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The Ultimate Guide on NFTs

NFT is non-fungible token. This doesn’t really explain much. This page explains what an NFT is in its abstract and outlines some examples of NFT use cases.

Let’s first break down the name. Before we go into “non-fungible”, what does “token” mean? A token is a type of record in an information system called the blockchain. We won’t go into the intricacies of blockchains here. We only need to have some background knowledge to understand the NFT.

A little bit of history

The blockchain that invented the term is the most well-known. , the whitepaper on Bitcoin, opened a new window. introduced a “chain of blocks” to track the history and protect it over time. The term “blockchain” was adopted by new networks that built on it. Bitcoin has one token called “Bitcoin”.

Bitcoin is fungible like traditional cash. This means you can swap one Bitcoin for another without affecting its value. Technically, “one Bitcoin” does not have its own identity. While cash might have a serial number that can be used to identify bills from one another, the Bitcoin network does not track each coin individually nor assigns them an identifier. Instead, the system simply keeps track of each account’s quantity, debiting an account and crediting the other with each transaction.

Bitcoin was the inspiration for many other blockchains, which adapted the same idea and added new capabilities. Ethereum was the first to develop NFTs. This was the most important for NFTs. Ethereum, which added general-purpose computations to the blockchain consensus model developed by Bitcoin, is positioning itself as a “world computer” that enables “programmable money.”

Ethereum has a native token named Ether. It is used to store value and pay for computations in the form of gas. Ether, like Bitcoin, is fungible. The smart contract computation model permits developers to create their tokens. These tokens can have unique properties depending on the logic of the contract.

The first smart contracts described fungible tokens like Ether. But people started to experiment with tokens that contained data. This makes each token unique and distinct from the rest. This results in a token that cannot be easily exchanged with any other arbitrary tokens of the same type or a nonfungible token.

What makes a token not fungible?

As a way of distinguishing a one-dollar bill from the other, we have mentioned serial numbers earlier. Two dollar bills can be distinguished from one another, but they are still fungible as each has the same currency value. It is not enough that a unique identifier makes something non-fungible.

Picasso sketched on a dollar bill is unique. Our imaginary Picasso has made it less transferable by using it as a medium to create artwork. Although you can technically redeem it for one dollar worth of snacks, its exchange value is far greater than that of one dollar.

NFTs can also be allowed to contain small amounts of arbitrary data. This allows for creativity and increases the possibility of NFTs being used as an account or unit of exchange. An NFT’s value is highly dependent on what data it contains. Different people may value the same NFT differently depending on different factors, such as aesthetic taste or identity.

There’s a reason why we don’t trade Picasso sketches for business. An NFT without fungibility is not as good as currency. NFTs can benefit from the security and privacy guarantees of blockchain by being part of the same networks that allow digital currency.

What makes NFTs so special?

What is the difference between an NFT and an animated GIF file hosted on someone’s site or other digital records such as a spreadsheet?

These differences are due to a few key properties of the blockchain design. A blockchain network’s primary purpose is to bring all participants together to agree on one “state of the universe”.

 The shared state for Bitcoin is the balance in each account. For Ethereum, it is the inputs, outputs, and outcomes of smart-contract interactions. It takes time for the network members to agree on the same state. There are also special rules to avoid cheating and malicious behavior. Once everyone has agreed to the state, it is part of the historical record of the blockchain.

The cost to modify older blocks becomes more difficult and expensive as new blocks are added. Within a matter of blocks, the cost to “change the history” becomes prohibitive. The information stored in the blockchain is permanent.

The traditional web, however, is notoriously dynamic and impermanent. The time of day, or geolocation of the visitor’s Internet Protocol address, can all influence the content served by a web server. As anyone who has ever been frustrated by an old link will attest, the content disappears almost as often from the internet as it appears.

This property of stability and permanence is the core of NFT’s value proposition. NFTs can be trusted to last as long as the blockchain is operational. This brings up another fascinating property of blockchains. A blockchain encourages its own survival by rewarding node operators with cryptocurrency for maintaining the network’s existence. 

The economic reward will motivate anyone to keep the network online as long as people are attracted to it. This ensures that all historical data, including NFTs, is preserved.

However, a blockchain doesn’t always suffice to keep your NFTs online forever. NFTs can often link to data that is not on the blockchain. This data also needs to be kept up online.

What is the purpose of NFTs?

CryptoPunks is one of the earliest NFT experiments. This set of 10,000-pixel art characters can be collected and traded on Ethereum. While anyone can see the artwork of any punk, only one official “owner” can be seen on the Ethereum blockchain at any given time. CryptoPunks was a great success with rare punks trading Ether for millions of dollars.

CryptoPunks and other digital collectibles are still a popular and compelling use case for NFTs. The successors to CryptoPunks helped create the first standards for interoperability for NFTs and metadata.

Since CryptoPunks’ inception, NFTs became a platform for many creative projects. Artists are looking for new ways to make a living and engage with their fans. This is why there has been so much excitement. This is supported by a growing network of NFT markets, which bridge the gap between the web and the mysterious world of cryptocurrencies. It has also led to millions of dollars in direct payments to artists for digital creations.

Beyond digital art and collectibles, NFTs can be used in gaming to represent plots of the virtual landscape, avatars, skins for game characters, and in-game items. NFT-powered games allow for new mechanics by allowing players to share their “inventory” of items on a shared blockchain. This allows them to be used in multiple games and experiences. These games allow players to trade, buy, and sell items between themselves, without having their purchases locked into one company’s marketplace or storefront.

The internet of assets

NFTs and Ethereum address some of the issues that plague the internet today. Digitalization is bringing about the need to duplicate physical properties such as scarcity, uniqueness and proof of ownership. Digital items are often limited to the product they are being used in. You can’t resell iTunes mp3s you have purchased or exchange loyalty points from one company for credit on another platform, even if it’s in demand.

Here’s how the internet of NFTs looks compared to what we use today.

Comparison

An NFT internetToday’s internet
Digitally, NFTs can be unique. No two NFTs will ever be the same.A copy of a file like an.mp3 and.jpg is the exact same as the original.
Each NFT must have an owner. This information is public and easily accessible.Digital items have ownership records that are kept on servers managed by institutions. You must trust them.
NFTs can be used with any Ethereum-based product. NFT tickets for events can be traded on any Ethereum marketplace for a completely different NFT. A ticket could be traded for a piece or art.Digital items require companies to build their own infrastructure. An app that allows you to purchase tickets digitally for events, would need its own ticket exchange.
Content creators have access to a worldwide market and can sell their work wherever they are.The infrastructure and distribution of platforms are critical to creators. These platforms are subject to geographical restrictions and terms of use.
Creators have the right to retain ownership of their work and can claim resale royalty payments directly.Platforms like music streaming services retain the largest share of sales profits.
There are many ways to use items. Digital artwork can be used as collateral for a decentralized loan.

NFT examples

NFT is a relatively new field. The scope of NFTs can be anything that is unique and requires provable ownership. To help you understand the concept, here are some examples of NFTs currently in existence.

Examples from ethereum.org

NFTs are used to give back to contributors. We even have our own NFT domain.

POAPs (Proof-of-attendance protocol)

You can get a POAP NFT if you make a donation to ethereum.org. These are collectibles that can be used to prove your participation in an event. Many crypto meetups use POAPs to get tickets to their events. Learn more about contributing.

ethereum.eth

The alternative domain name for this website is ethereum.eth. Our .org domain is managed centrally by a DNS provider. However, ethereum .eth registrations are made on Ethereum via the Ethereum Name Service. It is also owned and managed entirely by us.

Learn more about ENS

What is the working principle of NFTs?

NFTs differ from ERC-20 tokens such as DAI and LINK in that each token is unique and cannot be divided. NFTs allow you to claim or assign ownership of any piece of unique digital data. This information can be tracked using Ethereum’s public ledger. An NFT is created from digital objects and can be used to represent digital or non-digital assets. An NFT might represent:

  • Digital Art
    • GIFs
    • Collectibles
    • Music
    • Videos
  • Real World Items
    • Transfer a deed to a vehicle
    • Tickets for a real-world event
    • Tokenized invoices
    • Documents legal
    • Signatures
  • There are many other options available to you!

An NFT can only be owned by one person at a given time. The unique ID and metadata manage ownership. No other token can duplicate them. Smart contracts are used to create NFTs. These smart contracts assign ownership and manage transferability. A person creates or mints an NFT by executing code stored in a smart contract that conforms to different standards such as ERC-721. This information is added to the blockchain that is managing the NFT. These are the steps involved in minting a coin from a high-level perspective.

  • Create a new block
  • Validating information
  • Information into the Blockchain

NFTs possess some unique properties

  • Each token is issued with a unique identifier, which can be directly linked to an Ethereum address.
  • They are not interchangeable with any other tokens 1:1. One ETH can be exactly the same as another ETH. NFTs are not like this.
  • Each token has a owner, and this information can easily be verified.
  • They are available for purchase and sale on every Ethereum-based NFT marketplace.

Also, if you own an NFT:

  • It is easy to prove that you have it.
    • It is similar to proving that you have ETH in an account to prove you own a NFT.
    • Let’s take, for example, the purchase of an NFT. The ownership of the unique token will be transferred to your wallet via a public address.
    • The token is proof that the digital file you have downloaded is your original copy.
    • Your private key proves ownership of the original.
    • Public keys of content creators serve as certificates of authenticity for a particular digital artifact.
      • The token’s creators public key is basically a permanent record of its history. The public key of the creator can be used to prove that the token you have was created by a specific individual and thus contributes to its market value (vs. a counterfeit).
    • Signing messages is another way to prove that you are the owner of the NFT can be used to your advantage.
      • Your private key, as mentioned above is proof of ownership of the original. This means that the NFT is controlled by the private keys associated with that address.
      • You can use a signed message to prove that you have your private keys, without having them revealed to anyone.
  • It is impossible to manipulate.
  • It can be sold, and in certain cases it will earn the original author resale royalty payments.
  • You can also keep it forever and rest assured that your Ethereum wallet is protecting your asset.

If you create an NFT:

  • It is easy to prove that you are the creator.
  • The scarcity is determined by you.
  • Royalties can be earned every time the product is sold.
  • It can be sold on any NFT or peer-to-peer market. There are no restrictions on platforms and you don’t need to intermediary.

Scarcity

The creator of an NFT has the final say on the scarcity of their asset.

Consider a ticket for a sporting event. The creator of an NFT can also decide how many copies are available, just as the organizer of an event can decide how many tickets to sell. These replicas can be exact copies, such as the 5000 General Admission tickets. Sometimes, several tickets are minted with very similar designs, but each one is slightly different. Another possibility is that the creator wants to create an NFT in which only one is minted, as a rare collectible.

Each NFT would have a unique identifier, similar to a bar code on a ticket, and only one owner. It is up to the creator whether the NFT will be scarce. The creator might want to make every NFT unique in order to create scarcity or may have reasons to make several thousand copies. This information is public.

Royalties

When they are sold, some NFTs automatically pay royalties to their creators. Although this is still a new concept, it is one of the most powerful. EulerBeats Originals owners earn an 8% royalty each time the NFT goes on sale. Some platforms, such as Foundation or Zora support royalty payments for artists.

This process is fully automated so creators can simply sit back and enjoy royalties from the sale of their work. Unfortunately, the process of calculating royalties is still very tedious and inaccurate. Many creators don’t get what they deserve. You won’t miss out if your NFT has royalty programming.

What is the purpose of NFTs?

You can find more information about some of the most advanced use-cases and visions of NFTs on Ethereum.

  • Digital content
  • Gaming products
  • Domain names
  • Physical Items
  • Investments and collateral

Maximizing earnings for creators

Digital content is the biggest area where NFTs are most commonly used. This is because the digital content industry is in crisis. Platforms swallow up content creators’ profits and earning potential.

Artists publishing their work on social networks make money for the platform, which then sells ads to artists’ followers. Although they get exposure, exposure does not pay the bills.

NFTs are a powerful new creator economy that allows creators to not hand over ownership of their content to the platforms they use for publicizing it. The content is embedded with ownership.

Funds go directly to the creators when they sell their content. The original creator may also receive royalty payments if the NFT is sold by the new owner. This guarantee is in place every time the token is sold. The token’s metadata contains the creator’s name, which cannot be altered.

Explore, buy or create your own NFT art/collectibles…

NFT art – Explore

The Copy/Paste Problem

Many Naysayers bring up the fact NFTs are “dumb”, often with a picture of them taking screenshots of NFT artwork. “Look! I now have that image for no cost!” They say it smugly.

Well, yes. However, is it possible to find a picture of Picasso’s Guernica online and become the proud owner of an expensive piece of art history worth millions of dollars?

The market can make the real thing as valuable as it is. In the end, owning the actual thing is just as valuable. A piece of content gains more value the more it is shared and used.

The verifiable real thing is always more valuable than the fake one.

Gaming potential boosted

Game developers are very interested in NFTs. NFTs are a way to keep track of who owns in-game items and provide a wealth of benefits for players.

You can purchase items in a lot of regular games to put into your game. If the item was an NFT, you can recoup your money by selling it off when you’re finished with the game. If the item is more popular, you might even make some profit.

Game developers, as issuers for the NFT, could receive a royalty each time an item is resold on the open market. This creates a mutually beneficial business model in which both developers and players can make money from the secondary NFT marketplace.

This means that even if the game’s developers stop making it, your items will still be yours.

The items you earn in-game may outlive the game. Your items will remain under your control even if the game is not maintained. In-game items can be digitally preserved and used for other purposes.

Decentraland is a virtual reality gaming platform that allows you to buy NFTs, which are virtual parcels or land you can use in your own way.

Check out Ethereum games, powered by NFTs…

Explore NFT games

Make Ethereum addresses memorable

NFTs are used by the Ethereum Name Service to provide your Ethereum address using a more easily-remembered name such as mywallet.eth. This allows you to ask for ETH from someone via mywallet.eth instead of 0x123456789 .

It works in the same way as a website domain name, which makes an IP address memorable. ENS names, like domains, have value. They are usually based on their length and relevance. To transfer ownership of ENS, you don’t have to register it on a domain registry. You can instead trade your ENS name on an NFT market.

You can use your ENS name to:

Physical items

It isn’t as advanced as digital tokenization, but the tokenization of physical items has not yet been developed. There are many projects that explore the tokenization of real estate and one-of-a-kind fashion items.

You could purchase a car or a home with ETH, and then receive the NFT as a deed in the same transaction. It’s easy to see a future where your Ethereum wallet could be the key to your car/home – the cryptographic proof that ownership unlocks your door.

You can use NFTs to secure decentralized loans. This is especially useful if you don’t have cash or crypto-rich, but do own tangible items of value. Learn more about DeFi

NFTs and deFi

In a variety of ways, the NFT and the decentralized financing (DeFi) universes are beginning to interact.

NFT-backed loans

You can borrow money using collateral with DeFi applications. You can collateralize 10 Ethereum to borrow 5000 DAI ( a stablecoin). This ensures that the lender is paid back. If the borrower fails to pay the DAI, the collateral will be sent to the lender. But not everyone has enough cryptocurrency to use as collateral.

NFTs are being used as collateral by projects. Imagine that you purchased a CryptoPunk NFT in its original form back in the day. They can be worth $1000s today. This can be used as collateral to get a loan that follows the same rules. Your CryptoPunk will be used as collateral if you fail to pay the DAI. This could be used with any token you tokenize as an NFT.

This is easy on Ethereum because the infrastructure for both NFT and DeFi is identical.

Fractional ownership

NFT creators have the option to create “shares”, which are NFTs that allow them to own a portion of their NFT. Investors and fans can own a portion of the NFT, without needing to purchase the entire thing. This opens up even more possibilities for NFT collectors and minters.

  • Fractionalised NFTs can also be traded on DEXs such as Uniswap and not only NFT markets. This means that there are more buyers than sellers.
  • The price of its fractions can define the overall price for an NFT.
  • It is easier to profit and own items that you are passionate about. It is harder to price out NFTs.

Although this is still an experimental method, you can find out more about fractional NFT ownership on the following exchanges.

This would allow you to own a Picasso piece. This would allow you to become a shareholder of a Picasso NFT and have input into revenue sharing. You will likely soon be able to own a small fraction of an NFT, which will allow you to join a decentralized autonomous organization (DAO), for the management of that asset.

These organizations are Ethereum-powered and allow people from different countries, such as global shareholders, to coordinate securely, without having to trust each other. Because not one penny can be spent without approval from the group,

This is an emerging market, as we have already mentioned. Different technologies are being developed, including fractionalized tokens, DAOs and NFTs. All their infrastructure is available and can be used together because they all use the same language, Ethereum. Keep an eye out for this.

Learn more about DAOs

Ethereum and NFTs

Ethereum allows NFTs to function for many reasons.

  • Publicly verifiable transaction history and token metadata – It’s easy to prove ownership.
  • It’s almost impossible to alter transaction data once it has been confirmed.
  • Trading NFTs can be done peer-to-peer, without the need for platforms that offer large compensation cuts.
  • All Ethereum products share the “backend”. In other words, all Ethereum products have the same “backend”. This makes NFTs transferable between products. An NFT can be purchased on one product and sold on another. You can list your NFTs on multiple products as a creator. Each product will have the most current ownership information.
  • Ethereum is never down so your tokens are always available for sale.

NFTs’ environmental impact

NFTs are gaining popularity, which means that they’re being scrutinized more closely, especially in light of their carbon footprint.

Let me clarify:

  • NFTs don’t directly increase the carbon footprint for Ethereum.
  • Although Ethereum’s current method of protecting your assets and funds is energy-intensive, it’s on the verge of improving.
  • Ethereum’s carbon footprint will improve by 99.95% once it is improved. This will make it more efficient than many other industries.

We’ll need to explain more so please bear with us…

It’s not your fault, NFTs

Because Ethereum is decentralized, the entire NFT ecosystem works.

You and others can verify that you have something. All this without you having to trust or grant custody to third parties who may impose their own rules. This also means that your NFT can be used in many markets and products.

Secure means that no one can copy/paste or steal your NFT.

This makes it possible to digitally own unique items and get a fair price. However, it comes with a price. Because it takes so much energy to maintain the qualities of blockchains such as Ethereum and Bitcoin, they are very energy-intensive. It would be easy to change Ethereum’s history in order to steal NFTs and cryptocurrency. The system would collapse.

Your NFT is worth the effort

There are a few things that must happen when you create an NFT.

  • It must be verified as an asset on blockchain.
  • This asset must be added to the owner’s account. This allows it to be traded or verified “owned”.
  • Transactions that confirm the above must be added to a block, and “immortalized” on the chain.
  • Everyone in the network must confirm that the block is “correct”. Because the network agrees that your NFT is real and exists, there’s no need to have intermediaries. It’s also on the chain, so anyone can see it. This is how Ethereum allows NFT creators maximize their earnings.

These tasks are performed by miners. They also inform the rest of your network about your NFT and who it belongs to. Mining must be difficult enough to make it a viable business. Otherwise, anyone could claim they have the NFT and then fraudulently transfer ownership. To ensure that miners act honestly, there are many incentives.

More information on mining

Mining can help you secure your NFT

Mining difficulties arise from the fact it requires a lot of computing power to create new blocks within the chain. Blocks are not created only when they’re required. They are created approximately every 12 seconds.

This is essential to make Ethereum tamperproof, which is one of the attributes that makes NFTs possible. The chain is more secure if it has more blocks. If your NFT is created in block #600, and a hacker attempts to steal it by altering its data, the digital fingerprint for all subsequent blocks will change. Anyone running Ethereum software could detect it and stop it from happening immediately.

This means that computing power must be constantly used. This means that even if a block contains zero NFT transactions, it will still have a similar carbon footprint because computing power was still used to create them. The blocks will be filled by other transactions, non-NFT.

Blockchains require a lot of energy right now

Yes, mining blocks create a carbon footprint. This is true for Bitcoin chains as well. But it is not the fault of NFTs.

Many mining activities rely on renewable energy or untapped energy from remote areas. There is also the argument that NFTs or cryptocurrencies have large carbon footprints. However, just because some industries are failing doesn’t mean that we shouldn’t try to improve them.

We are. Ethereum is changing to make it more efficient to use Ethereum (and NFTs by virtue) That’s been the plan since its inception.

We are not here to defend mining’s environmental footprint but to show how they are improving.

Greener Future

Since Ethereum was created, the energy consumption of mining has been a major focus area for researchers and developers. The goal has been to replace it as soon as possible. Read more about Ethereum’s vision

This vision is already being realized.

Eth2: A greener Ethereum

Eth2 is a series that replaces mining with staking. This will eliminate computing power as a security feature and reduce Ethereum’s carbon footprint to 99.95% . To secure the network, this world sees stakeholder commit funds rather than computing power.

The energy cost of Ethereum will be multiplied by how many nodes are in the network. The cost of running a home computer costs approximately 525kWh annually if there are 10,000 nodes on the network. This is 5,250,000kWh 1 a year for the entire network.

This can be used to compare Eth2 with a global service such as Visa. 100,000 Visa transactions consume 149kWh 2. . Eth2 would cost the same transaction 17.4kWh or 11% of total energy . This is without taking into account the many optimizations that are being done in parallel with Eth2, such as rollups. It could cost as low as 0.1666666667kWh to power 100,000 transactions.

This improves energy efficiency and preserves Ethereum’s security and decentralization. While many other blockchains may already have some form of staking, they are not as secure as Ethereum’s. The system will be more secure if there is more decentralization.

Get more information about energy estimate

Timelines

This is already happening. In December 2020, the Beacon Chain received its first upgrade. This is the basis for staker participation and provides the basis for staking. Next, energy efficiency can be improved by merging the existing chain, which is currently secured by miners, into a Beacon Chain, where no mining is required. Although time frames are not yet known, it is expected that this will occur sometime between 2022 and 2023. This is also known as the merger (previously called the docking). Learn more about the merge.

More information on Eth2

Use NFTs to build

The ERC-721 standard is used for most NFTs. There are many other standards you might be interested in. The standard permits semi-fungible tokens, which is especially useful for gaming. To make minting NFTs more efficient, EIP-239 was proposed. You can mint as many NFTs as you want in one transaction with this standard!

Looking Ahead

We are still in the early days of NFTs, and it’s very likely that we’ll see a new crop of interesting NFT use cases and experiences that are outside of anything being done today. It’s hard to predict what the future will bring but as they say, the best way to predict the future is to invent it yourself!

Henry Hicks
Henry Hickshttps://nonfungibletalk.com
NFT and Crypto Enthusiast. Loves Travelling and Exploring the Metaverse!
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