INTRODUCTION TO NON-FUNGIBLE TOKENS (NFTs)
Article I. INTRODUCTION: NFTS ARE MINTING A NEW MARTKETPLACE
The hype surrounding NFT has been around for much longer, but on March 11, 2021, the craziness was complete. Artist Beeple sold through auction house Christie's his digital collectible "Everydays: The First 5000 Days" for the sweet sum of $69 million. An NFT artwork that the artist worked on for over 13 years. It is the first NFT work to be sold by a traditional auction house. A week later, Twitter founder Jack Dorsey's very first tweet was sold as an NFT for over $2.9 million. (See my contribution in the NOS eight o'clock news. In April 2021, a concert by DJ Don Diablo was sold for 1.2 million euros. (I spoke about this in the NOS Youth News). And in May 2021, memes like Disaster girl ($495K) and Bad Luck Brian ($36K) were sold as NFT.
An NFT is a certificate that contains a unique ID, a link to a digital object, plus a signature from the creator. It is your own unique proof of authenticity and provenance: you can be sure that you own the NFT and not someone else. For completeness: An NFT is not an image, MP3 or video. An NFT refers to the file that is somewhere on the Internet. Thus, an NFT is a pointer to an external file. The certificate contains that reference including the reference to the owner.
Article II. NON-FUNGIBLE TOKENS
1. What Are Fungibles and Non-Fungibles?
Fungibility is the ability of a good or asset to be readily interchanged for another of like kind. Like goods and assets that are not interchangeable, such as owned cars and houses, are non-fungible. Money is a prime example of something fungible, where a $1 bill is easily convertible into four quarters or ten dimes, etc. Cross-listed stocks, which refer to the shares of stock listed on multiple exchanges are still considered fungible. The shares represent the same ownership interest in a firm, whether you purchased them on the New York Stock Exchange or the Tokyo Stock Exchange. Although fungibility is commonly associated with finance, it is also found in other disciplines, such as quantum physics.
Example: f Person A lends Person B a $50 bill, it does not matter to Person A if he is repaid with a different $50 bill, as it is mutually substitutable. In the same sense, Person A can be repaid with two $20 bills and one $10 bill and still be satisfied, since the total equals $50.
Conversely, as an example of non-fungibility, if Person A lends Person B his car, it is not acceptable for Person B to return a different car, even if it is the same make and model as the original car lent by Person A. Cars are not fungible with respect to ownership, but the gasoline that powers the cars is fungible. Assets like diamonds, land, or baseball cards are not fungible because each unit has unique qualities that add or subtract value.
2. What Are NFTs and Why Not?
Like other cryptocurrencies, this crypto resides on a blockchain. This is basically a public ledger, in which crypto transactions are encrypted. Most NFTs are on Ethereum's blockchain, but they are also supported by other blockchains. Like Ethereum, such a blockchain has a Turing-complete programming language. This allows smart contracts and applications to be programmed into the blockchain. Like investing in any other crypto currency, there are many risks involved in trading NFTs. It is difficult to predict how much an NFT will be worth in the future. The value of an NFT is based on what someone else is willing to pay for it. Demand drives the price, and its future is highly uncertain. This makes it difficult to determine the right time to buy and sell an NFT.
3. How Bitcoin Ultimately Paved the Way for NFTs
On December 4, 2012, an article was published by Meni Rosenfeld that introduced the concept of "colored tokens" issued on the Bitcoin blockchain. Colored tokens describe a class of methods for representing and managing real-world assets on the Bitcoin blockchain and can be used to prove ownership of those assets. They are essentially ordinary bitcoins but branded to define their use. While the concept of colored coins was never realized due to the limitations of bitcoin, it laid the groundwork for other NFT experiments in the future. A significant amount of development and experimentation has taken place in platforms built on the Bitcoin blockchain. This was the beginning of Ethereum's initial domination of NFTs. Most notable was the Counterparty (Bitcoin 2.0) platform, which enabled the creation of digital assets. Later, Spells of Genesis followed in Counterparty's footsteps and was the first to publish game assets through its platform. Finally, the meme era began in 2016, with the launch of Rare Pepes' NFTs on the Counterparty platform.
4. NFTs Are Powered by Blockchain Technology
Developed since 2008, blockchain is primarily a technology for storing and transmitting information. This technology offers high standards of transparency and security because it operates without a central control body. The blockchain allows its users - connected in a network - to share data without intermediaries.
- The identification of each party is done by a cryptographic process.
- The transaction is sent to a network (or storage "node") of computers located around the world
- Each "node" hosts a copy of the database in which the history of the transactions made is recorded. All stakeholders can access it simultaneously
- The security system is based on a consensus mechanism of all the "nodes" each time information is added. The data is decrypted and authenticated by "data centers" or "miners". The validated transaction is added to the database in the form of a block of encrypted data (this is the "block" in blockchain)
- The decentralization of security management prevents the falsification of transactions. Each new block added to the blockchain is linked to the previous one and a copy is transmitted to all the "nodes" of the network. The integration is chronological, indelible, and unforgeable
5. The Architecture of NFTs Ethereum, Tokens and Small Contracts
Ethereum is one of the largest blockchains, with a robust ecosystem of users, developers, wallets, and applications. Today the majority of NFTs in circulation have been built on top of Ethereum with many of the top projects and platforms. While most NFTs in existence today are on Ethereum, the fees associated with NFT transactions (so-called “gas” fees) can be prohibitively expensive for smaller transactions. Because of this and the fact that Ethereum is so developer-friendly, some companies have begun to build adjacent blockchains or “2nd layer networks” on top of Ethereum that would allow for the transfer of Ethereum-based NFTs to achieve much lower costs, and much higher transactional volume/speed.
A smart contract is code that is executed deterministically in the context of a blockchain network; each participant in the network verifies the state-changing operations that a smart contract’s code makes. Smart contracts are the primary means by which developers can create and manage tokens on a blockchain. Smart contracts can store small amounts of data in common data structures, which is a critical component of tokenization use cases that map token identifiers to owner identifiers to track who owns which token.
1. Supporting a NFT on Ethereum
With the introduction of the Ethereum blockchain in 2014 and the platform going live on July 30, 2015, a new era began for NFTs. The Ethereum blockchain introduced a set of token standards that enabled the creation of tokens by developers. In short, the token standard is the daughter of the smart contract standard. For the blockchain that supports smart contracts, the token standard is often included to tell people how to create, issue and deploy new tokens based on their underlying blockchain.
2. How to Buy and Sell an NFT
Many NFTs can only be purchased with Ether, so owning some of this cryptocurrency—and storing it in a digital wallet—is usually the first step. You can then purchase NFTs via any of the online NFT marketplaces, including OpenSea, Rarible, and SuperRare.
1. Challenges and Risks of NFTs
NFTs are one of the most important trends of the year. Along with the rise of NFTs, the crypto community has seen the emergence of NFT markets. The NFT marketplace is the ultimate platform for artists and collectors to create, trade and collect digital art for profitable revenue. It also allows users to create and monetize structures such as virtual worlds, similar to Sandbox or Decentraland. On the NFT Market, you can also sell, trade, and buy individual game items that players accumulate during the game, such as costumes, avatars and in-game currency. Without a doubt, NFT Marketplaces allow anyone to participate in the NFT Marketplace and a wide variety of NFTs such as game items or artworks such as pictures, sounds and collectibles. However, as technology advances, attack activities become more delicate. NFTs, like anything on the Internet, can be hacked and stolen. They, like email and other online accounts, can be hacked.
Non-fungible tokens are an evolution of the relatively simple concept of cryptocurrencies. Modern financial systems consist of sophisticated exchange and loan systems for various types of assets, ranging from real estate to loan contracts to art. By enabling the digital representation of physical assets, NFTs are a step forward in reinventing this infrastructure. Of course, the idea of digital representations of physical assets is not new, nor is the use of unique identification. However, when these concepts are combined with the benefits of a tamper-proof blockchain of smart contracts, they become a powerful force for change. Perhaps the most obvious benefit of NFTs is market efficiency. Converting physical assets into digital assets streamlines processes and eliminates the middleman. NFTs that represent digital or physical artworks on a blockchain eliminate the need for agents and allow artists to connect directly with their audiences. They can also improve business processes. For example, an NFT for a bottle of wine will facilitate interaction between the various actors in a supply chain and help track the origin, production, and sale of the wine throughout the process. The consulting firm Ernst & Young has already developed such a solution for one of its clients.