A Beginner's Guide to Non-Fungible Tokens

Outline

• What is an NFT?
• A Brief History of NFTs
• Why are they different from other digital files?
• Where to buy NFTs
• Is NFT a scam or bubble?

What is NFT?

The easiest way to understand what Non-Fungible Tokens are is to grasp what economists refer to as fungibility. A good, old-fashioned dictionary defines fungibility as the

“quality of being capable of exchange or interchange.”

It refers to commodities and goods that can be "freely exchanged or replaced by another of [the same nature]...”

In simpler words, when we say an asset is fungible, we mean its value can be exchanged for another asset EXACTLY like it. For instance, if Mr. A collects a $100 note from Mrs. B and gives two $50 notes back to Mrs. B, they both end up with $100. None has more value than the other.

The same is true if you collect a newly minted €20 from your brother and give him a crumbled €20 note you've had in your jean pocket for some time. It doesn't matter. All €20 is worth the same thing.

Assets that are non-fungible, on the other hand, have a unique value. They can't be EXACTLY exchanged for another that looks like them. For instance, the famous Mona Lisa painting is one unique work of art. Even if another copy by the same artist were to be discovered tomorrow, its value won't be the same as the one that has been in existence for quite a long time.

Non-Fungible Tokens are like this too. They are unique, provably scarce digital assets powered by blockchain technology. To an average Joe, this means three things:

1. NFTs are digital assets like images, audio & videos, and all things that can be rendered online. Examples of these include digital arts, songs, gifs, music videos, domain names, game icons and assets, and a whole lot of other things.
2. We can prove that NFTs are one-of-a-kind, unlike regular cryptocurrencies that are not one of a kind.
3. We can also prove its ownership.
4. Both ownership and uniqueness of an NFT can only be achieved through blockchain technology like smart contracts.

A Brief History of NFTs

Meni Rosenfeld introduced the concept of Colored Coins in 2012 on the Bitcoin blockchain. These are otherwise regular Bitcoin tokens that are “marked”. With this mark, colored coins are assigned uses and a system to prove ownership of assets; therefore, colored coins became the first tokens with unique values, which make them as close to NFTs as any crypto token at the time.

After the experimentation with Colored Coins, two things became apparent: the first is that NFTs cannot be effectively built on the Bitcoin blockchain, and the second, Bitcoin users are not hyped about using valuable block space to prove token ownership. These led to platforms like Counterparty and Spells of Genesis building more effective technology on top of the blockchain to power NFTs, and eventually, the adoption of Ethereum blockchain as the de-facto technology for NFTs.

Kevin McCoy and Anil Dash minted Quantum, the first-known NFT on May 3, 2014, at the Seven on Seven Conference in New York. This was followed by innovations such as:

• Using NFT as in-game assets and tokens, pioneered by Spells of Genesis in 2015
• Memefication of NFTs with Rarepepes based on Pepe the Frog on Ethereum in 2017
• Matt Hall and John Watkinson define the iconic punk-retro aesthetic of NFTs with their CryptoPunk project. This was one of the defining moments in NFT history, not only for its aesthetic movement but because they CryptoPunk was one of the most commercially successful NFTs with some selling for millions of dollars.
• CryptoKitties helped raise the hype around NFTs to non-crypto users with its massive success. It also marked the emergence of NFT communities and ecosystem which is still a highly relevant feature of the crypto industry.
  

Why are NFTs Different from Other Digital Files?

People unfamiliar with blockchain technology seem to have a hard time grasping exactly how NFTs are different from everyday digital files. If we say that an NFT is rare, does that mean that people cannot copy, use or redistribute our NFT image? The answer, unfortunately, is NO! So, if anyone can copy, use and share our NFT file the same way they can any other “worthless” file, why put a price tag or value on it or care about ownership? And how exactly does the value and ownership mechanics work?

You see, Non-Fungible Tokens are first and foremost just crypto tokens. Not artworks, images, videos, and whatnot. Your regular digital file, collectible or in-game asset are only referred to as NFT when they go through a process of being “wed” with the blockchain technology. Ideally, this is a three-stage process:

• Stage 1: Create a new block.
• Stage 2: Validate information.
• Stage 3: Record validated information on the blockchain so others can view and verify it.

Unlike other digital files, it, therefore, becomes easy to prove your ownership of an NFT. The process to do this is quite simple as well, especially if you are familiar with crypto wallets. You have some information generated through the process of minting or buying an NFT which includes a private key, creator’s public key, and token. With this information, your NFT’s authenticity, value and ownership can be verified.

• The private key serves as the proof-of-ownership.
• The creator’s public key shows that your NFT is authentic since it is a permanent record of your token’s history. It is also important to the intrinsic value of an NFT since the digital artist that created your NFT may become much more popular which can result in a surge of demand for their works.

Of course, no one bothers to verify the source of digital files, and there are no intrinsic incentives associated with having a random digital file, unlike we have in the NFT space.

Where to Buy NFTs

An NFT marketplace is a dedicated place to buy and sell NFTs. In recent times, there has been a surge of interest in NFTs leading to the availability of more places to buy and sell NFTs. But the most popular place remains Open Sea, in January 2022 for instance, monthly transactions on Open Sea crossed an all-time-high record of $3.5billion while the daily average is recorded at around $169million. Other notable places to buy, sell or even mint NFTs are listed here with links to their apps or website.

• SuperRare
• Axie Marketplace
• Foundation
• Rarible

Are NFTs a Scam or Bubble?

Given the rate at which NFT millionaires are being minted, it only makes sense to be conscious of any activity that seemed like a scam or bubble. But contrary to how it's being portrayed on social media, investing in NFTs is not a "get rich quick" scheme. Although like Bitcoin and other cryptocurrencies, it enjoys periods of hype where the market is extremely bullish, this is usually followed by a period where the market is corrected, and sometimes an extended bear run.

Hence, NFT is not a scam. It is a legitimate and legal way to buy, sell and participate in the crypto economy. More so, a lot of respectable brands and companies have committed millions of dollars to NFT creation, adoption and use in their products. A notable example of such a brand is Nike which recently opened a Nikeland on Roblox metaverse to sell NFTs.

On the other hand, it is difficult to say whether NFTs are currently undergoing a bubble. Although there was a lot of activities and excitement in 2021, with Twitter's Co-founder and former CEO, Jack Dorsey selling his first tweet as an NFT valued at $2.6 million; Beeple selling a world record $69million NFT at Christie’s. Some pop icons like Snoop Dogg, Grimes, Lil Pump, and Young M.A. also made millions on NFT projects in 2021. This initial excitement seems to have subsided but it doesn't render NFTs as a bubble or scam. And if the bitcoin adoption is a useful model, it seems such excitements would be experienced a couple of times again.

What Is Next in the NFT World?

If Crypto's big mission is to take over fiat as the default means through which commerce and global trade are run, NFT seems to be positioning itself as the default means through which creators would push their work to their audience.

Of course, NFT adoption and technology are still in their infancy and as such, we cannot make certain claims about future events. However, judging from current trends, the next five years, at least, would see the adoption of NFTs in the gaming industry, social media, sports, and fashion.

Reference

https://decrypt.co/resources/non-fungible-tokens-nfts-explained-guide-learn-blockchain?amp=1

https://ethereum.org/en/nft/

https://futurice.com/blog/a-short-introduction-to-nfts