Background on NFTs

As Bitcoin and other cryptocurrencies continue to rise in popularity, people have begun to apply the technology behind popular coins and tokens to something other than finance. Blockchain technology has found a place in gaming, art, celebrities, sports; and every other market where unique items or ideas can be bought and sold.

Nonfungible Digital Tokens (NFTs) have been around since the early days of crypto, but became popular in 2017, using the Ethereum Network’s Smart Contract abilities as a method for reliably transferring ownership. In 2021 they reached their apex in popularity, with big corporations and A-list celebrities creating NFT collections that sold for millions of dollars.

What is an NFT?

NFT stands for non-fungible token, meaning each token is unique and represents something that can’t be replicated; whereas any single bitcoin is “fungible,” meaning all bitcoins are worth the same and can be swapped without any change in value. Essentially, NFTs are tokens used to prove ownership of unique items - allowing people to tokenize anything from art, collectibles, and even wedding rings. Before NFTs, people needed providence paperwork to prove the authenticity and ownership of a rare and valuable item, but NFTs store that information on the blockchain where it can’t be defrauded and is easily accessible to anybody. NFTs are bought and sold online, frequently using cryptocurrency (mostly ETH). 

Most NFTs are collectables. One of the main advantages of owning a digital collectible versus physical is that each NFT contains unique information encoded on the blockchain, and that information stays remains in the records as the NFT changes hands. This information makes each NFT distinct and easily verifiable, eliminating the distribution of fakes. To fake an NFT somebody would need to alter the blockchain, then convince thousands of unrelated verification nodes to accept the change, which is nearly impossible. 

Most NFTs are built based on Ethereum blockchain standards (mainly ERC-721) because it’s easy to use and offers compatibility with the broad and popular Ethereum ecosystem. If you are purchasing an NFT on the Ethereum blockchain or a blockchain closely related to Ethereum, you must pay the required gas fees in ether, so it’s a good idea to have some ETH on hand when you enter the marketplace.

Fungibility

While NFTs use the same technology as cryptocurrencies, they are not the same. One bitcoin is virtually the same as any other bitcoin, meaning bitcoin is fungible or is easily replaced with another identical item. NFTs are non-fungible, meaning they are not interchangeable because no two NFTs are identical. Each token has different attributes encoded into it on the blockchain.

The best way to think about an NFTs is like a concert ticket — most concert tickets look the same, but the barcode on the ticket contains specific information that is unique to the purchaser, the date of the event, the venue, etc. This data makes it impossible for a Kid Rock ticket in the nosebleeds to be exchanged for front-row seats at Taylor Swift.

Here are some real-world examples to show how NFTs work in the wild:

NFTs in Gaming

CyptoKitties is one of the first uses of NFTs. In this blockchain-based game, you can purchase, collect, breed, and sell virtual cats with each CryptoKitty uniquely coded on the blockchain.

NFTs in Sports

Have you ever tried to look up sports trading cards on eBay? Unique and rare cards can be sold for big bucks. The sports industry has upgraded its collectibles approach to be more modern and more difficult to fake with NFTs.

NBA Top Shot is a blockchain application from the NBA that has recently exploded in popularity. Each item in Top Shot is an NFT containing iconic video clips of a game moment instead of a photo like a regular trading card. Because it is an NFT, it has unique identifying information and a blockchain-based guarantee of authenticity. 

Top Shot is an example of an NFT that does not use the Ethereum blockchain. Instead, it uses a blockchain from Dapper Labs created with the sole purpose of building NFTs. You can buy or sell your moments directly on the NBA Top Shot platform. 

NFTs in Art + Music

Since the dawn of time, the art world has been plagued with counterfeiters, thieves, and people taking credit for artwork they did not create. So far, the internet has only made it easier to steal other people’s work. NFTs solve this problem. They’re used to encrypt digital artworks with the artist’s signature on the blockchain, which effectively verifies authenticity and ownership. 

The added bonus is that if somebody wants to use a piece of art for a commercial or whatever, they can lease it directly from the owner, with less of the usual red tape and middle-men associated with that process. Some NFTs even have built-in protocols to ensure that the original creator gets a cut from these deals.

Music artists have been some of the world’s most prominent champions of NFTs, with NFT projects popping up all around the industry. Big names in the NFT music world include 3LAU, Grimes, Steve Aoki, Deadmau5, and Odesza. In March of 2021, Kings of Leon became the first band to release a new album as a non-fungible token. This has appeal to fans because they get to own the music they purchase, much the same way as when CDs and cassettes were popular. Artists like it because they get paid directly, rather than going through recording and distribution companies.

Future of NFTs

NFTs are useful in any market where somebody needs to verify authenticity before a sale. For the housing market, NFTs could replace deeds and deed insurance. For automobile licensing, NFTs could replace registration cards. While they’re still largely associated with art, NFTs are a very useful technology that could see mainstream applications in the coming years.

The NFT hype of 2021 may have settled a bit, but it is clear NFTs are a permanent part of the Internet. NFTs are extremely useful as an immutable record of ownership and authenticity and can be used for just about anything.