Nowadays everyone knows about NFT, and of course who doesn’t? NFTs are extremely popular, and in the near future more people wil buying NFTs. In 2021, we saw a significant increase in both the popularity and value of some cryptocurrencies, such as Bitcoin.
It’s not too late to start using NFTs now. That is why we explain everything about it in this article. This way you know exactly what NFTs are, how they work and which NFTs are the most popular at the moment. That’s so handy, isn’t it?
- 1 What does fungible mean?
- 2 Anonymity as a condition for fungibility
- 3 What is a non-fungible token (NFT)?
- 4 Is NFT new?
- 5 Why are NFT’s so popular?
- 6 More and more platforms for NFTs
- 7 How sustainable are NFTs?
- 8 What are NFTs used for?
- 9 The most famous NFT games
- 10 What’s the future for NFTs?
- 11 Conclusion
What does fungible mean?
Before we get into the definition of a non-fungible token, it’s worth explaining what fungible (or fungibility) is. Fungibility is used to qualify a currency. An asset is said to be fungible if:
- It’s not unique
- It is exchangeable for an asset of the same type
The most obvious example is of course the currency we use every day. Euros are thus fungible assets. A one euro coin is not unique and is indeed exchangeable for another one euro coin of the same value. If Jan lends a euro coin to Henk, Henk can later return any other euro coin to Jan. Likewise, most cryptocurrencies are fungible or partially fungible assets. Each coin or token is thus worth the same as all others of its kind.
That said, it is important to point out the partial fungibility of some cryptocurrencies. Bitcoin (BTC), for example, is a partially fungible cryptocurrency, as the entire transaction history is freely available. This means that the coins can be considered unique: some have been used for illegal exchanges, which distinguishes them from ‘blank’ coins. This can create a market where ‘clean’ coins are preferred over previously used coins.
Anonymity as a condition for fungibility
Absolute fungibility thus implies a form of anonymity. In this case, each coin is strictly identical and unidentifiable. We can cite the example of privacy altcoins such as Monero (XMR) or Zcash (ZEC). Since it is not known what the coins were used for, they all have the same status.
However, genuine fungible tokens like Monero often come into the crosshairs of regulators. They are suspicious of the anonymity layer, which they believe encourages money laundering.
What is a non-fungible token (NFT)?
Now that you know what fungible is, let’s talk about non-fungible tokens. NFT is the abbreviation of the English term ‘non fungible token’, which means ‘non-exchangeable token’ in Dutch. A token is a digital asset issued by a blockchain. Bitcoins (a well-known cryptocurrency), the ether of the Ethereum blockchain, or the XRP of the Ripple blockchain are all tokens.
One of the specific features of these tokens is their fungibility: this term refers to the fact that one Bitcoin is equivalent to another Bitcoin and that they are basically indistinguishable from each other. This is a feature of the coin and one of the arguments advanced by those who view cryptocurrencies as similar to traditional money.
But it is not a requirement: a blockchain can issue non-fungible tokens. So these are digital assets that each have unique characteristics and therefore cannot be traded for each other. The NFT thus provides a non-fungible token with a specific cryptographic layer based on an ERC (Ethereum Request for Comment) blockchain. Thanks to this unique encryption and the attached metadata, the token can then serve as an identification certificate for any digital object (an image, a piece of music, a video game object, etc. ).
Is NFT new?
Not really. The concept of non-fungible tokens first appeared on an experimental basis in 2015, with the Etheria project. This project offered users the opportunity to acquire a plot of a virtual world, where the attributes of each plot of the map were stored on the Ethereum blockchain. This first experimental project laid the foundations for NFT at the time, which used the blockchain to record ownership of virtual objects and transfers of ownership between different users.
While the Etheria project served as the first proof of concept, it would be another two years before we saw the emergence of NFT in its modern form, supported notably by two projects: the Cryptopunks project, and the CryptoKitties project.
Cryptokitties was the first NFT project to be very successful at the time: it allowed users to collect virtual kittens, where each kitten was represented by a non-fungible token containing its various characteristics. The success of the project, developed by the studio Dapper Labs, caused congestion on the Ethereum blockchain in December 2017 and prompted the founders of the project to develop another specific blockchain.
Buoyed by these initial successes, the creators of Cryptokitties proposed a new token standard, ERC-721, which defines the main characteristics of this new kind of token: non-fungible and thus indivisible. This standard, based on the Ethereum blockchain, was soon adapted by other players, who proposed their own versions based on different blockchains according to their needs. And an entire market has taken these tools to develop proprietary NFT applications over the past four years.
Why are NFT’s so popular?
We can give a very short answer to that. NFTs are so popular because there is a lot of money to be made with them. And when you can earn a lot of money with something, a lot of people come to it.
The digital art market sees the use of these non-fungible tokens as a way to solve the problem of art in the digital age, by automatically replacing the precious certificate of authenticity of a work of art.
Artist Mike Winkelmann saw one of his digital works sell for $69.3 million (in cryptocurrency) at a Christie’s auction in early March. But at that price, buyers don’t just get a USB stick containing a copy of the work in question: rather, it’s the unique token that corresponds to that work, confirming that the owner is indeed the rightful owner of the work.
But that’s not all, in fact Jack Dorsey, the CEO of Twitter, has put his very first Tweet up for sale in an auction where the amounts are approaching 2 million euros. Canadian musician Grimes (also a friend of Elon Musk) has also put some of her digital productions up for sale online, which have grossed 6 million.
More and more platforms for NFTs
In recent years, several specialized platforms have emerged to exploit this opportunity: they allow artists to post their virtual works online and generate a non-fungible token corresponding to the work in question. This token can then be bought, resold or given away by interested parties and can give rise to speculation. It can even be stolen from you, like any digital asset, and sold cheaply to unscrupulous buyers.
In addition to artists, many industries see this technology as an opportunity: the video game industry has not waited for the emergence of the NFT to trade virtual objects, but the use of a blockchain allows the central role of the game publisher in transactions with eliminate virtual objects.
In the sports field, the NBA has also decided to offer a digitized version of its trading cards by launching an NFT platform, developed in partnership with Dapper Labs, that offers a virtual equivalent of its trading cards in the form of non-fungible tokens. The deal has reportedly generated nearly $240 million in revenue in 30 days, with publishers and the NBA being paid through commissions on transactions and the release of new cards.
How sustainable are NFTs?
Of the many criticisms of NFTs, those related to environmental impact are the most frequent. As is often the case with blockchain applications, one of the issues is environmental impact. Many blockchains, including Bitcoin and Ethereum, rely on a validation system known as Proof of Work (PoW), which uses a lot of electrical energy to validate the new blocks.
While some projects aim to evolve the protocol towards less computationally intensive validation models, it is quite reasonable to point out that NFTs are not exactly sustainable.
On the other hand, you have to say that works of art are not always that. Different materials are needed to make a painting. For example, think of the canvas, but also of the paint. Paint production can release many harmful chemicals that have a negative effect on the environment.
As the blockchain world becomes more sustainable, so will NFTs. And that can mean that at some point NFTs are better for the environment than actual works of art.
Several good steps have already been taken in this regard. For example, Bitcoin is no longer mined in China , so Bitcoin has already become a lot greener. That was a big problem for many people, including Elon Musk. He decided to temporarily stop Bitcoin payments at Tesla because Bitcoin would not be green enough.
NFTs run on the Ethereum blockchain, which is currently undergoing a transformation to Proof of Stake (PoS). As a result, there is a good chance that much less energy will be needed to validate transactions on Ethereum, which will automatically make NFTs a lot greener. However, it is not certain whether this will actually produce the desired result. It has never happened before that such a large blockchain undergoes such a transformation. There are also people who think that the transformation to Ethereum 2.0 will go in the wrong direction. At the end of 2021, we will know what the reality has become for Ethereum, and thus whether NFTs will be more sustainable.
What are NFTs used for?
As we mentioned briefly, non-fungible tokens or NFTs can support a multitude of applications. They really exploded as collectibles in 2021, but of course they are not limited to that. Here are some of the major areas where they are used.
NFTs first attracted attention in the game field, especially collectible games. The most famous game is of course CryptoKitties. Launched in 2017, the decentralized Ethereum app allows you to collect virtual cats just like you would collect Pokémon cards. Each cat is actually an ERC-721 token, which is stored on the blockchain, is freely exchangeable, and has its own value.
Other card games followed, most notably those inspired by Magic: The Gathering of Hearthstone. They let you fight your cards and earn rewards in cryptocurrencies. One of the best known at the moment is Gods Unchained .
NFTs are also used in more varied games. Sometimes they are created to represent important items, such as armor or weapons, which can be freely stored and traded by the players.
Digital art and collectibles
The area for which non-fungible tokens have become known is, of course, art and collectibles. With an NFT, any digital object can be stored on the blockchain: an image, a GIF, a video, etc. This has allowed artists to offer their work as non-fungible tokens.
In March 2021, Kings of Leon released the very first NFT album. Other musicians have offered career highlights as non-fungible tokens, such as Eminem. This type of token is of course also used in particular by digital artists. One example is Beeple, whose work regularly fetches huge prizes.
Not surprisingly, NFTs have also been swept up in the memes culture on the internet. So much so that some cult memes themselves have taken on a symbolic character, and are now being bought up at a premium. The non-fungible token for ‘Disaster Girl’ sold for $473,000 in April 2021. And Doge – which led to the creation of Dogecoin (DOGE) – has of course not been spared. The original meme was bought for $4 million.
Digital Real Estate
Halfway between video games and theme parks, there’s also the digital real estate sector. Projects like Decentraland or The Sandbox offer users 3D worlds with plots. Everyone is free to buy a piece of land and build on it whatever they want.
Each package is represented by a non-fungible token, which can be purchased with a cryptocurrency – Ether (ETH) or MANA for example. Plots vary in price depending on their attractiveness and location, just like “real” real estate.
Digital worlds attract: the legendary Atari brand has particularly plunged into the world of Decentraland, buying up numerous plots of land to launch – among other things – a casino with cryptocurrencies. The giant Binance has also taken the opportunity and has acquired much of the land from The Sandbox. The highest ranked lots are the most visited, thus yielding rewards.
Tokenize physical objects to the blockchain
Less playfully, non-fungible tokens can also be used for traceability. Thanks to its fraud resistance and high security, the blockchain can certify the origin and authenticity of an object or good. Therefore, it is increasingly used in such cases. As early as 2019, the LVMH group had begun experimenting with ERC-721 non-fungible tokens to certify luxury goods and combat counterfeiting.
The blockchain also makes it possible to tokenize a wider variety of assets. One of the most telling examples is real estate (real real estate). NFTs can be used to digitize particularly illiquid assets (such as a house or land). When these get on the blockchain, they become much more liquid. This is an application that is currently very limited, but is likely to come to the fore in the coming years.
Placing contracts on the blockchain
Elements of contracts and formal agreements can also use non-fungible tokens. In April 2021, a couple got married on the blockchain, exchanging rings in the form of NFTs.
NFTs can also be used to digitize official documents such as ID cards, certificates, etc. There is currently a legislative loophole around these practices, but they are also expected to be more widely applied in the future.
The most famous NFT games
The gaming industry quickly understood the interest of these unique tokens. After all, these tokens can easily represent many items that are now traded in existing video games. And then it’s not necessarily about in-game purchases against virtual and worthless currencies, but also in fiat currencies. Using NFTs for these different items in the game would really take the players’ ownership of them.
Axie Infinity is a universe inspired by the Pokémon and Tamagotchi games. Axies are imaginary creatures that you as a player can breed, improve, fight and even reproduce. They live in a virtual world, and it is by considering them as friends (like a Tamagotchi) that the player can manage to advance them in the best way.
This ecosystem, based on the Ethereum network, also includes a marketplace where players can buy and sell creatures, land, and even items. All these assets are present in the ecosystem in the form of NFTs, which allow users real ownership. There is also a strategic aspect to the game: knowing that every part of the body affects an Axie’s performance, and that players have different cards to play from, these must be carefully chosen to hope to win battles.
CryptoKitties is the first video game to use NFTs and has contributed to the democratization of this unique token system. It was at the end of 2017 during the general hype around cryptocurrencies that CryptoKitties got a big success from the community. The concept is quite simple as it consists of deploying NFTs that represent cats and their unique characteristics through a ‘DNA’ which is then coded into Solidity. These cats can reproduce with each other and thus give birth to new cats with unique characteristics.
The value of one of these cats depends on several factors, mainly related to the rarity of the cat. The cat’s generation can be a factor, as there are only 50,000 generation 0 cats, and a cat’s generation depends on the generations of its parents. But there are also rarer types of cats, and features that are more sought after than others. The value of a particular cat depends entirely on supply and demand. Purchases are made in the form of auctions.
Decentraland is an open-source interactive virtual reality platform where users can buy, use and build on a piece of land. The system guarantees its users full ownership rights and permanent registration of ownership on the Ethereum blockchain.
Like Minecraft or Second Life, there is no real purpose in Decentraland. Instead, users walk through a virtual world and buy virtual land called LAND. So you can create content and applications there, but you can also experiment with them and then put them up for sale. It is an interactive 3D world, which can be accessed with a virtual reality headset or via the classic web browser.
There is a limited number of LANDs you can buy, each unit is 16 x 16 meters, but there is no limit to the height of what you can build on it. So you can fully use your creativity when you play Decentraland. Many people therefore compare it to Minecraft as well, because you can basically do the same here.
In recent years, a kind of game that few could have imagined would be successful has developed: virtual trading card games. The principle is simple, as each player builds his or her card collection as he or she plays or by paying at the till. He can then use his cards by playing against other players in different game modes. Hearthstone, developed by an internal Blizzard team, started this digital trend.
One of the problems with these virtual card games was that the players had no control over their collections. Still, virtual cards are generally just as expensive as physical cards, which can be traded and have a real secondary market. This is where Gods Unchained comes in, a virtual card game based on NFTs. Players get real digital ownership of the cards they have purchased, which they can freely use in the game.
Note that in the context of physical collection, some entrepreneurs or artists think of co-integrations that tie real physical collectibles to their property rights, modeled by such tokens. This is the case, for example, with Pascal Boyart, who tokenized some of his frescoes and then auctioned them off in more or less fractional form.
Sorare is a blockchain-based football game where you collect cards, build your teams with them, and earn points based on the actual performance of your players. On Sorare you really do have your own cards. Every card is an NFT, which runs on the Ethereum blockchain. This means that each card is available either uniquely or in very limited quantities, and no additional copies can be made.
These token cards can be traded or transferred to other people and wallets at the discretion of their owners. Currently about 140 clubs and their players are tokenized on Sorare. You will find prestigious clubs such as Juventus, AS Roma, Paris Saint Germain, and many more. This number is growing every day.
In addition to the clubs, Sorare has signed licensing agreements with several national federations, including the French Football Federation (FFF) and the German Football Association.
What’s the future for NFTs?
Although the concept of NFTs is not really new anymore, the market for NFTs is indeed still very young. But the ecosystem is constantly evolving. We can therefore expect many developments in the coming months. First of all, technically, because if the ERC-721 standard is widely used and Ethereum is the main hub for NFTs, other players will want to carry this ecosystem.
They could be different and innovative standards: for example, new formalizations (such as ERC-1155, ERC-994 or ERC-998) could enable new ways of interacting between fungible and non-fungible tokens, or even create NFTs that allow other Encapsulate NFTs.
So much for this article on NFT where we discussed what NFT is, how it works and what different uses it can have. As is often the case in this field, innovations are yet to come and current functionalities do not represent the capabilities offered by these non-fungible tokens.
Aside from the headlines, NFTs do have uses beyond memes or trading cards. Their integration into broader sectors, including Decentralized Finance (DeFi), therefore appears to be on track. Like other aspects of blockchain technology, non-fungible tokens enable high security, fewer middlemen and decentralized processes. Therefore, they should continue to be preferred for various uses.
We are therefore also certain that a lot will still happen in the field of NFT, but we do not yet know exactly what that will look like. We can only wait for that, and maybe buy some NFTs ahead of time, so we can make a lot of money out of this later!
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com