NFTs — basic guide
24 Questions about Non Fungible Tokens, and the answers everyone should know
1 — What is an NFT?
Non Fungible Tokens are the representation of non fungible assets in digital media.
2 — Technical definition of NFTs
“NFT is a smart contract standard that provides a standardized way to verify who owns an NFT and a standardized way to “move” non-fungible digital assets” — Revoredo, Tatiana. In: Blockchain — Tudo o que você precisa saber, Vol I, Amazon, 2021.
Also, one can define NFT as a piece of software code that verifies that you hold ownership of a non-fungible digital asset, or the digital representation of the non-fungible physical asset in a digital medium.
3 — What are non-fungible assets?
Domain names, event tickets, digital currencies in games, identifiers in social networks like Twitter or Facebook, all are non-fungible digital assets.
4 — Are NFTs used only in the art market?
No. NFTs are also used in the games industry, domain names, the event ticket industry, sports, the Metaverse, and others.
Sports cards have become convincingly virtual thanks to the clever use of blockchain technology. These virtual collectible cards in the picture above, are rotating, floating digital cubes and each one features a video of an NBA player. Image credit: Dapper Labs
5 — What is the size of the NFT market? How to measure it?
The market for NFTs is a bit harder to measure than that of cryptocurrencies due to the lack of spot prices for non-fungible assets.
Well for this reason, using secondary trading volume as a metric, i.e. analyzing point-to-point sales of non-fungible tokens as an indicator of their size, the current NFT secondary market is estimated to be approximately $2 million to $3 million in volume, per month.
6 - What is the NFT market projection for the next years?
The company Epic Games, for example, generated $2.4 billion in revenue from the sale of “skins” NFTs from the free-to-play Fortnite game in just one year.
And in the online event ticketing industry alone, the use of NFTs in this market is projected to generate $68 billion in revenue by 2025.
7 — When did NFTs emerge?
Despite the fever that has dominated headlines around the world, non-fungible digital assets and their representation in tokens — NFTs — are nothing new. They have been around since the birth of the Internet.
8 — If NFTs are nothing new, what is all the fuss now about NFTs?
Because before, NFTs were not standardized, and the markets were closed, limited to the platforms that issued and created that particular NFT.
Now, with the introduction of blockchain technology in NFTs, this scenario has changed.
9 - What were NFTs like before using blockchain technology?
Digital currencies in electronic games, airline points already existed before the emergence of bitcoin, the first blockchain.
But traditional NFTs did not have a unified representation in the digital world. That is, they were not standardized.
In this way, a game represented its collectible items in a different way than an event ticket system. The user of an electronic game, for example, could only buy a tool or a skin on that game’s platform, and could not sell his NFT on eBay, for example.
10 — When did the first experiments of NFTs on blockchains appear?
A. Colored Coins
The first experiments of NFTs on blockchains started with the birth of the colored coins, a class of metadata that represented and managed real-world assets on top of the bitcoin blockchain.
Although originally designed to enable bitcoin transactions, the scripting language of the bitcoin blockchain allows small amounts of metadata to be stored on the network, which can be used to represent asset manipulation instructions.
Colored Coins could be used to represent a multitude of assets and even have multiple use cases:
- Property
- Coupons
- Ability to issue your own cryptocurrency
- Issuance of shares in a company
- Subscriptions
- Access tokens
- Digital collectibles
The first mention of Colored Coins originates from a blog post in early 2012 by Yoni Assia, titled “bitcoin 2.X (aka Colored Bitcoin) — especificações iniciais”. He discusses Colored Coins in his post, but not in reference to them representing various assets or use cases.
The potential of these new assets was apparently not explored until December 4, 2012, when Meni Rosenfeld published an article entitled “Overview of Colored Coins”.
A few months later, in 2013, another article was published entitled “Colored Coins — BitcoinX”. Not only was this paper more in-depth than the first, but it also had renowned authors in the blockchain-crypt universe such as Yoni Assia, Vitalik Buterin, Lior Hakim, and Meni Rosenfeld.
Colored Coins exemplified a huge leap in Bitcoin’s capabilities, however, their drawback was that they could only represent certain values if everyone agreed on their value.
B. Counterpart
The creation of Colored Coins led many people to realize the massive potential for issuing assets on blockchains.
However, people also realized that Bitcoin itself, at the stage it was at in 2012, 2013), was not made to enable these additional features.
In 2014, Robert Dermody, Adam Krellenstein, and Evan Wagner founded Counterpart: a peer-to-peer platform and distributed open source Internet protocol built on top of the Bitcoin blockchain. Counterpart enabled asset creation with a decentralized brokerage and even a cryptographic token with the ticker XCP. It had numerous projects and assets, including a card game and Memes trading.
C. Spell of Genesis in Counterpart
The creators of the game Spells of Genesis were not only pioneers in issuing assets within a game on Blockchain via Counterparty, but were also among the first to launch an ICO (Initial Coin Offering).
At the time, ICOs were then known as crowdfunding. The developers of the game Spells of Genesis launched a token called BitCrystals, which was used as in-game currency.
11 — What is the first NFT to be launched on the Ethereum blockchain?
The first NFT experiment based on the Ethereum blockchain was Cryptopunks, built by Larva Labs, which consisted of 10,000 collectible and unique punks. The fact that the punks “live” on the Ethereum network makes them interoperable with marketplaces and digital wallets.
12 - When did NFTs on blockchains reach the mainstream?
NFTs on blockchains have reached the mainstream with Cryptokitties.
Launched in late 2017 at the ETH Waterloo hackathon, Cryptokitties is a game that allows users to create digital cats together to produce new cats, with varying “rarity.”
This project was pioneering for creating a sophisticated incentive system, taking the precaution to reserve certain NFTs for later use as a promotional tool, using a Dutch auction contract that subsequently became one of the main mechanisms for price discovery for NFTs.
13 — Why are blockchain-based NFTs more powerful?
The interesting thing about applying blockchain technology to NFTs is that it makes them more “powerful”.
When Cryptokitties was launched on the Ethereum blockchain, it brought standardization to NFTs by introducing the first standard for representing non-fungible digital assets: the ERC-721.
This is a smart contract standard that provides a standardized way to verify who owns an NFT and a standardized way to “move” non-fungible digital assets.
14 — What standards exist in NFTs today?
Other standards used in NFTs besides ERC-721 are ERC-1155 which brings the idea of semi-fungibility, and ERC-998 which provides a model by which NFTs can have both fungible and non-fungible assets.
15 — Are there NFTs using other blockchains besides Ethereum?
Here, it is worth mentioning that while Ethereum is where most of the action is currently happening, there are several NFT patterns emerging on other blockchains. For example the DGoods, created by the Mithical Games teamwhich is focused on providing a cross-chain standard and uses blockchain EOS.
16 — What advantages has blockchain technology brought to NFTs?
An NFT, if registered on a blockchain, is now truly a “unique” asset that cannot be counterfeited, tampered with, or defrauded.
The first benefit that blockchain technology brought to NFTs was standardization.
A) Standardization
In addition to standardizing basic attributes of NFTs such as ownership, transfer, and access control, blockchain technology enables additional attribute standards to be incorporated into NFTs such as specifications for how to demand an NFT, for example.
B) Interoperability
NFT standards have also enabled interoperability, so that NFTs can more easily move between various ecosystems. In a new design, non-fungible tokens can be immediately viewable across dozens of different wallet providers, tradable in multiple markets, and required in multiple virtual worlds. And this interoperability has only been possible because the open standards enabled by blockchain technology provide a clear, consistent, reliable, and read- and write-enabled API.
C) Negotiability
Interoperability, in turn, has extended the tradability of NTFs by enabling free trade in open markets. That is, blockchain-based NFTs enable users to move their non-fungible assets out of their original environments, and take advantage of sophisticated trading capabilities such as auctions, bids, and the ability to transact in any currency, from stablecoins and application-specific digital currencies, to crypto-assets such as bitcoin and dash. And this advantage of tradability represents, in turn, a transition from an initially closed NFT economy, to a free market economy.
D) Liquidity
The instant tradability of NFTs, made possible by blockchain, brings greater liquidity to markets that can cater to a wider variety of audiences, which enables greater exposure of non-fungible assets to a wider group of buyers.
The fifth advantage of using blockchain technology in NFTs is provable immutability and scarcity. This is because, smart contracts allow developers to place strict limits on the supply of NFTs and impose durable properties that cannot be changed after a token is issued. In this way, one can ensure that the specific properties of an NFT do not change over time by encoding them in the blockchain. And this is especially interesting for the “physical” art mecca, which relies heavily on the proven scarcity of an original piece.
And what is interesting about this new world of blockchain-based NFTs is the emergence of new trends and possibilities in traditional markets.
E) Programmability
If in the market for artworks represented in NFTs immutability and scarcity is important, in the market for “digital” artworks what has been considered important is the advantage of programmability, the sixth advantage brought by blockchain technology to non-fungible tokens.
An example programmability can be found in Async Art, a platform for trading and creating NFTs for the art market, which allows collectors to interfere with the original design of the work — what is known as programmable art.
Imagine if the owner of a digital painting could change a smile, a look, an expression of the image of this painting whenever they wanted?!
17 - How do you register the transaction of buying an NFT?
There are many questions for those new to the NFT market as to how an NFT registration takes place.
When an NFT of a digital artwork, for example, is transacted, the buyer receives an identifier (ID) from the registry of that purchase transaction, which leads him to the artwork in digital form.
That identifier may, or may not, be registered on a blockchain, because as we said, NFTs already existed when the first blockchain came along, and in these cases it was a centralized administrator such as a website or platform that was responsible for creating and storing the identifier of record of the purchase transaction, and the token representing that non-fungible asset.
Now, when NFT transactions are recorded on a blockchain, when the transaction is completed, it is recorded and added to a block, timestamped, making it traceable on the blockchain network at any time, in the case of a public blockchain. Also, since blockchains are decentralized, blockchain-based NFT records are more secure, as it is more difficult for a cyber criminal to break into a distributed network.
18 — How does an NFT acquire identity? How is it identified as real on the Internet?
It is the “metadata” that provides the description of an NFT. It is they that provide the descriptive information for a specific token identifier.
How does the OpenSea platform identify, for example, the identity of a Cryptokittie? How does the Cryptovoxels platform identify the appearance, name and attributes of a work of art made available in its virtual museum?
That is where metadata comes in. This is what, in the case of Cryptokitties, tells you the name of the cat, the image of the cat, and tells you the description and any additional characteristics of the Cryptokitty on the OpenSea platform or on Cryptokitties.co.
In the case of an NFT of an event ticket, the metadata may include the date of the event, and the type of ticket, plus a name and description.
19 — Where do most projects store data from an NFT?
It is up to the developers to decide which metadata to represent on the blockchain network (on chain) and which metadata to represent off chain. That is, whether the metadata will be inserted directly into the smart contract that represents the tokens, or whether it will be hosted separately (off chain).
20 — What are the advantages of On Chain Storage?
The benefits of representing metadata on chain are that it resides permanently with the token, persisting beyond the lifecycle of any application, as well as can change according to the business logic of the network.
But it is worth noting that most NFTs projects store data off the blockchain network (off chain) due to the current storage limitations of the Ethereum blockchain.
21 — What is the simplest way to store an NFT Off Chain?
The simplest way to store this metadata off chain is on a centralized server somewhere or in a cloud storage solution.
22 — What are the disadvantages of Off Chain Storage?
The disadvantages in this case are that the developer can change the metadata at will; and if the project goes offline, the metadata can disappear from its original source.
23 — What is the best way to store NFTs Off Chain?
A better solution for off-chain storage is therefore to use decentralized storage, via the InterPlanetary File System (IPFS).
IPFS is a distributed file storage system that allows content to be hosted on computers spread around the world, so the file is replicated to many different locations. This ensures that the metadata is immutable, and persists over time.
24 — Where can the buyer of an NFT store it?
Let’s take as an example the NFT of the crypto artist Beeple, which was leiolated by British auction house Christie’s for the sum of $69 million dollars.
In this case, according to Christie’s itself, the NFT was transferred to the buyer’s digital wallet.
Final considerations
Would you buy an NFT of the Kings Of Leon band album? Then, perhaps you would buy the NFT of LeBron James making a historic dunk for the Lakers? Or would you prefer the NFT of land and asset ownership in Decentraland, the blockchain virtual world that raised $25 million in an ICO for its MANA token?
It is worth “diving” into the world of NFTs to understand the direction this “phygital” society is taking.
See you soon!
