In 2012, there were already blockchain projects that foreshadowed what are now NFTs. The NFTs themselves are smart contracts with a unique identifier and with unique metadata. NFT means ‘non-fungible token’. ‘Fungible’ means replaceable or interchangeable.
NFTs represent digital assets and each has its own non-exchangeable identity that sets them apart from other NFTs. Because NFTs run on a blockchain, their digital history can be tracked without any problems. The creator, the current owner and any previous owners of an NFT can be easily identified. This information can be found on the blockchain. The popularity of NFTs has grown exponentially since 2021.
So, NFTs are ‘non-fungible tokens’, but most people still don’t know what that means. It is therefore good to first explain what ‘fungible’ and ‘non-fungible’ mean exactly.
What is fungible and non-fungible?
If something is fungible, it can be replaced with an identical item. They can therefore be completely interchanged with each other, without the value ultimately being different. The simplest example is the euro. If Jan lends one euro to Kees, it does not matter which euro Kees returns to Jan, because all euros are identical and exchangeable. They all have the same value and it doesn’t matter if someone is in Amsterdam, Madrid or Rome. That is, they are fungible.
Cryptocurrencies are also fungible, as the value of one Bitcoin is the same as any other Bitcoin. Ether and other cryptocurrencies also work in the same way.
If something is non-fungible, then it is unique and cannot be replaced or exchanged. This includes diamonds, land or NFTs. Diamonds are all cut differently and they differ in colour and size. Land can be of different sizes or vegetation. NFTs are unique in that only one copy was made.
However, it is possible that, for example, a series of a certain NFT has been made, but then they are all numbered, so that they ultimately remain unique.
That is why, for example, NFTs are not equal in value, as is the case with fiat or crypto currencies.
How do NFTs work?
The creator can enter different types of information in the metadata of an NFT. For example, a batch of potatoes can be represented by an NFT or an artist can digitally provide their NFT with a signature.
A special feature of an NFT is that it is possible to program a resale percentage into the NFT. In the way, the creator of the NFT always receives a percentage of the price each time it is resold. This is a ground-breaking innovation in the art world. In the past, an artist or, for example, a painter only received money when a painting or art object was sold for the first time. Years later, if the same art object is sold for ten or a hundredfold, the original artist gets none of this. Something similar is happening with Spotify, Netflix and similar services. They take a high fee from the producer and/or the artist. With an NFT, this intermediary disappears and the artist benefits every time their work is resold.
Creating an NFT is called ‘minting’ and when a collection of NFTs is sold for the first time, these NFTs are ‘dropped’. An NFT can be copied as a simple JPEG, but the proof of ownership is recorded on the blockchain and lies with one person.
The same people who were behind the technology of the ERC20 tokens of the Ethereum blockchain also developed the first NFTs. ERC721 and ERC1155 protocols are used for this.
These ERC tokens are protocols used to develop NFTs. ERC721 tokens contain the minimum information needed for game tokens, such as owner, security and metadata info. On the ERC1155 tokens, the transaction and storage costs required for NFTs are reduced and multiple different NFTs can be bundled into one smart contract.
NFTs can run on different blockchains, although the blockchain must offer special support for these types of tokens. Blockchains that support this include Ethereum, Solana, Polkadot, Cardano, and EOS.
How can I buy or trade NFTs?
Art or gaming NFTs can be bought and sold on special NFT marketplaces. Well-known marketplaces include OpenSea, Rarible, Nifty Gateway, or SuperRare, and dozens of other NFT marketplaces can be found.
After registering on an NFT marketplace you will need a wallet, such as MetaMask. With this wallet it is possible to send and receive both cryptocurrencies and NFTs. The cryptocurrency is needed to pay for an NFT purchase, or in the case of a sale, to receive the crypto amount paid. With a wallet it is also possible to send NFTs, for example to another wallet, or to a new owner.
If the wallet is connected to an NFT marketplace, a desired NFT can be searched for. Most NFT marketplaces use the same system as an auction, where NFTs can be bid on. The highest bid within a set period then wins the NFT offered. If a bid is successful, the bid is debited from the wallet. However, it is also possible to buy an NFT directly, but then you have to pay more. Many NFT collections also have a so-called ‘floor price’. This is the cheapest price at which an NFT from a series or collection can be purchased, so it does not mean the average price.
How is an NFT created?
An NFT can be created on a NFT marketplace. This process is also known as ‘minting’. In addition to being able to buy and sell NFTs, almost every NFT marketplace has an option to mint NFTs.
To begin with, it is necessary to select a digital object from which to create an NFT. It is important here that the creator of the NFT also manages the intellectual property of this digital object. When it comes to converting a digital object into an NFT, the possibilities are virtually unlimited. Think art, photos, in-game objects, collectibles, music, memes, a GIF or how about a tweet? Almost anything is possible.
The next step is to select a blockchain. The most widely used blockchain for NFTs is Ethereum, but there are now various other blockchains on which NFTs can also be created. In addition, a wallet is also needed for any payments, because creating an NFT is not always free.
You will then have to put your NFT on an NFT marketplace, of which there are several. As soon as a suitable NFT marketplace has been found, the NFT can therefore be minted. Exactly how this works differs per marketplace, as do the costs involved.
After minting, the NFT can be offered for sale in three different ways, depending on the marketplace.
- With a set price – the first person willing to pay this price gets the NFT offered.
- By setting up a timed auction – a bid must be submitted within a set time frame.
- Start an unlimited auction – no end date is set here, but the seller determines when the auction ends.
Please note that different costs are possible when creating an NFT. These costs may vary on the various NFT marketplaces. For example, it is possible that payment has to be made to offer the NFT on the marketplace. Minting is not always free and the marketplace may charge a commission on the sale. After a purchase has been made, there may also be gas fees to transfer the NFT to your own wallet. Depending on the blockchain used, these gas fees can also be high.
It is possible to make a lot of money creating and selling NFTs, but remember that not all NFTs are sold, by a longshot. With all the costs that can arise it is also quite possible that you end up making a loss, even if you sell your NFT.
What are the uses of non-fungible tokens?
NFTs are used for many different applications. The main characteristics of NFTs, that they are identical and stored on a decentralised network, ensures that they offer many solutions and opportunities for a wide range of applications.
- Improving business processes – The origin, production and sale of a multitude of products can be tracked if an NFT is also made of them. The whole supply chain is better mapped out.
- Identification – Passports or admission tickets can be packaged digitally. Unique and unforgeable. Physical passports at borders or tickets to events.
- Real Estate – Digital real estate is for sale in games like The Sandbox and Decentraland. In these 3D worlds, various pieces of land spread over several worlds are for sale, all in the form of NFTs. In 2021, a piece of land in The Sandbox was sold for $4.3 million. There are several other projects active in the metaverse that also offer real estate as NFTs, such as Bloktopia, or will offer when it is launched, such as Star Atlas.
- Merge – Two NFTs can be merged into a new third and unique NFT. This is an important advantage, especially in the gaming world.
- Tokenising physical objects on the blockchain – There are many different types of physical goods that can be tokenised. Tokenizing is when something of value is converted into a digital form, such as an NFT, and that can then be stored on a blockchain. Think for example of gold or real estate.
- Art can be divided – For many people, art is too expensive. With NFTs, art can be broken down into hundreds or thousands of different NFTs. Thus, more people have the opportunity to own a small portion of this art at a cheaper price.
Summary
Because NFTs are unique and non-exchangeable, they can play an important role on several fronts. The proof of ownership of the NFT is stored on the blockchain, which means that it is not held by a central, third party.
The protocols used to develop NFTs are the ERC721 and ERC1155 protocols. These are smart contracts with which various applications of NFTs can be programmed.
The buying and trading of NFTs takes place on NFT marketplaces, where NFTs can also be created. After minting an NFT, they can be offered for sale on the marketplace. NFT marketplaces may have different ways of trading NFTs. Please note that minting is not always free of charge and that there may also be additional costs for offering an NFT for sale on a marketplace after minting.
The list of applications for NFTs keeps growing. It is not only in the art and gaming worlds that NFTs are popular. A few years ago, NFTs were still a small-scale experiment, today they have become a multi-billion dollar trade. Examples include the CryptoPunks and the Bored Ape Yacht Club NFTs. Celebrities are lining up to get their hands on one of the Bored Ape Yacht Club NFTs, which go for prices sometimes well above a million US dollars. Due to the publicity surrounding these purchases, the demand for NFTs continues to rise.