Although DeFi has enthralled the crypto world, non-fungible tokens (NFTs) have slowly but steadily gained popularity. NFTs make it possible to create digital scarcity and prove ownership of one-of-a-kind properties. A fungible object or token is compatible with another unit of the same thing. One Bitcoin, for example, is the same as another Bitcoin, just as one US dollar is the same as another US dollar. Non-fungible items, on the other hand, are not compatible with one another and have specific properties that can differentiate them radically, even though they appear to be identical (1).
In the real world, non-fungible objects include drawings, concert tickets, and other related items. Even if two paintings appear to be the same, their rarity levels can be radically different. Similarly, front-row concert seats are much more expensive than back-row tickets. (2) Non-fungible tokens are a powerful type of token representing non-fungible assets on a blockchain in some ways. Non-fungible tokens have details in their code that define the properties that distinguish each token from the others. A piece of digital art may contain coded information about individual pixels, while tokenized in-game objects may contain information that enables the game client to identify which object the player owns and its attributes.
How do non-fungible tokens work?
From the time it was developed, each NFT has a record of transactions on the blockchain, including any time it has changed hands. This means that each token can be checked as genuine and not a forgery, vital for owners and potential buyers! non-fungible tokens should be provably scarce to appeal to potential buyers. This ensures that assets remain desirable over time and that supply does not outstrip demand. The majority of NFTs can’t be traded as fractions of a whole. Non-fungible tokens cannot be divided into smaller denominations, just as half of a concert ticket or trading card cannot be purchased. NFTs are completely programmable, much like all other conventional digital assets and tokens based on smart contract blockchains (3).
Breeding mechanics are developed right into CryptoKitties and Axie Infinity tokens. It’s possible to add even more features. To put it another way, NFTs are a hybrid of decentralized blockchain technology and non-fungible properties. Unlike traditional digital assets, which are issued and controlled by centralized authorities and can be seized from you at any time, crypto assets are not subject to such restrictions. (4) Therefore, it is possible to regulate and control your own NFT’s. Since NFTs can reflect virtually any asset, digital or physical, they can be extremely strong. We’ve seen how NFTs can be used to make highly desirable new types of digital collectibles with CryptoKitties and CryptoPunks. More typical collectibles, such as baseball cards and coins, are being tokenized as well. NFTs could also be used to trade tradable in-game products. Most of the implementations we’ve seen so far have revolved around turn-based combat or trading card games like Axie Infinity or Gods Unchained. With NFTs, however, games with thriving item economies, such as Fortnite or CS: GO, can one-day support on-chain item trading! (5).
Tradeable digital art has been a hot topic since the launch of the art marketplace Rarible and their yield farming incentive program. Artists may use NFTs to monetize their work while still protecting their copyright. NFTs often allow artists to earn royalties once their works are sold. The Ethereum Name Service and Unstoppable Domains have converted. Eth and. Crypto domain names into NFTs that can be exchanged. Decentraland and Cryptovoxels, virtual world real estate, have also been tokenized into NFTs. One of the original aims of NFTs was to tokenize real-world assets so that they could be traded. Users will be able to properly secure and monitor their details, such as medical records, birth certificates, and more, with the aid of NFTs.
History in the making
Non-fungible tokens have existed for a longer time than you would expect. Many people were looking to innovate on blockchain technology to create newer, more efficient tokens after Bitcoin’s founding in 2009 and the initial proliferation of token forms such as Litecoin, Ripple, and others. Colored coins, which were first suggested in a blog post by Yoni Assia in March 2012, are arguably the earliest ancestors of non-fungible tokens. These were very small Bitcoin units with unique attributes coded into metadata using Bitcoin’s scripting language, allowing them to be colored. As a result, even one satoshi (0.00000001 BTC) can represent any asset you can think of (6).
Colored coins had significant flaws and roadblocks, even though the design was very promising and potentially strong. The Bitcoin network did not officially support colored coins. As a result, it was up to wallet providers to identify colored coins. Back then, the minimum transaction size for a Bitcoin transaction was changed to 5430 satoshis or bitcoin. As a result, colored coins eventually faded and died out. Coinprism, the first wallet to accept colored coins, shut down in 2018, citing regulatory scrutiny as well as the Bitcoin network’s inflexibility and slowness (7).
Who accepts these NFTs?
Counterparty was created in 2014 to issue non-fungible and semi-fungible tokens based on colored coins. The founders of Counterparty recognized that Bitcoin lacked the functionality necessary to build a robust asset development and trading platform. Spells of Genesis, a mobile game, was the first to issue in-game assets on any blockchain in 2015, using Counterparty. Counterparty gained even more traction in 2016 when the successful trading card game Force of Will released cards on the site. Force of Will was, at the time, the fourth most successful trading card game in North America, behind Magic: The Gathering, Pokémon, and YuGiOh (8).
CryptoPunks have algorithmically generated 24×24 pixel characters that live on the Ethereum blockchain, developed by John Watkinson and Matt Hall in June 2017. There were only 10,000 characters made, each with its unique appearance. The creators of CryptoPunks made it possible for everyone to claim the Punks for free, and it’s safe to assume that all 10,000 were quickly claimed. The rarity of various Punk styles and characteristics varies, and some combinations of unusual or desirable traits can be extremely valuable. Ape-types, for example, is the second most uncommon. An Ape Punk with a Hoodie, the most expensive Punk ever, sold for 150 ETH.
In October of 2017, CryptoKitties was born. It was a video game in which players could breed, raise, and exchange virtual cats with different genomes that influenced their looks. CryptoKitties were published during the late-2017 crypto boom, and their value rapidly skyrocketed, with one CryptoKitty fetching 600 ETH. The project received widespread coverage in the mass media, including CNN and the Financial Times. Today, trading in CryptoKitties has slowed slightly, with the project dropping to the 13th position in terms of volume of tokens exchanged over the last week, according to NonFungible.com. However, we cannot overstate the project’s effect on the NFT landscape. The project is still ranked first in terms of all-time volume traded, with over 38 million dollars worth of CryptoKitties transacted since 2017 (9).
Challenges and obstacles
It is obvious that non-fungible tokens are extremely strong and have a bright future ahead of them. They are, after all, extremely versatile instruments that cater to an inherent human desire to own rare and unique objects. The possibilities are infinite, limited only by the developers’ ingenuity. Despite this potential, it’s impossible to ignore that NFTs are still a very niche technology. NonFungible reports that about 70,000 active addresses are belonging to NFT Dapps users. 70,000 is also a long way from the 71 million crypto owners worldwide, despite having more than tripled since 2018 and more than doubled since the start of the year. Despite this, NFT acceptance remains poor about the tens of millions of people who hold cryptocurrencies across the world. Inaccessibility, the newness of the technology, the uncertainty of transaction fees, the challenge of linking real-world assets to NFTs, and regulation are all barriers to widespread adoption of NFTs.
Collectibles, art, and gaming are the most common uses for NFTs. While there should be a wide demand for these properties, the reality is that NFTs are restricted to relatively experienced crypto users familiar with Dapps. Not everybody who collects enjoys art, or plays video games is a crypto trader, to put it another way. Innovative Technology NFTs are a relatively recent technology built just a few years ago in their current form. Many people are also suspicious of NFT’s protection and authenticity due to a lack of understanding about these properties. This most likely means that existing NFT users are only in the early adopter, niche consumer demographic (10).
Even if NFTs can represent real-world properties, making a claim to ownership on a real asset for NFT holders can be difficult. Real-world businesses would have to either issue their own NFTs or collaborate with crypto companies to accomplish this. It’s also debatable if NFTs have many advantages over a conventional database. Regulating because NFTs can be used to describe real-world properties, NFT ventures run the risk of their tokens being classified as securities and attracting regulators’ attention. This will put off developers who are on the fence about building new NFTs.
These obstacles are far from insignificant, but there are encouraging signs that the industry is starting to overcome them. To counter the unfriendliness of NFTs, blockchain-based games are starting to reconsider their user interface. Non-fungible tokens merge the best features of decentralized blockchain technology with non-fungible assets to build blockchain-based tokens that are provably special, provably scarce, and probably authentic. NFTs can be used in various applications, such as collectibles, games, art, virtual assets, and tokenizing real-world assets.
If millions of users interact with NFTs without even knowing they exist, in other words, a smooth user experience, then these tokens have achieved mass acceptance. Before this innovative implementation of blockchain technology achieves widespread acceptance, there is still a long way to go. Although the technology has progressed significantly since its introduction in 2012, it will inevitably take some time before NFTs are shown to be more than a niche market for early adopters (11).
The recent market for NFT
The NFT has seen the rise of promising new ventures such as Hashmasks and musicians, both old and new, minting their work. The number of weekly users of NFT platforms, which reached an all-time high of 398,800 for the week beginning March 8, reflects this increased interest. With 379,000 users, the crypto-collectible marketplace NBA Top Shot was the most common, followed by Ethereum-based NFT game Axie Infinity with 12,260 users. An animated Gif of Nyan Cat, a 2011 meme of a flying pop-tart cat, sold for more than 500,000 on February 19. Grimes sold some of her digital art for more than 6 million a few weeks later. Art isn’t the only thing that is tokenized and marketed. With bids approaching 2.5 million dollars, Twitter founder Jack Dorsey has sponsored an NFT of the first-ever tweet. Christie’s selling of a digital artist Beeple’s NFT for 69 million dollars or 50 million euros set a new high for digital art.