Non-fungible tokens (NFTs) have the potential to revolutionize the internet as we know it. NFTs are unique digital assets that can represent anything from a piece of art to a virtual world asset. Unlike traditional tokens, NFTs are not interchangeable and each one is unique. This allows for a whole new level of interactivity and ownership in digital experiences. For example, an artist could sell an NFT of their work and the buyer could then display it in their virtual world. The possibilities are endless and NFTs are just beginning to be explored. With the help of NFTs, the next wave of the internet will be even more immersive and interactive than ever before.
1. What are non-fungible tokens (NFTs)?
Non-fungible tokens, or NFTs, are digital assets that are unique and cannot be replaced by another identical asset. NFTs are often used to represent items in video games or online worlds that can be owned and traded by players.
NFTs are stored on a blockchain, which is a digital ledger that records all transactions. This makes NFTs very secure and allows them to be easily traded or sold.
The use of NFTs is still in its early stages, but there is potential for them to be used in a wide variety of ways. For example, NFTs could be used to represent physical items, such as art or collectibles. They could also be used to represent digital products, such as virtual stickers or online courses.
2. How do NFTs work?
NFTs work much like traditional video game or online world assets such as weapons, tools, characters, Land, etc. The major difference is that these assets are recorded on the blockchain using a token. When a token is issued, it is assigned a unique identifier (URI) that identifies the asset being represented. The token also contains information about the issuer, issue date, how to transfer the asset, and what program it is compatible with.
The illustration below shows how NFTs work. The artist, Johan Boholin, issues a token (represented by the colored dots) for his digital artwork “Swipe”. Each token represents a unique copy of the digital artwork that cannot be replaced or replicated. The buyer now owns the rights to copy and transfer this token. If the artist wanted to issue multiple copies of this token, they would have to create new tokens with different IDs so that there would never be two identical assets.
3. Benefits of non-fungible tokens
The benefits of NFTs are endless, but here are a few of the benefits players and owners of NFTs receive.
Unique items: NFTs are unique. They can’t be duplicated, which means tokens represent items that are one of a kind. This ensures the integrity of the item is always maintained.Entire economies: Often, games offer players the opportunity to buy, sell and trade in-game assets. By using NFTs, players can securely trade their assets online and players can potentially sell their assets for actual money. This has the potential to grow player-player and player-company economies in new and innovative ways.Join communities: When tokens represent art, collectibles or other physical items, players can get insight into the history of the item and community around the item by looking at the token’s metadata. This can encourage players to get involved in communities surrounding specific tokens.Proof of ownership: Each NFT has a record on the blockchain that identifies its owner. This can provide peace of mind for players because they know their tokens are securely owned by them and that their ownership can’t be challenged.The ability to interact with other online and in-person venues: Because NFTs are tokenized and identifiable on the blockchain, they can be brought online and interacted with in new ways. For example, a token representing a concert ticket could grant access to a concert when scanned at the venue.
4. Examples of non-fungible tokens
Tickets (or any valid ticketing software) with metadata and information about the event.
Avatar items in online games such as Fortnite, these items are famous for their unique backstories, designs and gameplay.Rare or exclusive event tickets, where the ticket has additional digital functionality, such as participating in a lottery when the event is sold out.Artworks where the token represents ownership of an entire artwork or a fraction of one.Authenticated physical NFTs such as famous recording sessions for back-to-back vinyl tokens.Conditions associated with the item’s ownership such as event reservations, or restrictions.Virtual goods such as in-game items with unique attributes.A digital representation of a physical property such as a home or land.A token that represents a vote in a community, group or political system.
5. Legal challenges and controversies surrounding non-fungible tokens?
There is some debate over whether NFTs should be treated as securities given their close relationship with securities such as stocks and bonds. This in turn has resulted in some delays and uncertainty when trying to launch an NFT project. Due to the way NFTs are tokenized, personalized and represented, they present a number of legal challenges which regulators will need to account for when shaping the future of regulation around NFTs. The two most noteworthy issues are questions of identity and property ownership.
6. Tools for building non-fungible tokens
There are multiple tools available for developers looking to build NFTs. This section will cover the most well-known tools available for developers, developers who are familiar with the Ethereum network, and those looking for a more user-friendly NFT developer tool.
Non-fungible tokens are a new digital asset format that are designed to improve upon cryptocurrencies like Bitcoin, which are fungible. Many organizations are already using NFTs to replace physical carriers like tickets, stickers, or event cards because of features like metadata, scalability, and uniqueness which are difficult to achieve with currencies.
Transaction execution speeds of NFTs are roughly comparable to those of cryptocurrencies, although there is currently debate around how fast ERC-721 transfers can be confirmed given the need for validators. Additionally, transactions fees for NFT transactions are likely substantially higher than those of cryptocurrencies given the need for validators. This high cost mitigates mass adoption of NFTs for small-scale transactions.
Valuation and pricing of NFTs present a challenge since the format does not contain a hard-coded monetary value. Pricing NFTs is an automated mediation process that involves calculating the market value of tokens using trader pairs, using discounted cash flows, or some other method. Mediation processes like these are highly experimental and have yet to see widespread use in digital assets.
There are a number of startups and projects that have been or are being developed to address some or all of the challenges faced by NFTs such as Theta Tokens’ Theta Studio, Forcefield Labs’ Brave Browser, Quantstamp’s MetaToken, and symbols or events (e.g., NYC Events) from Protocol Labs ‘filemarket.io. These projects aim to enhance the user experience of creating, distributing, and trading NFTs while also ensuring compliance with regulatory laws. This is an area of active innovation.
In conclusion, although NFTs present exciting new possibilities for digital/virtual goods in the digital world, their use cases, adoption, and technology need to evolve more before they can compete with fiat currencies and traditional assets for mainstream use.