Non-Fungible Tokens – Crypto’s Next Evolution

Introducing the MEME part of history, where a digital picture is worth as much as a Picasso. But WTF does non-fungible mean?

In some circles Pokemon and Yu-Gi-Oh cards are considered a form of currency.

Pokemon Illustrator Card
Pokemon Illustrator Card

These cards have been bought, sold, and traded since the early 2000s. Each card holds a specific value based on its content and condition, and the value of certain cards has increased over time. Today, certain first edition Pokemon cards are valued at $224,250.

That’s 6-figures for a holographic-trading card based on an anime cartoon… Gotta catch ’em all!

To those outside of the trading card game community, that price tag might sound shocking, but those within the close-knit community of enthusiasts understand the value of these cards. The rarer they are, the more they’re worth.

The same is true for non-fungible tokens.

The world was aghast last month when Beeple sold an NFT artwork for $69 million. How could a digital artwork be worth so much? Also, what’s the significance of 69?😆

Think of it like an unboxed action figure. The figure inside the box retains a high value because it is irreplaceable. Many people might have the same action figure, but the figure’s unboxed condition makes it even more valuable and unique…a one-of-a-kind.

This logic holds true for some tokens in the cryptocurrency ecosystem. These tokens can act as a reward from coin issuers. The difference between non-fungible tokens and fungible tokens is each token’s uniqueness.

The uniqueness of NFTs gives them their value.

So why is that? Hop-in and let’s go for a quick ride.

What is a Non-Fungible Token?

A non-fungible token is a cryptographic asset with a unique value. Digital assets are often thought of as infinite, but NFTs are digitally scarce.

To break it down in simple terms, imagine you had 2 identical tennis balls. Losing one in the middle of a match isn’t too much of a worry because you had another backup in case your opponent hail mary’s it across the court.

Now imagine you had a specialty tool or component. It’s harder to get and an inconvenience because it’s not easily stored somewhere for quick access. Perhaps you need to custom make one each time you replace it like a rare bottle of wine.

That’s kind of how NFT’s work.

A simpleton’s explanation for NFTs

To better understand this, let’s look at fungible assets. Fungibility is a property of a unit where the unit is divisible. Each resulting unit is interchangeable with another unit. Money, for instance, is a fungible asset. A certain amount of money doesn’t change its value no matter where you take it. You can use it for payment as long as it holds monetary value.

Well, except in certain countries where a dog-eared bill is worth less than a crisp one.

In some cases, fungibility is governed by classes. Think tickets at the theatre, clothes, or even airplane boarding passes.

  • You can only exchange theatre tickets for seats within a particular section.
  • You cannot change the value of the ticket for a pricier seat or a cheaper seat.
  • Clothes cannot be bought in one store and exchanged with clothes from a different store.
  • With airplane tickets, you can only change seats within the same class, not out of it. You can move to a different class if you spend more or are willing to overlook the initial price and move to a cheaper section.   
Fungible vs. Non-Fungible

There are cases where certain things hold more value for one person than another. You can see this with collectors’ items. Coins, cards, or stamps, for example, are assigned value by the person collecting them. In these scenarios, the person holding the item has assigned it a higher value than someone who considers it an everyday object..  

The same logic applies to blockchain technology and its non-fungible tokens. Unlike cryptocurrencies like bitcoin, ether, and most tokens and coins on the blockchain, NFTs are unique.

These scarce assets are built on smart contracts so that each creation of a new non-fungible token is unique from the one made before and after it. Non-fungible tokens also do not hold the same value as one another and cannot be broken into smaller pieces.

How Does the Non-Fungible Token Work?

Fact: NFTs are scarce. And that makes them unique. 

How unique? Take a look at what some people are willing to pay for them.

Most Expensive NFTs Sold

Every token has a unique code, which gives it a highly specific digital identity tied to blockchain technology. These rare physical assets are documented in digital ledgers that contain a historical record of their ownership. This makes them hard to tamper with or duplicate.

Blockchains such as Ethereum, Tezos, and Flow each have their own token standards that govern the use of their NFTs. These standards allow the NFTs to operate within the blockchain ecosystem.

Ethereum, for example, uses the ERC-721. Conversely, their normal tokens fall under the ERC-20 standard. In addition to these standards governing the Ethereum blockchain, there’s also ERC1155, built by Enjin.

The ERC1155 standard is like a vending machine. It allows for the trading of different assets as long as they operate in an individual space. For example, in a game, you have various collectibles. There are swords, coins, portals, and characters. The ERC1155 standard enables the trading of these items using semi-fungible tokens. It makes trading efficient and allows for interoperability with ERC 721.

NFTs are still largely in their infancy, and their bugs are still being worked out. Currently, many NFTs point to URLs, but if the server for your NFT disappears, so does its value. To address this issue, some are turning to IFPS or decentralized servers for NFT hosting.

Let’s briely explore the biggest advantages and risks you’ll face when choosing an NFT.

The Pros and Cons of the Non-Fungible Token

We get it. Many are heralding cryptocurrency and blockchain technology as an ultra-modern financial knight in shining armor–a decentralized system that will reset everything and bring order with advantages galore.

Yet, like most technologies, there is a dark side to this technology too. But before you start shaking in your boots, let’s look at both sides.

NFT Strongpoints  

  • NFTs are standardized, which means we can assign them a real-world value. This makes them easily transferable because there is a similar standard governing them.
  • NFT owners can feel confident about their value because they are difficult to counterfeit due to their decentralized and permanent record on the blockchain. This allows buyers to maintain their ownership rights because no one can change the data later.
  • Value and interoperability provide a robust framework for gaming, sports, art, technology, and hobbyists. Any item in these communities can be exchanged and retains its value.
  • One of the biggest pitfalls of fungible tokens such as FIAT currency is the risk of fraud. Unlike fungible tokens, NFTs are more secure. The blockchain acts as a security system in the exchange of NFTs. Better security makes the exchange of NFTs or assets backed by NFTs faster and easier across similar or different platforms.

Weaknesses of Non-Fungible Tokens 

  • For all the benefits of NFTs, they’re still very much a niche product. They have not yet been widely accepted. The slow uptake presents a unique yet solvable problem. If you look at it in terms of profitability, only a relatively small pool of enthusiasts stands to gain from them. 
  • The technology used in developing NFTs is complicated. While this is debatable for established developers, entry-level developers have a hard time catching up to the ever-evolving nature of NFTs. 
  • Non-fungible tokens are indivisible. How is that a problem? Divisible assets can be used on micro levels. You can trade lesser value items with fungible tokens, giving the fungible token an edge over NFTs. Items traded using fungible tokens are currently more likely to scale in value faster than NFT assets.  
  • Although often overlooked, there is the possibility of an NFT bubble. The endless possibilities of NFTs can create too much hype and get people rushing to make quick cash without understanding the system. However, if the values get inflated, and the market collapses, there’s a huge risk of losses for everyone involved.
  • Some or most NFTs arent hosted actually hosted on a decentralized server. This means if you purchased an NFT from someone and they stop paying their server bills, you could lose your NFT. You want to ensure your NFT is hosted on something like IFPS.

What Non-Fungible Tokens Should I Look Out For?

  1. CryptoArt.

This is a platform used for NFT-based artworks. It had reached a total volume of $8.2 million as of December 2020, up  from $2.6 million in November 2020. 

Think of CryptoArt as cold storage. The art is the ‘face’ of the storage facility. 

Cryptocurrency such as Bitcoin is safe – that much we know. However, what happens when you get hacked? You can lose your Bitcoin. 

By taking Bitcoin offline and putting it into art, you have maintained its value and reduced the risk of losing it if hackers compromise your digital security. 

  1. CryptoKitties

If you have been following Ethereum, you probably know about Cryptokitties. It is a game, much like Pokemon, where you “breed” digital cats to evolved forms. These evolved forms have high value and you can trade them with other players in the game.

Ether is the main means of purchase for Cryptokitties. 

Their tagline states “each cat is one-of-a-kind and 100% owned by you; it cannot be replicated, taken away, or destroyed.” 

The game became so popular that it jammed Ethereum servers. It also attracted the attention of investment heavyweights such as Peter Thiel who backed OpenSea, the store that enables the exchange and sale of Cryptokitties.

  1.  CryptoPunks 

When an anonymous buyer splurges roughly $1 million on a digital asset, you know there’s some serious clout behind it. This is the case for CryptoPunks.

Larvalabs is behind the creation of CryptoPunks. CryptoPunks mirrors Cryptokitties in some ways. They are both based on the Ethereum blockchain and they have unique characters. Currently, there are about 10,000 characters, known as Punks.

A CryptoPunks piece named “Alien” NFT made headlines in January 2021 when it sold for 605 ETH ($760,000) despite being valued at only 8 ETH ($1500) in July 2017. The continuing trend towards pop culture art like that of Kaws and Banksy has helped propel these digital works forward and driven up their price.

Where Can You Get NFTs

There are endless possibilities for non-fungible tokens. They can be assets such as art, collectibles, or game pieces. Also, there is currently an eager consumer base more than ready to collect these assets. As long as NFTs remain popular with their consumer base, they will remain profitable.

Currently, there are several platforms for selling assets as NFTs. 

Take for example Handshake Domains and Ethereum Name Service (ENS). They deal with websites that sell for cryptocurrency. There’s Sorare for fantasy football, NBA TopShot for basketball, and Nifty for general sports. On these platforms, sports fans can turn player cards into NFTs for other fans to trade and enjoy.

Real estate enthusiasts can check out Decentraland and OpenSea, while art enthusiasts can go to Async Art, Cryptograph, and KnownOrigin.

Creating your Own NFT

After hearing about the monumental figures NFTs are garnering, you’re likely tempted to get in on the action. Whether you’re an artist or just excellent at crafting dank memes, platforms like Rarible and OpenSea let you create your own NFTs.

OpenSea is free, but charges users transaction fees. Conversely, Rarible charges a small fee for placing the NFT on the market. Rarible allows users to upload various file types, including PNG, GIF, WEBP, MP4 or MP3, with a maximum weight of 30MB, while OpenSea is open to a wider variety of file formats, including JPG, PNG, GIF, SVG, MP4, WEBM, MP3, WAV, OGG, GLB, GLTF, with a maximum size of 100MB.

Before uploading your NFT, you’ll have to set up a wallet on the site of your choice. You’ll also have to decide whether you’ll be selling a single item or multiple collectibles. The multi option is for collections of things like photographs or trading cards. Next, follow the instructions for uploading and naming your NFT, establish your payment parameters, and pay any fees, and you’ll be on your way.

Moving forward, the only thing left for NFTs to succeed is for the blockchain to transcend into the mainstream. More positive reception from the general public means more people benefit from the advantages of NFTs. 

With more mainstream companies taking their stab at NFTs, other companies might follow in their footsteps. 

However, despite the current buzz around NFTs, their growth is still slow. We need more public awareness around NFTs and the blockchain. The technology has already proven its worth and capability. It is up to stakeholders to drive up interest and bring more people into the fold to maximize on the strong points of non-fungible tokens.

FAQs

What items are usually turned into NFTs?

The most common NFTs on the market right now are artworks. Rare in-game items are also traded within their respective communities as NFTs. There’s also fantasy sports that offer player cards as NFTs.

Are NFTs a good investment?

As with any other financial investment, NFTs require plenty of due diligence before diving in. Presently, NFTs have a market cap of $65 Billion. To the proponents, such numbers and the potential for growth of NFTs make them a viable investment. 

Still…

NFTs such as Cryptokitties are having a hard time regaining the traction they had at their peak. 

If you decide to invest in NFTs, keep an open mind and invest wisely.

What NFTs should I look out for?

The hottest NFTs right now are mostly art that’s auctioned off. You can check out the works of Mike Winkelmann/Beeple, Trevor Jones, Giant Swan, Indrani Mitra, and Micah Johnson.

Can NFTs be faked?

Technically yes. Fortunately these fakes are easy to spot. NFTs are verifiable in the blockchain since each of them is unique and it is easy to identify legitimate NFTs.

How are NFTs sold?

NFTs are usually sold through auctions. Follow artists or people that are looking to sell their work and participate in the auctions. Some websites specifically cater to selling NFTs such as SuperRare, MakersPlace, Crypto Art Data, and OpenSea.