What are NFTs, Exactly?

Non-fungible tokens, or NFTs for short, are a type of provably unique digital asset that is stored and secured using blockchain technology.

By breaking down their name into its two components — non-fungible and token — we can start to get a better idea of what they are and what makes them so special.

Starting with non-fungible, this essentially means that NFTs are not interchangeable. The term fungibility essentially means equal or identical. While any dollar bill is just as valuable as any other and any two bitcoins (BTC) have the same amount of purchasing power, non-fungible tokens cannot be directly substituted since no two are alike.

The second term, token, simply means that these assets are associated with a smart contract that controls how many of these tokens exist, what their characteristics are, how they can be transferred, and more.

Colored coins are one of the first known examples of non-fungible tokens and can be issued on the Bitcoin blockchain. By leveraging the limited amount of metadata that can be stored on the Bitcoin blockchain, it is possible to create unique digital units that can be used to represent ownership of essentially anything — ranging from shares to coupons, physical goods, subscriptions, and more.

Although non-fungible assets are unique by virtue of their differing data/metadata, they can be of the same type, rarity, value, utility, etc. For example, an artist could mint 50 images of a cat, each of which ostensibly feature the same design and sell for the same value, but nonetheless have unique metadata, timestamp, and ID.

How do NFTs Work?

As completely unique, non-divisible assets, NFTs can be used to represent practically any scarce, unique, or personalized item or asset.

They exist on a blockchain as provably unique information that can generally be freely transferred between wallets via their public address. The address that holds the NFT is the owner.

Each NFT is created and managed by a smart contract, which essentially assigns the NFT to different public addresses when it is transacted. It is easy to verify both who created the NFT and who currently owns it, thereby preventing fraud and falsification.

By examining the information associated with each NFT (such as its metadata and identifier), it is possible to prove that the NFT is completely unique. Since this system is backed by an immutable blockchain ledger that is secured by a network of thousands of nodes (at least in the case of Ethereum), they cannot be forged, since no other NFT will have the same metadata and ID.

This metadata can be used to store a wide range of information in an NFT, such as images, video, audio, documents, and more. It can also be used to represent ownership of real-world items, through digitized deeds, titles, tickets, and more.

There are a variety of different NFT token standards, which imbue NFTs with different characteristics. Right now, the Ethereum ERC-721 and ERC-1155 standards are among the most popular. The main difference is that all ERC-721 tokens come from separate token contracts, whereas ERC-1155 allows any number of non-fungible or semi-fungible tokens to be minted by a single contract

How Can NFTs be Used?

Designers and creators have been using NFTs to create unique digital artworks for more than half a decade now, and as of writing 9 out of the top 10 most expensive NFTs ever sold are artworks.

Although the first generation of NFTs were primarily examples of digital art and other blockchain-based collectibles, the scope and utility NFTs has gradually expanded with time. Nowadays, NFTs are being used for a huge range of use cases — some of the most popular include:

  • Gaming items: Blockchain-enabled games like Cryowars, Star Atlas, Warena, My Neighbor Alice, and more now use NFTs to represent a range of gaming assets. These might include character skins, weapons, plots of land, characters, powerups, and more.
Image courtesy of Star Atlas
  • Digital identification: Since NFTs are provably unique and easily verified, they make ideal identification tools. Several self-sovereign identity solutions are beginning to use NFTs to enable use cases like blockchain-based medical records, decentralized voting, and land ownership records.
  • Domain names: NFTs are now being used to represent special blockchain-powered domain names such as .eth. These are being sold by platforms like UnstoppableDomains and HandShake, and provide a permissionless, decentralized way to map to a specific website on the blockchain.
  • Digital ownership rights: NFTs can be used to denote the ownership of copyrights, intellectual property, patents, physical goods, tickets, digital content, and more. Perhaps most commonly, a number of firms, including Propy, are now exploring the use of NFTs as a way to represent the ownership of land and real estate.
  • Yield-bearing instruments: The use of NFTs in decentralized finance (DeFi) has exploded as of late, with NFTs now being used to represent yield-bearing assets like Telos T-bond tokens. Moreover, they have been experimentally used to represent tokenized derivatives positions — such as short and leveraged margin positions.

As a relatively new technology, many of these use cases are still in the exploration phase, while others are tried-and-tested. New use cases for NFTs will likely continue to be elaborated for the foreseeable future.

What’s Stopping the Copycats?

Technically, it’s a simple process to create a near duplicate of an NFT. After all, its metadata and other associated information are stored on a public ledger and can be easily accessed by anyone.

However, actually doing so would be of little benefit. Similar to how simply printing out a picture of a Picasso doesn’t automatically imbue it with incredible value, neither would duplicating an NFT. Its value is derived from its origins. Being the original, with its original characteristics is what determines its value.

The original artwork will always be noted on the blockchain ledger and would have a specific timestamp and creator. These cannot be replicated without completely subverting the entire blockchain

That said, anybody is free to copy any NFT, but the practice is rather uncommon, since there is very little value to be gained from it — unless the copycat is looking to pass the duplicate off as an original to an unwitting buyer.

Nonetheless, anybody is free to duplicate any other NFT for their own purposes, but given that this is significantly more involved than simply copying and pasting it and actually costs money (in the form of transaction fees), few individuals are inclined to do so.

Assessing Value in the NFT Space

As with all things, NFTs are only worth as much as somebody is willing to pay for them. In some cases, this could be millions of dollars, whereas, in others, the NFTs are essentially worthless.

In the last year, the average value of many NFTs has increased considerably, as has the minimum value (frequently described as the “floor price”). Indeed, according to recent stats by Statista, the average floor price of all NFTs tracked by the platform increased by as much as ten times in the last five months and is currently hovering at almost six times the values tracked in June 2021.

Image courtesy of Statista

Likewise, there has been a number of record-breaking NFT sales in this time, including Beeple’s (Mike Winkelmann’s) magnum opus piece, known as “Everydays: The First 5000 Days” which sold for 40,000 ether — worth $69 million at the time.

Numerous multi-million dollar NFT sales have been recorded throughout 2021, whereas such figures were relatively uncommon in previous years.

Depending on the specific NFT and its purpose, gauging the value of an NFT can vary considerably in complexity. That said, there are several parameters that often form part of the equation, these include:

  • Creator: for digital works of art and crypto collectibles, the creator/designer/author can have a considerable impact on the price. Well-known artists can create NFTs that easily command thousands of dollars at auction and may appreciate in value over time, whereas NFTs created by unknown artists are likely to be near worthless.
  • Age: In some cases, the age or order number of an NFT can impact its price. For example, the very first NFT minted in a sought-after collection will generally be worth more than later mints. As with most scarce assets, some limited mint NFTs will appreciate with time, making older collections more desirable.
  • Utility: Since many NFTs have a specific utility associated with them, this can affect their market value. For example, a rare and powerful NFT-based weapon could fetch considerable sums on the open market.
  • Rarity: Although all NFTs are, by definition, unique, they can still be minted as part of a similar ‘class’ of NFTs. For example, in the space exploration game Star Atlas, there might be 500 copies of one type of spaceship skin, 50 copies of another, and just 5 copies of a third type. Although these may provide equal utility, their desirability and hence value can differ due to differences in their rarity. For algorithmically generated NFT art, the rarity can frequently be checked by automatic tools — like this one.
  • Hype: The value of NFTs can fluctuate considerably over time. In some cases, NFTs can see their value inflate quickly as they generate hype, before seeing their value fall just as fast when the bubble pops.

Are NFTs Just a Fad?

There is a great deal of disagreement about whether NFTs are simply a fad or if they’ve got staying power.

While some believe that they have limited adoption and real-world use cases, projects continue to push the boundaries of what NFTs can be used for, and adoption is growing rapidly.

In the last year alone, the number of NFT holders has increased by an order of magnitude, while according to data from non-fungible the number of NFT sales has increased from around 80,000 per day at the beginning of the year, to close to a million as of writing.

Image courtesy of non-fungible

Likewise, the number of wallets participating in the secondary NFT market has increased from just under 20,000 in January to over 200,000 in November 2021.

These figures alone indicate that the NFT market is still growing at a rapid pace.

As with all new innovations, not every NFT will be a success and a large proportion will inevitably fail to generate any real traction. Likewise, the indicators suggest that broad adoption of NFTs has yet to occur, but public awareness is rapidly growing.

This is partly owed to the rapidly growing adoption of NFT technologies by major brands like Coca-Cola, Taco Bell, Dolce and Gabbana, Gucci, and dozens of others, as well as their growing utility outside of the digital art sector — with NFTs nowadays forming a staple part of most blockchain games and widely considered to be a cornerstone feature of the upcoming Metaverse.

Are NFTs a Type of Cryptocurrency?

Whether or not NFTs are a type of cryptocurrency is a common question among investors and enthusiasts due to the fact that both cryptocurrencies and NFTs frequently have value — that is, they can often be exchanged for goods and services.

However, though both cryptocurrencies and non-fungible tokens are both types of digital assets, they are not the same. Cryptocurrencies are examples of digital assets that are designed to be a store of value or means of payment, whereas NFTs are simply unique blockchain-based data stores.

Nonetheless, there are examples of NFTs that are designed with cryptocurrency-like features and hence blur the line further. For example, NFTs can be redeemed for merchandise, tickets, or experiences. But these are far from the norm.

NFTs are not divisible like most cryptocurrencies. This means you cannot send, for example, one-tenth of an NFT the same way in which you can send 0.1 BTC. This is another common distinction between the two.

That said, technologies are being developed to split up ownership of NFTs across multiple holders through a process known as ‘fractionalization’. This, however, simply relies on secondary tokens that represent partial ownership of the NFT rather than genuinely splitting the native token.

Why Are NFTs Controversial?

In cryptocurrency circles, NFTs are generally hailed as an extraordinarily promising technology that can be applied to innumerable use cases. But they’re not without their naysayers.

Much of the concern surrounding NFTs stems from the amount of energy used to create and transfer them. Most valuable NFTs are issued on the Ethereum blockchain, which is currently secured by a network of power-hungry mining nodes that put in a great deal of computational work to process transactions and include them in a block.

Given that NFT transactions contain a lot of data, they’re far more energy-intensive than a regular one. Indeed, according to current stats by Digiconomist a single Ethereum transaction consumes an estimated 172.96KWh of energy and has a carbon footprint of 82.16 kg CO2 — while NFTs can be several times higher.

Image courtesy of Digiconomist

Throughout their lifetime, when both minting and regular transfers are considered, a single NFT can be responsible for the release of several tons of CO2 into the atmosphere. And given that there are now millions of NFTs, the total CO2 burden is considerable.

This staggering figure has led to a great deal of backlash against the technology, with many opponents arguing that the benefits they offer are not worth the cost to the environment.

While these facts cannot be disputed, it neglects to consider that NFTs are also present on a variety of other blockchains, including Binance Smart Chain, Solana, Flow, and Polygon — each of which uses a validator-based consensus system that is far more energy-efficient than Ethereum’s proof-of-work.

As such, the energy concerns are a result of the inefficiency of the Ethereum blockchain, rather than the NFT tokens specifically.

Ethereum itself is set to undergo a major upgrade soon by transitioning to a proof-of-stake-based consensus system, which will see its efficiency improve by more than 100-fold — dramatically reducing its impact on the environment.

Can Anyone Make an NFT?

In the early days of the NFT landscape, creating an NFT collection was a somewhat complicated process since creators would need to know how to write and deploy a smart contract.

Today, the NFT industry is far more developed and there is now a huge range of freely available tools that can be used to create, mint, and trade NFTs with little to no experience.

One of the main considerations uses will need to make when creating their NFTs is the token standard to use and the blockchain to deploy on. Each blockchain has a different NFT landscape and user demographic, while some offer NFT standards and functionalities that are not supported by other chains.

Many of today’s most popular NFT marketplaces, including OpenSea, Rarible, and SolSea all allow users to create and list their NFTs, as well as several standalone tools — such as NiftyKit.

Image courtesy of OpenSea

It’s possible to create a huge range of NFTs, including some with special functionality — such as automatic resale commissions, and variable designs — fairly easily. That said, ensuring that it’s useful, valuable, or even desirable isn’t quite as simple.

In any case, learning how to create your NFT and the challenge of building interest can be an excellent way to get started in the NFT space and learn the ropes. Many major NFT-capable blockchains will provide extensive documentation that can be used to get started — some of the most popular resources are listed below:

Whether you’re an individual hobbyist, aspiring artist, seasoned game developer, social media personality, scientist, superstar, or anything in between, getting started with NFTs can be a challenging but ultimately rewarding endeavor.

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About Master Ventures

Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.

Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.

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