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Non-fungible Tokens (NFTs) could be the next big wave in the crypto market: A detailed explanation on NFTs

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Crypto Kitty

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. 

Fungibility

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)

Indivisibility:

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.

Uniqueness: 

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.

Scarcity: 

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.

Interoperability:

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.

Tradeability:

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.

Collectibles:

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.

Fine Art:

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.

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Jack Dorsey‘s Square to develop open source Bitcoin mining

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On Friday, October 15, Twitter CEO Jack Dorsey announced that American fintech company, Square, would be looking to get into Bitcoin mining. Jack Dorsey who is also Square’s CEO announced this on Twitter which subsequently sent waves through the bitcoin market, surging its price to almost a record high, rising over $62,000 over the weekend. According to the Twitter boss, Square is looking to building an open source Bitcoin mining system that would be available to individuals and businesses.

Sharing his thoughts further on the initiative, he stated that “Mining needs to be more distributed” and that “the more decentralized [mining] is, the more resilient the Bitcoin network becomes. He also mentioned the apparent inaccessibility of mining stating that “Bitcoin mining should be as easy as plugging a rig into a power source.

Dorsey also believes that bitcoin mining “needs to be more efficient and that “clean and efficient energy use” would be undoubtedly beneficial to the digital currency in the long run.

Dorsey ended the thread by saying that a “technical investigation would be undertaken by a Square team led by Jesse Dorogusker, Square’s hardware lead. If successful, this initiative would be another of Square’s bitcoin focused projects which includes a Bitcoin hardware wallet.

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Learning Guides

Understanding Speculation and Crypto Volatility

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Everyone who dabbles in the crypto industry learns almost immediately that the market is very volatile and oftentimes things can change very quickly. That volatility is the fundamental reason why some investors make absolutely stunning gains in so short a time and others lose a lot of money as well. Trading in crypto is one of the riskiest ventures any person can undertake and as they say, it’s not for the faint of heart. The risks can be mitigated of course and sometimes depends specifically on the coin or crypto asset being traded on, barring general market trends.

Nevertheless, to get to the bottom of the volatility concept, one must understand speculation in the market. To start off, the concept of speculation isn’t limited to cryptocurrencies, on the contrary, speculation has existed for as long as economics and trading has. But it is worth saying that speculation is often a feature of novel sectors, assets, commodities and the like. So, even though cryptocurrencies have been around for more than a decade, they’re still in their infancy as far as markets go. One could say that the market is still trying to find its feet.

One of the fundamental reasons why cryptocurrencies are so volatile is that they are fundamentally backed by nothing of value outside the attention that they get. Unlike many fiat currencies which are either pegged to another currency’s value or whose value is unilaterally determined by a central authority, cryptocurrencies only derive value as a function of how many people are willing to use is to transact, i.e. trust in the asset because other people trust it. As a rule of thumb, the larger the number of people who accept the asset, the more valuable it becomes.

This is one of the hallmarks of speculative trading. In the crypto world or in any market that’s novel and untested, many people are in it to win it which means their strategies in trade has the objective of making as much profits as possible in the short term. Therefore, the market enters a subtly dangerous cycle of rapidly changing prices of assets. Basically, investors typically buy assets when prices are low and wait. As more investors are attracted to the commodity for its low prices, it sets off a cascade where more people buy in, causing the price to steadily rise. 

However, all good things must come to an end and it almost always gets to a breaking point whereupon the price gets high enough for investors to begin to sell. This reverses the earlier cascade and as more and more investors pull out, the prices can fall dramatically causing even more to sell off in fear of losing whatever investments they have left. The prices having fallen resets the game and primes investors to begin buying again.

Volatility has been one of the talking points of many critics of cryptocurrencies often comparing it to a Ponzi scheme. And in certain cases, persons of interest with large pulls and audiences can substantially affect the rate at which prices rise and fall. Other factors include government regulations. Volatility at its core reflects the often chaotic nature of trade and market interactions and human hopes and fears.

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Market Watch

What China’s crypto clampdown means for investors

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Over the weekend, China, the biggest crypto mining country once again, began to clamp down on cryptocurrency. Ten Chinese agencies including the central bank and banking, securities and foreign exchange regulators have vowed to work hand in hand to expose illegal cryptocurrency activity.

China has always placed stricter rules on cryptocurrencies but the new rule has made all crypto-related activities illegal. According to the People’s Bank of China (PBOC), it is illegal to cryptocurrency trading and anyone that does so will be severely punished; this includes those within China that are working for overseas platforms. To fully phase out the cryptocurrency mining sector, the National Development and Reform Council (NDRC) said that it would launch a nationwide crackdown on cryptocurrency.

Over the years, China does not recognize cryptocurrency as a legal tender. In 2013, the Chinese government referred to Bitcoin as a virtual commodity that individuals are allowed to freely participate in. This freedom, however, precludes banks and payment companies from providing services that are Bitcoin related.

In 2017, Initial Coin Offering (ICO) was banned. The ban was also extended to the conversion of legal tenders to cryptocurrencies by trading platforms which led most of the platforms to shut down operations in China. The crackdown led 88 trading platforms and 85 ICO platforms to withdraw from the market as of July 2018.

To China, the crackdown on cryptocurrency is necessary as the country is trying to launch its official digital currency and the need to fulfil its 2060 climate targets. The crackdown was necessary as cryptocurrency was seen as infringing on people’s properties and ‘disrupting the normal economic order.’

The statement by PBOC on Friday was unequivocal as the current crackdown is distinct from the previous ones. In his statement on Friday, PBOC called Bitcoin, Ether and Tether ‘legally irreparable’ and should not be used. The new regulations forbid financial institutions, marketing and IT providers from supporting crypto-related activities. The activities of both crypto holders and miners are now considered illegal. This is what Henri Arslanian, a PwC crypto leader termed as “No ambiguity. No room for discussion. No grey areas” in his tweet.  

What does this mean for crypto holders worldwide?

The major effect of China’s crackdown on cryptocurrency is the increase in price volatility. While volatility is a common phenomenon in the crypto world, a crackdown initiated by the world biggest cryptocurrency mining country will have a huge effect on market price.    

After the PBOC interview, Bitcoin fell by 4% within 24 hours and is currently trading at $43,320. Ethereum fell by 6% and it is currently trading at $3,036. With the Evergrande debt crisis and the huge blow bedevilling the crypto market, a clampdown by China would most likely keep the market price on the red until another good news crops up.

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