NFTs - Exploring Infrastructure, Usability, Role in DeFi, And Questions About Ownership

This article is a walkthrough NFT Standard, NFT characteristic traits and explanations, NFT utilisation in DeFi.

NFT is a shortcut for Non Fungible Tokens which is a token standard on blockchain. NFTs is a data structure (token) which links metadata files which may be pinned to an image or file. This token is uploaded and modified to meet the requirements of blockchain networks like Ethereum, Kusama, Flow or others.

The Non Fungible Tokens boom opens up new doors to financial perspectives and utilisation to the market itself.

There is a long road ahead of us although many teams are building new DeFi premises for the non-fungible token market.

The NFTs are gaining traction on financial markets, creating new utilisation of those tokens. DeFi and NFTs projects are at the intersection of the exciting future that is ahead of us, it is closer than we think it is.

The standard

NFT key concepts lie in the ERC-721 and ERC-1155 standard which both have the ability to give a record of ownership to digital goods. The art file is being uploaded to a network which creates a metadata file that is being uploaded to the token data structure which is uploaded on blockchain.

As an artist (creator) you upload your art file on a platform that takes metadata from your file, which then goes throughout the back-end process of which of a product is your shiny NFT.

Your NFT has a cryptographic hash (key) which is a tamper-proof record with a date, time uploaded to on chain. These data are valuable if as an artist you don’t keep track of when the art has been created and modified afterwards.

Uploading your art on-chain can give you a better perspective on when the art file metadata was tokenized. As the data of the artwork are uploaded no one should take it down (there is a very little chance of your artwork disappearing from the network).

Controller of the contract that the NFT metadata and token data structure holds can modify the artwork by reuploading it on-chain. Different blockchains have a different technical background of how they upload token data on-chain.

The infrastructure behind NFTs

Every file and NFT that is being uploaded to the blockchain needs to have cryptographic hash (unique fingerprint) in order to be uploaded on blockchain as metadata.

This applies to NFTs as well to other files that can be found on the blockchain for example token data.The artwork file will most likely be uploaded to IPFS or to some other storage. IPFs which is a peer to peer protocol for storing and sharing data using Pinata file management.

Pinata is built on the IPFS and classifies itself as file infrastructure for NFTs. Pinata uploads the data of the NFT (and other files) with hash that is uploaded on blockchain. Some of the galleries may use Arweave protocol for storing and sharing data.

Arweave is very similar to IPFS but it is promising to store data forever by paying miners to indefinitely store the data. This hash is attached to the NFT itself which gives it time signature, blockchain autograph (cryptographic hash).

NFT characteristic traits and explanation

Layer of life by JUNG

NFT is a token with metadata attached to it, not just a picture or a file uploaded to the blockchain. By minting an NFT you are assigning a unique token to your artwork.

This unique token becomes programmable if the author allows or issues the artwork based on its programmability. Async art is all about programmable art which the artwork changes it states over time based on the set attributes of the author, for example artwork is transforming based on set time into day version and night version.

Explore Layers of life for better understanding of how NFT can be programmable.

Verifiable as anyone can see who is the issuer (artist) and owner of the artwork, if you sell your art you are becoming issuer and owner is someone who bought your artwork.

Your artwork may become divisible if you mint it with fractals that together are making the artwork itself, this can be done via fractionalising artwork. Durable, the artwork data are uploaded on-chain, what is on-chain stays on-chain.

Artwork is becoming universally addressable, digitally secured, and easy to access as it is uploaded on-chain as metadata. Composability in blockchain terms means that an artwork is accessible from other sources, it is not visible only on one type of website or wallet.

Originality and ownership of NFTs

Given the nature of the blockchain as an underlayer of NFTs, the tokens showcase proof of authorship of the digital items. NFT holds, denies or restricts the rights of users on specific assets ensuring the exclusivity of the digital item.

Scarcity of NFTs

The scarcity aspect plays a big role in NFT space. Every NFT is scarce, unique, prominent and exclusive which is the reason why people want to own it. Once the artist issue (mint) NFT on blockchain it is becoming scarce as there is only one piece of this artwork which makes collectors to be more humble to get the artwork.

Especially if the artist is famous, the artwork is unique. If you are struggling as an artist to sell your art try to think of what you art is unique and prominent that someone should own it.

NFTs can be seen as artwork or a collectible, minted and sold on marketplace like Foundation, Rarible, SuperRare, Makerspace, Nifty Gateaway, KodaDot, Unifty and many more.

Digital items can be sold and utilised as skin in a game or metaverse, the items can be bought via Digitalax. Ethereum Name Service (ENS) is another use case for the NFT as it is unique collectible, the more popular you own the more scarce it is becoming.

NFT utilisation in DeFi

Overview of a few the most popular NFT use utilisation

Fractionalise NFT

By purchasing a higher value NFT owner can fractionalise the artwork which will allow users to hold a percentage of the artwork. This allows users who participated in the auction to buy a piece of the artwork they were auctioning but were priced out of. Fractionalising NFTs will allow NFT holders to see some liquidity from the NFT itself without selling it.

In simple language, image you hold NFT — Lego house and you will be able to sell lego part tot a different owners but you will still be owner of the Lego house itself.

What is Fractional? by Fractional is a great article if you are interested in exploring the Fractionalisation of NFTs deeper.

NIFTEX works similar to Fractional, although Niftex seems to be more developed. You can decide on the price of the fraction which is then being sold to users and you will receive the ETH after the fractions will get sold. The factions are then listed to secondary markets like Uniswap and OpenSea where anyone can buy them.

Learn more about how Niftex fractionalisation works.

Take collateralized loan with NFT

NFT can cost a lot of $, you can collateralise your NFT as it is ERC721 token which can be collateralized and other users can offer you a loan in ETH. If you lend ETH or other crypto assets you get NFTs. Similar to other crypto loans, this works with NFT as well.

Take your collateralized loan with NFTfi if you are interested to learn more.

NFT Collateralized Loan on Aave

NFT Loans opens up a new way of looking at NFTs. Artworks are becoming a part of the DeFi. By locking up your NFT to the contract you can open a loan on Aave. Imagine it like conserving your NFT for competitive and instant loan on Aave. The price of the NFT is priced out based on the NFTX.

Stay tuned for more info about Bunchy Protocol

Liquidity NFT Market

Liquidity market on NFT gives the non fungible token attribute of a fungible token that allows user to trade NFT blue chips like Axie, Crypto Punks & Crypto Kitties on Uniswap. It is like a Coin Market Cap for NFTs where users can find liquidity and price related information like TVL, volume about the NFT blue chips. Adding oracles opens up a new way to variety of DeFi utilisation, now they are available to trade NFTs. Non Fungible tokens are getting the attributes of fungible tokens that makes them easier to trade the NFTs.

Community owned protocol for NFT index fund NFTX

More to explore

Programmable NFT

Turn your NFT into almost anything you can imagine. Program the NFT to change itself when earning interest on it, add some sort of timelock to NFT that will release some data under customisable release conditions, make a donation to charity by transferring royalties of the NFT, do virtual geocaching by hiding the NFT in metaverse and let people find it, basket your collection of NFT and transfer them…The list goes on and on as the possibilities are almost unlimited.

Check out Charged particles and learn more on programmability of NFTs

Digital galleries and Metaverse

NFTs are being built mostly in the Open Source ecosystem where anyone can fork off the code and build their own application. This gives the opportunities for anyone to build a better way to display NFTs, put them into a work or collection. With the rising exposure of Metaveses and digital galleries, NFTs are a creative evolution that is already booming. The digital nature of the space already allows anyone to get their parcel at Cryptovoxels, Decentraland, Somnium, and create their own virtual gallery or upload it to Webaverse. The future is interacting with the world and art as well via VR and AR glasses. Keep an eye on KodaDot for more alpha leaks in Metaverse.

Check out Awesome NFT list for NFT projects and basically everything NFT related.

Thank you to Theo Rochaix, Edson Ayllon and Colin Platt for contributing and reviewing previous versions of this article.

Feel free to reach out to me via Twitter

Friendly disclaimer: I’m not associated with any of the projects that I mentioned in this article. All projects mentioned are in the experimental stage, use them at your own risk

Title picture by Lanju Fotografie on Unsplash

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