What are Non-Fungible Tokens (NFT)?

Beginner Oct 14, 2020

what are NFT
Key Takeaways:
– Non-fungible tokens (or NFT) are unique blockchain-based tokens that can represent practically anything—including physical assets. 
– Most are based on the Ethereum blockchain, but some other blockchains also support NFT—such as TRON and NEO. 
– A large proportion of NFT currently represent in-game items and crypto collectibles, but they have innumerable potential use cases, many of which are currently being explored.

Non-fungible tokens, or NFT for short, have been gaining considerable popularity in recent years due to their potential to tokenize practically anything, and confer true ownership of digital assets to holders. 

Here, we explore what NFT are and how they are currently being used today.

What are Non-Fungible Tokens?

NFT are relatively new types of digital assets that are designed to represent ownership of something that is unique and scarce, whether that be tokenized physical assets, rare digital resources, shares, or practically anything else. 

Because NFT are unique, no two are alike, and hence NFT cannot be replaced with another identical token—this is a property known as non-fungibility, and it is enforced by smart contracts that prevent duplication, while publicly visible blockchains allow for provable scarcity.  

NFT can come in a variety of different forms, depending on the standard they are built on, e.g. ERC721 and ERC1155 for Ethereum NFT, and TRC721 for TRON ones. Each of these standards has its own benefits and limitations, which can affect the types of NFT that can be created, similar to how a chef is limited by the ingredients he/she has available. 
The vast majority of NFT are currently based on the ERC721 standard.

Understanding fungibility

Similar to major digital assets like ether (ETH) and bitcoin (BTC), NFT are stored as data on a blockchain and are held in NFT-compatible wallets, like the Ledger Nano X. But unlike most digital assets, NFT have a property known as “non-fungibility”—which in the case of digital assets, is essentially a fancy term of uniqueness. 

Each NFT has its own specific set of attributes (e.g. onchain and offchain metadata) that make it unique. This uniqueness means one NFT cannot be simply replaced with another identical unit because no other identical units exist—unlike US dollars which are fungible, since one five dollar note is usually worth just as much as any other, irrespective of their serial number or other attributes.

Why some Non-Fungible Tokens have value

As you may or may not have already seen, some NFT are highly valuable, with several NFT fetching upwards of $100,000 on the open market, including a Decentraland parcel that sold for $215,000 in November 2018 and a rare Cryptokitty known as Dragon that sold for 600 ETH, at the time worth around $170,000. 

Since NFT are unique and can vary in their rarity, desirability, and utility, a market has developed around highly sought-after NFT, which sees collectors and traders buy and sell NFT, with their value being set by speculation, supply and demand, and other factors. Like many collectibles, NFT are worth as much as somebody is willing to pay for it—which can be a considerable sum.

Receiving, Storing, and Sending Non-Fongible Tokens

As we previously touched on, NFT are stored in compatible digital asset wallets. For Ethereum NFT, MyEtherWallet is one of the most popular choices, since it can be used to easily manage any Ethereum-based NFT, and can also be used to access NFT stored on Ledger hardware wallets.

Just like standard ether (ETH) and ERC20 tokens, NFT can be transferred from one address to another. But it’s important to note that the transaction fee is always paid in ether, since NFT tokens are usually indivisible by nature and cannot be used as gas. 

MyEtherWallet has a complete guide on using NFT through its NFT manager.

How Non-Fungible Tokens are Being Used Today

The number of potential use cases for NFT continues to grow with time, and ever more innovative examples appear regularly. Nonetheless, there are a handful of particularly popular use cases, as highlighted below:

In-game assets: NFT can represent in-game items, such as weapons, powerups, vehicles, characters, and more. Using the item could burn (destroy) the NFT, or lock it up using a cool-down timer until it can be used again. 

Trading cards/collectible: Right now, a large proportion of NFT represent crypto collectibles such as Cryptokitties, Axies (Axie Infinity), Cryptopunks, and sports trading cards.  

Land ownership: In Decentraland, NFT represent parcels of land in different districts of the virtual world of the game. LAND owners can build on and monetize their plot, such as by leasing it out to other players or using it for advertising. 

Domain names: NFT are currently being used as blockchain domains—essentially tokens that represent ownership of a particular crypto domain, such as name.eth or token.crypto. 

Works of art: NFT can represent individual works of art which have been tokenized and are now represented by a unique token. Ownership of the NFT equals ownership of the underlying work of art. 
Like standard digital assets, NFT are also used as speculative investment instruments, which are traded on NFT marketplaces like OpenSea and The Sandbox—usually by experienced traders and investors.

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