Defining NFTs

A Non-Fungible Token (NFT) is a digital asset that is unique and non-interchangeable. When an asset is fungible, it means that it can be easily exchanged with another asset of the same type and value. A simple example of a fungible asset is fiat currency, like a dollar bill, or a cryptocurrency like bitcoin, which can be broken into smaller pieces. Fungibility is especially important when it comes to assets that are used as forms of payment, as they have to be able to maintain a standardized value.

NFTs, on the other hand, are used more as a store of value. Think of any collectible item you’ve owned - a rare Pokémon Card, a vintage Cabbage Patch Kid, or a stamp. Their value is anchored to their scarcity and their singularity. NFTs are no different; they can be basic game pieces on a video game, or as unique as a digital work of art or a profile avatar. They cannot, however, be broken into smaller pieces the same as a Bitcoin or Ether can.

The recent hype around NFTs has largely revolved around digital art, with artists like Beeple selling his piece “Everydays: The First 5000 Days” as an NFT for over $69 million earlier this year. Yet there are many other valuable use cases for NFT, including as digital identity records, supply chains, and DeFi. More on that later. First, let’s take a look at how NFTs work!

How NFTs Work

NFTs exist in the form of specialized tokens on a blockchain, the most popular of which is Ethereum. On the Ethereum network, NFTs are known as ERC-721 tokens. This allows NFTs to circulate between platforms and wallets. A more recent standard, ERC-1155, was built to support both fungible and non-fungible token types. 

It is important to note that an NFT is not the rare item itself - after all, it exists digitally on a blockchain - it is the proof of ownership of a physical or digital object. This has been a major game changer, or rather game maker, for valuing digital assets, whether paintings, avatars, or even tweets.

When an NFT is sold from one party to another, the transaction provides proof of acquisition because the transaction itself is recorded on an immutable blockchain. As a result, while works can still be pirated or easily reproduced, the proof of ownership offers an irrevocable stamp of authenticity. 

NFT Use Cases

There are many use cases for NFTs. Their distinct guarantee of uniqueness and provable authenticity has made them incredibly popular. Add media hype and enthusiastic influencer engagement, and suddenly the NFT buzz makes a lot of sense. Artists, musicians and athletes alike have been able to mint works and sell them - for the first time - in digital form. 

Various NFT platforms cater to different niches in the market - from gaming networks and marketplaces for digital art, to virtual worlds. We’ll go through some of the most popular use cases below. 

Gaming NFTs

Unsurprisingly, NFTs are very well-suited to the gaming industry. Unlike traditional platforms where in-game purchases are limited to the game in question, NFTs enable cross-platform use. Imagine being able to use appearance upgrades, weapons, or even avatars across multiple games! They also give players more control over their assets, which can be sold, exchanged, or even rented for other items. 

Gaming NFTs also retain their valuable scarcity and mark of authenticity. Moreover, even if a gaming platform shuts down, users can keep their in-game purchases since they would exist in the user’s personal wallet rather than on the game platform.

With the popularity of CryptoKitties waning, the top NFT game torch has been passed on to the likes of Axie Infinity. Like the former, Axie Infinity allows users to buy, trade, and breed new characters, but with the added feature of customizing an entire habitat for the Axies - all with NFTs.

Digital Art NFTs

The most hyped up sector of the NFT world right now is arguably the booming market for digital art. Artists have been making a killing selling their work, a feat all the more impressive considering the controversial niche in which it resides. While authenticity is relatively easy to identify in traditional artwork, digital scarcity has been historically challenging to recreate; what gives value to an original if it can be endlessly reproduced?

NFT art has overcome this by leveraging blockchain technology, which provides a cryptographically secure record of ownership. Not to worry if pictures of your piece circulate online, what matters is that the original is verifiably owned by one person. And in some cases, there is perhaps more value to be found in the proof of ownership than the artwork itself. 

Some of the most popular NFT marketplaces for cryptoart include OpenSea, Nifty Gateway, and Rarible. Rarible, in particular, offers compelling DeFi features like yield farming and liquidity mining; selling and exchanging NFTs on Rarible earns users RARI, the network’s governance token. As a result, the community of users can vote on decisions that impact the platform. Art NFTs have not just been sold on crypto marketplaces though, with Beeple’s work being notably sold online at Christie’s. 

Collectible NFTs

There is a decent amount of overlap between gaming, art, and collectible NFTs. Some platforms manage to incorporate all three. Take the infamous (and much beloved) CryptoKitties. At the height of its popularity in late 2017, CryptoKitties infamously congested the Ethereum network. Reminiscent of Nintendogs or Neopets, CryptoKitties was one of the first games to really popularize NFTs. The appeal lies not just in collecting these virtual pets, but also being able to breed and trade them. And some of these kitties are incredibly expensive - one, called Dragon, sold for 600 ETH, or around $170,000 at the time. 

Other notable mentions include the recently popular NBA Top Shot by Dapper Labs, in which users can purchase packs enclosing famous NBA video highlights - yes, you can essentially own a moment. And, of course, Cryptopunks, one of the first NFTs built on the Ethereum blockchain. 

The Future Of NFTs

While NFTs are not new to the crypto space, other use cases are still in early stages of development. Along with their ability to represent fun virtual assets and provide proof of ownership, NFTs could be used to tokenize real-world assets - real estate, certificates, or licenses. They also offer an appealing use case for a new digital identity system.

NFTs offer a more colorful and accessible entry point into the crypto world, but are not yet entirely user-friendly. Creating or accessing your NFT requires a basic understanding of blockchain tech. This is something they don’t emphasize in the hype media. That being said, NFTs have been revolutionizing the art industry and even our understanding of ownership. Artists have more agency over sales and royalties, and users have more control over their assets. 

Critics like to raise concerns regarding sustainability and scalability, as most NFTs live on the Ethereum network; this means they require a lot of energy to mint, bid on, and sell. However, now that Ethereum has begun its transition to ETH2.0, its Proof-of-Stake blockchain will require far less energy. We should also note that these concerns exist industry-wide, and are paving the way for various solutions.