Non-fungible token, also known as nifty, is a digital asset that is tokenized. It is a special type of token that is not interchangeable or replaceable.
NFT belongs to the family of cryptocurrency, in the sense that it is traded on a blockchain and it has market or monetary value attached to it. It is also a virtual token that can be used to create and verify ownership of an asset, through cryptography.
There are several examples of non-fungible tokens, which are collectibles, access passes, fashion pieces, game items, digital art, event tickets, domain names and ownership records for physical assets (such as a driver’s license), amongst other examples. NFTs cannot be found and traded on normal cryptocurrency exchanges, instead, they are bought or sold on digital marketplaces like Rarible and OpenSea.
The major difference between cryptocurrencies and non-fungible tokens is that an NFT has distinct attributes that make it different from other NFTs, even if two or more NFTs seem similar to one another. These attributes can include metadata, visuals and serial numbers. It can also affect the market value of the NFT, based on what attributes are valued by the people who buy and sell them.
Short History of Non-Fungible Tokens
Non-fungible tokens were created by Witek Radomski, the co-founder of Enjin Coin. He wrote the programmable code around June 2017, but it was released two months later.
The most popular example of the NFT project in blockchain history, is Cryptokitties. There are several thousands of Cryptokitties in existence. However, they are not created equally. Each blockchain-based cat is unique and when you buy a cyptokitty, you are gaining the ownership of an NFT.
If you send someone a Cryptokitty NFT and receive a Cryptokitty NFT from someone else, the one you receive will be a completely different Cryptokitty from the one you sent (due to inbuilt attributes). Cryptokitty NFTs are often more valuable than one another, and this depends on the rarity of the NFT and other factors.
There are several other platforms that use NFTs. These include Decentraland, Nifty Wizards and Crypto Twerps.
The word “fungible” means something that can be replaced by something similar; interchangeable, exchangeable and replaceable. Gold, Fiat, Bitcoin and Ether are fungible because an individual unit is interchangeable with any other equivalent individual unit. A thousand-naira bill is interchangeable with any other genuine thousand-naira bill. This feature is imperative, as most currencies aim to be a medium of exchange.
Characteristics of Non-Fungible Tokens (NFTs)
Fungible tokens and currencies are generally divisible, they can be broken down into units and denominations respectively. Bitcoin and other cryptocurrencies can be sent in units, like $50 or $100 worth of bitcoin. Non-Fungible tokens, however, cannot be divided further into smaller units. It can only be bought, sold and held whole.
There is metadata that lies deep within an NFT. The Metadata denotes what makes the asset distinct from all the rest. A metadata is a permanent, unchangeable record that explains what the NFT is all about – like a receipt that proves the ownership that you bought a laptop.
Non-fungible tokens are tokens that create digital scarcity since they can only be produced in limited amounts, and can be verified without any centralized institution that authenticates it. NFT is a good example of how a token can be used to create scarcity. This makes NFTs very attractive and this characteristic plays a special role in increasing the market price of a NFT.
The standardization of non-fungible tokens allow for a higher level of interoperability, which helps the users. This means that unique NFTs can be easily transferred between different applications.
Instagram bans individuals from selling their account to others, but non-fungible tokens can be easily traded on specialist markets, such as OpenSea. In the gaming industry, this enables players to trade their rare cards for another card.
How does NFTs work?
ERC-721 is the standard Ethereum Non-Fungible Token, as used by platforms such as Decentraland and Cryptokitties. EOS, WAX and TRON blockchains equally have their own NFTs standard. Cryptocurrencies like bitcoin, litecoin, ripple and other ERC-20 based tokens are all fungible.
Non-fungible tokens can be created on an enabled smart contract blockchain with needed tools, protocols and support. NFTs and their smart contracts allow for detailed characters to be added, like rich metadata, owner’s identity etc.
Non-Fungible Use Cases: Beyond Digital Currency
There are several applications of non-fungible tokens, and it is virtually endless.
World of Gaming:
Non-fungible tokens are changing the world of gaming. NFTs can be used to represent inbuilt game assets and are fully controlled by the gamers, instead of the game developer.
Players can now freely acquire and trade assets like knives, cloaks etc. The creation of non-fungible tokens for these aforementioned assets make them tradeable for real money and inbuilt game virtual tokens.
An example of collectibles is the cryptokitty. It is a video game, built on Ethereum, which enables players to breed, collect and exchange virtual crypto cats. Each NFT created on the cryptokitty platform is absolutely distinct and impossible to replicate.
The crypto-collectibles are gaining a lot of interest in the crypto space, individuals can now purchase tokenized versions of their favorite celebrities or stars. In addition, users are using NFTs to digitize traditional collectibles, such as coins and baseball cards.
Digital Artists have been facing copyright issues with their artworks. With the special characteristics of non-fungible tokens, digital artists can now relax, create and sell their artworks without fear.
Since there is verifiable proof of ownership attached to the digital artwork, this allows the creator to retain their copyright, as the artwork cannot be easily duplicated.
Identity and License:
There are several forms of identification issued by the government to the masses. But most times, those identity cards either get lost or stolen. Education certificates, medical histories, driver’s license, voters card etc, these can be all digitized by NFTs. This feature will, in turn, give the masses greater control over their data.
The use of NFTs for software licensing will drastically reduce piracy. This allows people to sell NFT-based licenses in the open market for gains. This way, individuals can avoid yearly subscriptions, use a software against the purchased license, and after the use, sell it to another individual.
Non-Fungible Tokens’ Market Value Statistics
Early this year, the non-fungible token economy’s all-time US dollars sales volume crossed $100 million and it is forecasted to reach $500 million in all-time USD volume by the end of 2021.
The market capitalization of non-fungible tokens reportedly grew by 17% in 2019, and it is predicted to grow by 50% by the end of 2020, due to the recent influx of newer applications of NFTs.
The dollar value of NFTs transferred in 2018 reached highs of $159 million and fell to $152 million in 2019. This is due to the stagnancy in the number of players in 2019, but there has been an increased number of participants in 2020.
Predictions suggest that there is going to be a 64% increase in the dollar value of NFT in 2020 and more in 2021. This has been attributed to the fact that there is an increased mainstream adoption of NFTs. Major companies like Nike, Louis Vuitton etc are already into non-fungible tokens.
Future of Non-Fungible Tokens
Non-fungible tokens are filled with many opportunities and possibilities. This ranges from creation of secure and immutable ways of storing birth certificates to academic qualifications. One day, our mobile wallets could contain verified proof of the certificates, license and assets we own.
Non-fungible tokens will be used in the banking and financial industries, to tokenize traditional assets like precious metals and stocks.
Big brands are equally already licensing their contents for NFTs. Formula 1, a major racing company has signed an agreement with Animoca brands, which allows their players to build a collection of NFTs, including cars, parts and drivers, in an Ethereum-powered game.
The future of non-fungible tokens is very bright and it is undoubtedly the next boom in the crypto space. Since NFTs have the ability to digitize assets, the application of this technology is unlimited.