An introduction to NFTs (non-fungible tokens)

Every time you think you understand crypto and the blockchain, you discover that you need a little bit more or perhaps a re-introduction. With Bitcoin price surging, these technologies have reached an interesting milestone and there’s a general euphoric excitement accompanied with deep scepticism and even fear. 

But, there’s more…

Heard a lot about NFT’s lately? 

YouTuber Crypto Casey made an excellent video about them (along with a perfect general introduction to blockchain). I’m really excited about the concept and will be following it for sure. Here are my notes on her excellent introduction… 

Before NFT’s, let’s talk value

3 concepts to understand before getting into NFTs

  • Subjective vs objective value
    1. Somethings have an objective value, like air. This means that someone’s belief, perception, or preferences don’t add or takeaway of the overall value attributed to it. 
    2. However, subjective value is that an item’s value to a person IS dependent on belief, perception, or preferences. For example, a roundtrip airplane ticket to Iceland. Departing tomorrow and coming back in a week from now. Originally valued at $600. The value of this ticket is dependent on your own subjective circumstances and preferences (like have a passport, type of seat,). This ticket can be either worthless or extremely valuable to you. 
    3. A very good example of subjective value item is baseball cards. 
    4. There’s a market for all kinds of subjective value items (like collectable baseball cards, Pokémon cards).
  • What’s a market? 
    1. A physical or virtual place where people can physically go and access to buy, sell, exchange, trade goods and/ or services. a shop, a mall, eBay. 
    2. Market can be used to describe the existence of people who have a desire to buy, sell, exchange, trade goods and/ or services. Think of it as an abstract term to describe things like the housing market, Chicago housing market, Chicago condo housing market. 
    3. The existence of a market refers to having enough people interested to buy, sell, exchange, trade goods and services. A form of research around the existence of a market is called Market Testing. 

Fungible vs non-fungible assets 

  • What’s an asset? Think of it as a fancy financial term for something useful or valuable. Gold, bitcoin, or something abstract like expertise. Anything that helps generate income.
  • Fungible vs non-fungible
    1. Fungibility describes an asset’s ability to be evenly swapped with another asset of the same type. Something interchangeable. Examples: $100 bill, ethereum and bitcoin. 1 bitcoin is the same all the time. 
    2. Based on that, non-fungible asset isn’t interchangeable. Indivisible for the most part. Example: a pet dog, swapping dogs isn’t equal in value, even if they’re exactly similar. each dog has a unique personality, memories, etc. Other examples include: houses, cars, collectable cards. Such items can’t be divided evenly and retain their value. 
    3. There are also semi-fungible assets. An example is an airplane ticket; each airplane ticket, although they all look and function similarly, represent a unique seat on the plane. Similar example is a concert ticket, etc. 

Tokens

  1. A token is something physical or digital that can be exchanged for or represent a good, service or other form of value or utility. 
  2. In crypto and blockchain tokens are  representative of value like a stake, voting right, a toll, a currency, a store of value, ownership, or multifunctional within a certain ecosystem.
  3. A token’s value comes from the asset it represents. A gift card can be an example of a token, the plastic card is worthless but it represents an “exchange value” dictated by the card issuer. 
  4. The process of creating a token to represent a good, service or any value. It’s called Tokenisation. This will take us to: 

Tokenisation on the Blockchain technology

  • Blockchain?
    • Simply, blockchains are records of data stored on a network of computers. 
  • What makes Blockchain unique? 3 pillars
    1. Decentralisation: It means 2 things in regard to blockchain
      • It means that data is recorded and stored on multiple devices in multiple locations around the world. 
      • No one person, company, government, authority, or entity controls the data record or storage process. Recording, managing, and storing data is governed by a decentralised process on a network of computers with open source software around the world. Any changes to the blockchain goes through a consensus process that no one person or entity has control over. 
    2. Transparency
      • It’s about the way that transactions are recorded on a ledger that is available for everyone to see and saved on a network of computers around the world. Making the data impossible to change or alter.
      • Full accountability since it’s all public 
    3. Immutability 
      • This means that data stored on the blockchain can not be changed or altered due to the use of cryptography and blockchain hashing. 

Tokenisation on the Blockchain technology in form of a non-fungible token

  1. What’s an NFT?
    • It’s a digital representation of a unique asset that can not be equally swapped or traded for another NFT of the same type. 
    • NFTs can represent digital art, a ticket, an in-game item, virtual property, or even a real world asset like a deed or title to actual land in the physical world. 
    • Blockchain adds properties to digital assets by giving people ownership management permissions and transferability on a decentralised, transparent, immutable platform. 
  2. What’s the point?  
    • Real example: In a game, like Fortnite, people can buy skins that change the player’s look. They pay physical money for them. No special powers or anything. So the value is purely subjective. Jus the look. 
    • Now if you wanted to sell these skills on eBay for example, there’s a challenge around transferring the ownership of this skin (this digital asset) 
    • Now on the blockchain things are different. Blockchain provides a “coordination layer” that will impart 6 key properties onto digital assets all predicated on immutability.
  3. These 6 properties are:
    1. Standardisation 
      • Traditional digital assets currently don’t have a foundation that they can sit on. For example: tickets on ticketmaster, Fortnite skins are available Fortnite’s platform. Users can create non-fungible tokens with set standards and uniformity by tokenising digital assets on the blockchain, u. Something like JPEG vs PNG or HTTP Protocol. This unifies all aspects of NFTS. 
      • Example: If you bought a virtual land from a marketplace and a virtual house and art on another you can interoperate them with one another. Like putting the house on the land and putting the art in the house. this is possible because they’re on a unified network.  These standards allow developers to build applications using the same coding standards on one decentralised platform. The most common one now is the Ethereum network. 
      • There are 3 standards that dictate the tokenisation process of NFTs on the Ethereum blockchain. They’re called Ethereum Request for Comments (ERC). Since it’s a blockchain technology, there’s no one person or entity in charge of deciding what new features to add, changes to make, or fixes to implement to the protocols. ERC is a process that was created as a way for people to contribute information about Ethereum or introduce new features to the Ethereum network. They are a method that allows developers to propose improvements to the network. 
        • ERC-721: Pioneered in Jan 2018 by Cryptokitties, a game where people can trade and breed digital cats. Each cat is represented by a non-fungible tokens. It allows the creation of tokens with different values, basically non-fungible assets. This was a new thing. By enabling this, developers can now deploy tokens with different values and attributes like descriptions, quantity, type all from the same smart contract. From which an owner can be assigned and then the token can be transferred to users all around the same ecosystem.
        • ERC-998: Imagine we have a video game character with different clothing items, weapons, accessories and each one of those things like shirt, sword, etc is represented by a separate ERC-721 token. A character can be represented then by a certain number of non-fungible tokens, let’s say 50. Selling the character will mean doing 50 separate transactions. This means that there will be more transaction fees, it’s lengthy and not ideal ERC-998 was developed to mitigate this scenario by allowing bundles of separate ERC-721 tokens to be bought and sold in one transaction.
        • ERC-1155: Pioneered by Enjin (an Ethereum developer platform). It allows the deployment of both fungible and non-fungible tokens from the same contract. For example: If you develop a game where every player has a pistol and the pistols are all the same. However, within the game you have limited unique weapons. Players can earn, win, buy or trade. So only 10 of that weapon can exist in this game. Only 1 magic game. All this was made possible by the implementation of the ERC-1155 standard. 
    2. Interoperability
      • This means that since all these non-fungible tokens use the same standards and operate on the same Ethereum platform, we don’t run into the issue of having different platforms representing different assets. It allows NFT’s to be easily moved across multiple ecosystems. So when someone creates an NFT, it’s immediately viewable and tradable on all NFT marketplaces, virtual worlds or any other application due to this standardisation process. It allows free trade on open markets. 
    3. Tradability
      • For the first time ever, users across the world can create and launch NFT’s that can be instantly deployed on marketplaces across an entire ecosystem. Buying, selling, exchanging, trading, bundling etc for NFT’s is possible for crypto currency. 
    4. Liquidity
      • Liquidity refers to how many people are buying and selling and the frequency and in what frequency. High liquidity in the market means that items and bought and sold frequently and fast before much price change occurs.
      • Fast, efficient tradability of NFT’s due to blockchain tech, will lead to high liquidity. 
    5. Immutability
      • Immutability is key to blockchain. In NFT’s it’s key to ensure authenticity as well as proving their scarcity. 
    6. Programmability 
      • NFT’s are fully programmable, meaning that they’re capable of immense complexity like forging, crafting, redeeming, random generation, and more. 

NFT’s and the future

  • Art, collectable, domain, gaming and virtual worlds are already hot commodities and the market is growing.
  • NFT’s core properties: 
    • Verifiable digital scarcity
    • Ownership
    • Indivisibility
    • Interoperability
    • transferability 
  • Additional use cases: mainly gaming industry, expanding game economy. Opportunity for game developers. 
  • Filmmakers and musicians can register their work on blockchain in the form of an NFT to protect against copyright infringement. This might remove the need for the middle men like management agencies. 
  • Since they’re programmable, NFT’s can contain cryptos and digital files. 
  • They can be traded and redeemable for real world assets. Example: Unisocks Exchange. 
  • Proof of ownership of real world collectables can be easily stored and transferred. 
  • Will help drive adoption of the blockchain. 

NFT’s Cons

  • Most of current NFT projects aren’t maintaining long term users. 
  • The UI/ UX isn’t mature enough. 
  • We’re still using centralised portals to access decentralised blockchain. 

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