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A Guide to NFTs

By February 17, 2021March 21st, 202210 minute read

NFTs or Non-fungible tokens have been the most-talked-about topics in 2020 regarding blockchain technology, enjoying the same fame and popularity with DeFi and the iconic Bitcoin Halving that took place in summer 2020. NFTs are emerging in the crypto industry as a means to create and propagate exciting monetizing opportunities for various brands and collectors. This is because they are arguably authentic, secure to trade, and can include a wide range of branding opportunities and various types of artwork. 

But what are non-fungible tokens exactly? Let’s find out!

Understanding non-fungible tokens

In the most basic terms, non-fungible tokens represent uniqueness. They cannot be replicated or be equated with an asset that might seem similar. Let’s try to understand the concept of ‘non-fungibility’ by defining its opposite – fungibility. 

Fungibility refers to a good or an asset’s ability to be exchanged or interchanged with an asset or a good of a similar type or belonging to a similar category. Fungibility implies that there is certain equality in terms of value between two assets. Fungible assets are not a new concept and have been used to simplify trades and exchanges since time immemorial. 

A modern-day example of a fungible asset is the $1 bill in your pocket and the $1 bill in someone else’s possession. Given that both the bills are authentic, they hold the same value, and if they are exchanged, neither of the parties stands to gain or lose from the trade. This is because the value of both bills is the same, and they are interchangeable. 

However, in the case of non-fungible assets or tokens, our example changes a bit. Instead of two identical $1 bills, let’s take plane tickets. These might look similar and belong to the same category, but they are not the same in the sense that the information they hold is unique. They are non-fungible since the information is different and exclusive for both the tickets. These two plane tickets can’t be exchanged, simply because one might take you to a nearby state, while the other one could take you to the other side of the world. 

From this, we derive the concept of non-fungible assets: they might look similar, but they have unique features that make it impossible for them to be interchangeable or have the same value. This uniqueness is precisely what makes these non-fungible tokens – as they become in the crypto space – so great. Bitcoin is an example of a fungible token if this concept is applied to the world of blockchain, simply because all the 21 million Bitcoins are identical in value. 

Non-fungible tokens are not exchangeable and interchangeable. Each of these tokens is unique, and the data which makes them so unique is stored as information within these NFTs. This unique and exclusive identifying data is stored in the smart contracts inside these non-fungible tokens. 

Another exclusive and special feature of non-fungible tokens is that they are indivisible. Unlike Bitcoins, they can’t be sent in smaller denominations. You can not simply send a portion of an NFT to someone. 

Non-fungible tokens are important simply because they represent uniqueness and hence, have a critical function when it comes to the blockchain. This is because most of the world’s important assets are unique. From a breakfast cereal box having a unique serial number to expensive real estate withs exclusive addresses, uniqueness is everywhere and is imperative to preserve. 

Non-fungible tokens have a gargantuan role to play as we slowly slip into the digital economy’s next era. They are becoming increasingly critical as organizations and enterprises open up to the blockchain’s idea and integrate its tech into their functioning.

Standards for NFTs

Before we delve into the history of nun-fungible tokens and how they came into being, it is imperative to know and understand the ‘standards’ that these NFTs have. Standards play a monumental role when it comes to making non-fungible tokens powerful. In the case of NFTs, standards give developers a certain level of guarantee or assurance that the assets involved will behave in a specific way. These standards also describe how interactions will work when they try to interact with the assets’ basic functionality.

ERC721

This is the most popular standard when it comes to non-fungible tokens and was pioneered by none other than Cryptokitties. It is a blockchain game developed on Ethereum. This unique game allows the players to purchase, collect, breed, and sell virtual cats. Cryptokitties is an important landmark in the history of NFTs because they portray one of the earliest attempts made to employ blockchain for leisure activities. This is how ERC721 became the first standard ever that represented non-fungible digital assets. It is an inheritable Solidarity smart contract, which implies that interested and involved developers can create fresh and new ERC721-compliant contracts with ease by simply importing them from the OpenZepplin library

ERC721 involves two relatively simple methods that also reflect the essence of an NFT. The first is that it provides a mapping of unique identifiers to addresses. These represent the owner of the aforementioned identifier. Secondly, it also provides an authorized and permissioned way to transfer these assets. This is also known as the ‘transferFrom’ method. This is the core of the ERC721 standard for non-fungible tokens.

ERC1155

The Enjin team developed this non-fungible token standard. What’s unique about this Ethereum standard is that it brings the idea of semi-fungibility into the NFT world. With this standard, IDs represent a class of assets instead of individual assets. A major advantage of this system is that it brings efficiency and reduces the efforts to modify smart contracts for a large number of items. This makes development work significantly easier. Developers can carry out large modifications in the smart contracts with simple changes. However, this does not come without the loss of information as the history and information of individual assets cannot be traced.

Non-Ethereum Standards

Non-Ethereum standards are pioneered by chains other than Ethereum, with one of the most prominent examples being DGoods. This standard is pioneered by the Mythical Games team starting with EOS and focuses on providing a feature-rich and heavy cross-chain standard. Another notable development is the emergence of the Cosmos project, which is developing an NFT module that can be leveraged as a part of the Cosmos SDK.

Non-fungible tokens: a brief history

Now that we have a basic idea about how non-fungible tokens work and the standards involved, we can delve into how they came into being. Before Cryprokitties, a period that is unironically known as ‘0 BC’, some experiments began with the emergence of colored coins in the Bitcoin network. Illustrations known as ‘Rare Pepe’ that was built on the Bitcoin counterparty system were one of the first few, and some of these illustrations were sold on eBay. Later, a rare set of Rare Pepe was even sold in an auction in New York. 

CryptoPunks became the first Ethereum-based non-fungible token experiment, and it consisted of 10,000 unique punk collectibles, with each of them having individual and unique characteristics and features. This was built by Larva Labs and was featured as an on-chain marketplace that could be accessed and used by crypto wallets such as MetaMask. This further lowered the barrier to entry to interact with non-fungible tokens for crypto users. Today, CyberPunks are, in essence, true digital antiques, and since they live on Ethereum, it makes them interoperable with wallets and marketplaces. 

Cryptokitties mark the beginning of an era which pushed NFTs into the mainstream and were launched in late 2017. Cryptokitties debuted at the ETH Waterloo hackathon with a primitive on-chain game. Many in the gaming community labeled them as ‘not a real game’, but the team found their way around the blockchain’s design constraints considerably well. 

This project was covered by all major platforms, from CNN to CoindDesk, due to two main reasons: the game was slowing down the Ethereum network, and people were making insane profits while trading them.  Some virtual cats even sold for over $100,000! This rise of NFTs, thanks to CryptoKitties, coincided with the 2017 crypto bull market, which encouraged people to participate extensively. It was one reason why people opened up to the idea of non-fungible tokens and looked into their incredible potential. Dapper Labs, a company created by Axiom Zen, the genius behind CryptoKitties, successfully received a whopping $15 million funding from top investors such as Google Ventures
The period between 2018 and 2019 is known for the NFT Cambrian Explosion, which resulted in both these years witnessing a massive and exponential growth of non-fungible tokens. Although smaller in volume compared to other crypto markets, the trade volumes are growing at a brisk rate and have a long way to go. With the emergence of websites such as  nonfungible.com and nftcryptonews.com, which provide ample generic information about the space while also delving into the specifics about the NFT market metrics and gameplay guides, NFTs are now more accessible and easy to learn about than ever before.

Salient features of blockchain-based NFTs

When non-fungible tokens and blockchain technology come together, they make something powerful, unique, and interesting for users and developers that utilize them. While we have already discussed that non-fungible assets are all around us, the real problem is the part where ownership comes up. This is where Blockchain saves the day- it provides a coordination layer for digital assets. In layman’s terms, it gives users all permissions regarding ownership and management of these digital assets. Here are some salient features of blockchain-based non-fungible tokens: 

  • Standardization

Standardization is a revolutionary feature for NFTs because the emergence of digital assets, from domain names to airplane tickets, has no unified representation in the digital world. However, when NFTs are represented on public blockchains, they allow developers to build common, inheritable, and reusable standards relevant to all NFTs. This standardization serves as building blocks for digital assets from basic ownership, transfer, and control to advanced features such as additional standards for displaying the NFTs. 

  • Traceability 

The interoperability of NFTs, which we will discuss in the next section, paves the way for one of the most compelling features of NFTs, known as the traceability that enables free trade in open markets. This means that users can trade items outside of their original environments and transfer them to a place where they can leverage sophisticated trading systems and technologies. These include bidding, bundling, eBay-style auctions, the feature to trade in any currency, and many more. This traceability represents a shift from a closed economy to an open and free-market economy, specifically for game developers. 

  • Interoperability 

The NFT standards allow the easy and free movement of NFTs across various ecosystems and make them accessible inside several wallet providers if a new NFT project is launched. By making them displayable inside of virtual worlds, they become tradeable on a plethora of marketplaces. This interoperability is widely credited to open standards, which enable and provide consistent, clear, and reliable API that is authorized and permissioned for writing and reading data. 

  • Liquidity 

When NFTs are instantly tradeable, it paves the way for higher liquidity. This implies that the non-fungible token marketplaces will be able to cater to a wide variety of audiences, which will allow better and far greater exposure of these assets for a larger pool of buyers. These can include experienced and hardcore traders and even novice players who have just ventured into this arena. Hence, in a way, NFTs are expanding the market and demand for unique digital assets worldwide. 

  • Immutability and provable scarcity

Non-fungible tokens use smart contracts that also allow developers to place hard caps on their supply. Additionally, it empowers developers to enforce stringent and persistent properties that cannot be changed or modified after issuing these non-fungible tokens. Moreover, the developers can also specify which properties cannot be modified over time by encoding them on-chain. Hence, this is crucial and beneficial for several digital assets, including art, which relies heavily on individual pieces’ provable scarcity. 

  • Programmability 

Finally, another interesting characteristic of blockchain-based non-fungible tokens is the fact that they are highly programmable. A prominent example is that of CyptoKitties, who baked in a breeding mechanic into the actual contract directly, which represented digital cats. Moreover, several non-fungible tokens today have more intricate and complicated mechanics that include redeeming, random generation, crafting, forging, and much more, proving that this space is full of infinite potential and great possibilities.

Where can NFTs be used?

NFTs have a wide range of applications since they exist and trade on the blockchain network. Here are a few ways through which you can use NFTs!

  • Construct and curate collections 
  • Showcase your public non-fungible token inventory through various means such as social media or decentralized applications
  • Use non-fungible tokens in games and other decentralized applications
  • Gift and/or trade NFTs with other people
  • Purchase NFTs in a marketplace
  • Buy NFTs in a marketplace

The future of Non-fungible tokens

Non-fungible tokens are extremely new, and the technology behind them is still undergoing significant changes and improvements through tireless innovations. They come with their own sets of challenges and limitations that need to be tackled for smoother incorporation and usage. The first obstacle is that they are very inaccessible to mainstream users, in the sense that currently, only early tech adopters and spectators are using blockchain platforms. 

The second obstacle boils down to purchasing and selling non-fungible tokens and building efficient applications that can support larger transactions. However, the future looks promising for NFTs as the total market for them crossed a whopping $100 million by the end of July 2020. Experts in the crypto industry even speculate that 40% of new crypto users will use NFTs as an entry point. 
With the decentralized finance industry surpassing $4 billion in value, it is evident that the NFT space is set to grow exponentially in the days to come.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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