTs empower a new type of digital collectibles. Collectors can buy digital objects they deem valuable or signal their support for a specific company, brand, game, or artist. Unlike physical collectibles that can be slow to transport and expensive to maintain, NFTs have no such restraints as they are entirely digital, transferrable in seconds, and never degrade in quality.
Some of the most recognized NFT collectibles are CryptoPunks, a collection of 10,000 unique 8bit-style characters algorithmically generated so no two characters are exactly alike. CryptoPunks were some of the first NFTs ever created and were given away for free. They continue to attract users who want to own an original piece of NFT history.
Collectible NFTs are increasingly being used as profile pictures on social media platforms like Twitter and Discord. Doing so provides a powerful signaling mechanism, where like-minded individuals can display their interest in an NFT collection and join a community of like-minded individuals. Importantly, because NFTs are stored on the blockchain, users can cryptographically prove to others that they own the image being used in their profile picture.
Music Album NFTs
Blockchains have given music artists the ability to tokenize their work through NFTs as a way to increase their revenue and foster fanbase engagement. With the Covid-19 pandemic contributing to a 85% reduction in music industry revenue, supplemental income from NFTs has helped artists offset these losses while at the same time providing fans a way to earn special perks like limited-edition memorabilia and even direct access to the artist’s time.
A wide range of music artists such as 3LAU, Kings of Leon, Shepard Fairey, and Eminem have tokenized their work, generating millions of dollars in the process. As a result, NFTs have served as a new, more engaging and creative medium for creating fan reward programs and galvanizing community support for artists.
Real Estate NFTs
NFTs can also represent ownership of real-world assets like real estate to introduce additional liquidity into traditionally fragmented markets. The tokenization of real estate significantly increases the efficiency of transferring ownership and provides a single source of truth around the authenticity and provenance of a specific property. The concept of tokenizing real-world assets can be expanded to include many asset types such as physical paintings, government documents, certifications, and diplomas.
While still in the early stages, real-world assets tokenized as NFTs enable a number of new possibilities, from revenue-generating real-estate tokens backed by rental income to issuing digital credentials without the need of a physical document counterpart. They can also digitize existing records like educational diplomas and intellectual property contracts, leading to more transparency of credentials and opening up new forms of automation.
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