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# Breakdown: What is NFT and Its Major Characteristics

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April 16, 2024 April 30, 2024

Outline

Preface

What are NFTs (Non-Fungible Tokens)?

How Do NFTs Function?

Use Cases of NFTs

Why NFTs Are So Popular?

Illegal Activities Involving NFTs

Which Blockchains Support NFTs?

Are NFTs Cryptocurrencies?

Best Places to Buy and Sell NFTs

NFT-Backed Loans

Criticism Surrounding Non-Fungible Tokens

Conclusion

Preface

In our days, the digital technologies play a pivotal role in the lives of every person in the world. It stands to reason that digital assets, blockchain revolution and economy tokenization are trending nowadays and there is a certain overhype surrounding cryptocurrencies, DeFi and CeFi projects, and so on. The recent mainstream impulse (over the past few years) has been fueled by the so called non-fungible tokens (abbreviated as NFTs). However, the tokenized non-fungible assets have been in circulation for about 5 years already, the real popularity of NFT data pieces blossomed in 2021 and 2022 when celebrities started to tokenize and trade tokenized non fungible token items thus sending NFTs to new heights. Like it or not, but there are millions of people who do not have a clue about what is NFT, what are non fungible tokens and why people go crazy about these unique data units represented as NFTs on blockchain. Let us find it out and provide a definitive explanation to what is it non fungible token.

What are NFTs (Non-Fungible Tokens)?

Prior to giving a definitive answer to what is a non fungible token, its content, what it means and represents, let us first figure out the meanings of “non-fungible” and “fungible.” Fungible or fungible assets stand for items or asset classes that possess the possibility to be traded (bought or sold) or exchanged with the same type of asset or unit. In this context, one ETH always equals one ETH and it can be easily traded at the same value, much like fiat, crypto or any other legal tender . On the contrary, non-fungible tokens are unique and can not be reciprocally interchangeable. NFTs are one of a kind, there are no two identical NFTs and this is exactly what makes them so attractive to the audience.

Next, it is about time to define what is NFT (non fungible tokens what is that?). By and large, NFTs are represented as digital assets that operate atop of a blockchain network (be it Ethereum, Solana, Tron, or Concordium). What is NFT token? It is a type of digital certificate that establishes the ownership of goods, items or an asset that represents a great variety of both tangible as well as intangible things like art works, cryptographic paintings, tickets, postcards, music, tweets and so on and so forth. At the date of writing, the market capitalization of NFTs equals more than 11 billion US dollars, as per the data obtained from the CoinMarketCap.com analytical portal. Last year, its total market cap equaled incredible 41 billion US dollars due to an unprecedented interest in NFs spread among:

– Celebrities;

– Artists;

– Musicians;

– Sports players;

– Politicians;

– Gamers.

How Do NFTs Function?

NFTs work using the blockchain technology that records digital transactions in the ledger. Most of crypto addicts are familiar with blockchain because it is the underlying technology behind cryptocurrencies like Litecoin, Dogecoin, Chainlink, Stellar and so on and so forth. Just like virtual assets, NFTs include ownership details for flawless identification and data transfer rights. NFT owners can supplement metadata or specialized attributes regarding the concrete asset class. Factually, NFTs can represent any item or goods that have intrinsic value, be it a painting, game ticket, real estate, vehicle, etc.

The lion’s share of the best-performing NFTs is hosted on the Ethereum blockchain protocol because it supports the ERC-721 token standard. This token standard outlines the minimalistic interface options like asset ownership details, meta data as well as protection measures. In their essence, NFTs function like cryptographic tokens on blockchain, thereby creating of identifiable data hash blocks. This particular encrypted transaction process guarantees the authentication of each digitalized asset coupled by corresponding digital signature that allows to monitor the ownership rights of NFTs. To put it simply, a non-fungible asset is all about proof of ownership rights, which stands apart from copyright. You should keep in mind that digital non fungible tokens can have only a single owner at a time, thus there can not be two owners of one NFT respectively. Ownership rights are realized through the unique identifiers as well as metadata that no other NFT can duplicate.

Use Cases of NFTs

An non fungible token is minted from digitalized objects as a representation of digital or non-digital assets. In fact, NFTs are created via smart contracts operating on blockchain and assigning ownership rights and control the transferability of non fungible tokens. When a person creates a new NFT, there takes place the code execution, which is stored in digitalized smart contracts that pertain to various blockchain standardized format, be it the most popular ERC-721 or TRC-721, for instance. This data is added to the digital ledger where the nn fungible token is being controlled. Here is the list of what NFT can represent (it is exhaustive because there are many new cases arising on the horizon — it is all about creativity and imagination):

– Graphic art;

– Videos;

– GIFs;

– Internet memes;

– Virtual avatars;

– Metaverses;

– Tweets;

– Music records;

– Domain names;

– Invoices;

– Tickets;

– Medical records;

– Signatures;

– Certificates;

– Legislative acts and many more use cases.

The ownership right of non fungible tokens are oftentimes have relevant association with a license to utilize such a linked digital asset, but generally does not confer copyright to the buyer. Some agreements only grant a license for personal, non-commercial use, while other licenses also allow commercial use of the underlying digital asset The key characteristics of digitalized non fungible tokens encompass:

– Non-interoperability. It stands to reason that data stored in NFTs can not be exchanged or else used in any other fashion.

– Rarity. To put it simply, the smaller number of NFTs in circulation, the more valuable they are for people interested in digital art or any other industry.

– Non-destructible. Since non fungible tokens are stored and managed via blockchain, they can not be removed or annihilated from the ledger.

– Non-divisibility. Considering the fact that NFTs are non-fungible by their nature, a person can not divide and transact a certain volume of non-fungible assets to other people thus far.

– Authenticity. NFTs are always one of a kind.

The greatest benefit of non fungible tokens as of today lies in the digital content domain. Content creators do not need to use the services of galleries or exhibitions, pay bills for premises, public relations, share royalties, etc. NFTs create, demonstrate and boost a new digitalized economy — the ownership is instigated into the content per se. When creators of NFTs sell their creations, the money received from the deal go directly to them, plus the original author of the creation can receive royalties after the resale of minted non fungible assets. Metadata encrypted inside the minted NFT can not be altered and this displays the entire beauty of the NFT phenomenon.

There are so many of the best performing non fungible tokens that can be easily located in streamlined games and online games, which are oftentimes referred to as play to earn (abbreviated as P2E) games. The main concept of P2E games is that the developers of NFT-oriented games incentivize the audience to get involved in their gaming platforms via tradable non fungible tokens that can be obtained by completing a chain of missions. Among the most popular NFT games, we can mention the following trend-setting ones:

– CryptoKitties;

– Axie Infinity;

– Gods Unchained;

– The Sandbox;

– Cryptoflowers.

NBA stars are also actively involved in the promotion of NFTs, not to mention popular celebrities, movie stars, entrepreneurs, influencers and football players. Whatever the case, the future prospectives for non fungible tokens look pretty promising, conditioned by the fact that the total market capitalization of NFTs in 2021 reached a remarkable 41 billion US dollar mark. The analysts and crypto experts predict that nearly a half of newcomers in to crypto industry are about to use non fungible assets as their entry investment points. How about that, Elon Musk!?

Why NFTs Are So Popular?

Believe it or not, but there are zillions of numerous reasons why ordinary people, traders, investors, etc. start using NFTs in their everyday lives. First and foremost, the cool thing about non fungible tokens is that they represent a store of value, just like any other cryptocurrency, be it Bitcoin, Dogecoin, Yearn.finance, Tether USD, derivatives, futures, commodities, precious metals, raw oil, wines, etc. Everything is dependent on demand, how much people are willing to pay for this or tha non fungible token right now or in the future. It is similar to baseball cards that gain value with the force of time. In simple terms, non fungible tokens are gaining massive popularity due to the symbiotic nature of fandom, hype, the royalties involved, and the rarity.

The more a certain NFT is online and trending, the more value it gains for the audience. Once the digital asset is sold on a certain specialized marketplace, the creator of the maiden non fungible token receives his or her ten percent out, whereas the current buyer of the NFT gets the rest of the value. NFT standardized assets are really widespread in various blockchain technology sectors, particularly in the development of Dapps and other blockchain based solutions. Case in point, there is an increasing number of decentralized fintech projects interested in integrating and developing non fungible tokens to boost their architecture and the ecosystem overall.

About a year and a half ago, the music industry generated nearly twenty five million worth by trading non fungible tokens on specialized auctions and marketplaces. NFTs are even popular in the pornographic industry. As far as you can see, the NFTs are revolutionizing the lifestyles of billions of people and make things much simpler, faster and accessible. Due to the fact that NFTs can be easily bought and sold on the Internet, it makes people excited about the current perspectives that the next-gen technology can offer to everyone interested in digital technologies. The market efficiency is driven to the maximum and one does not need to buy actual physical object and store it in the garage. Let us say that it is needless to have only one owner of the physical object (painting or music). Instead, its digital counterpart can have several owners , whereas each and every is responsible for their portion. Such principles can accelerate the value and future revenues of the object under discussion.

Illegal Activities Involving NFTs

Despite all the benefits that NFTs and blockchain can offer to content creators, there is always a fly in the ointment. Due to volatility and market fluctuations, NFTs can be potentially used for illegal money laundering because the blockchain technology allows to transfer values anonymously. Therefore, the predominant share of NFT marketplaces are eager to comply with regulatory requirements and require compulsory ID verification (know your customer checks) in order to prevent any illegal manipulations with non fungible tokens. Some countries, government and officials use crypto, NFTs and any other blockchain based technologies to evade sanctions, sponsor terrorism, human trafficking, drug dealing, Darknet activities, and so on and so forth.

It is obvious that digital art works do not require transportation, taxes, custom checks, that is why fraudsters show a vivid interest in non fungible tokens for their illegal money laundering activities. Most national jurisdictions do not regulate the turnover of non fungible tokens, therefore the temptation to earn in an illegal way of NFTs is paramount. It is next to impossible topredict the crazy price swings of NFTs: today one non fungible asset may cost a few bucks, while in a week its price may reach millions just like that. Their meteoric volatility attracts criminals like a magnet.

Which Blockchains Support NFTs?

As has been discussed above, the key blockchain player on the NFT market is Ethereum. Its smart contracts allow to easily buy and sell non fungible tokens, however the gas fee for blockchain transactions on the Ethereum network is very high and the speed (transaction per second) is not impressive. There are more and more blockchains appearing that support NFTs and allow to trade virtual assets cost-efficiently and faster by contrast with the Ethereum ecosystem. We can enumerate some of the competitors of Ethereum:

– Tron;

– Solana;

– Binance Smart Chain;

– Concordium;

– Flowchain;

– Tezos;

– Wax.

To start with, Tron was the pioneering blockchain to have been following the Ethereum ecosystem with regard to pumping its DeFi networking for more than two years already. The Tron’s maiden non fungible token standard termed as TRC-721 was officially announced with the aforementioned period and its prime aim was to accelerate the realization of the mechanism of different blockchain based Dapps and straighten up the fierce rivalry with Ethereum. Each and every TRC-721 non fungible token is unique and plays just the same important role as TRC-20 standard tokens respectively.

The Solana’s extreme throughput and remarkably low commissions influence the choice of many people to choose it to mint new non fungible tokens, buy, sell, HODL them without any backhanded concerns. The Solana standard presents the concepts of royalties, editions, and promotes the open sourced contracts for the corresponding metaverse ecosystem. The average minting costs equals circa one and half US dollars, and there are more than 6 million Solana-based NFTs in circulation.

BEP-721 is a Binance Smart Chain token standard that allows to mint and operate new non fungible tokens and, besides, it is perfectly compatible with EVM because it is an extension of the famous ERC-721 token standard. With the BEP-721 token standard, each and every non fungible token is assigned a unique identifier module. Ordinary people can mint, transfer as well as buy and sell multiple collectibles with a direct reference to a market value, popularity, scarcity and so on and so forth.

Further, Concordium implements the so called CIS-1 token standard for non fungible tokens realized on smart contracts. It makes it possible for off chain apps to monitor corresponding token balances, meta data and authenticate all the pertaining events.

Flowchain has been particularly designed for gaming and non fungible tokens and is very similar to the one realized on the Ethereum network. Besides, Tezons deploy the TZIP-12 token standardized algorithms for non fungible tokens, which reverberates closely with the Ethereum’s ERC-1155 token standard. Finally, Wax uses the Simple Assets smart contract system which in its turn allows to mint, collect and trade NFTs in a fast, safe and secure manner.

As far as you can see, the number of blockchain standards for minting and managing non fungible tokens is growing and it is just a matter of time when NFTs become a daily routine in our smartphones. The main reason behind the popularity of NFTs is a perfect opportunity to monetize creativity and earn great rewards for digitalized items on blockchain.

Are NFTs Cryptocurrencies?

It is not surprisingly that many people use the terms NFTs and crypto interchangeably because both use the blockchain technology, but this comparison is not correct per se. Non fungible tokens possess absolutely different functions and use cases by contrast with the majority of cryptocurrencies be it Bitcoin, Stellar, Chainlink, Litecoin, Omisego, etc. Each non fungible token is unique whereas cryptos are fungible just like fiat currencies or CBDS and serve as a medium of exchange. Each and every non fungible token has a unique signature and identifier with metadata and it is not possible to equally exchange one NFT to another. Therefore, do not mix these two blockchani based concepts and follow the news and announcement to sta up to date with what is going on the digitalized high tech arena.

Best Places to Buy and Sell NFTs

After grasping the idea and concept of non fungible tokens and their core benefits in comparison with popular cryptocurrencies, a person may want to mint, acquire, collect, store, sell or HODL non fungible tokens. As a starter, you need to have a digital wallet to store your non-fungible assets and cryptocurrencies, which can be used to purchase NFTs. Then, you need to decide which NFTs you want to trade and where — which NFT marketplace can suit your needs. NFT marketplaces are similar to cryptocurrency exchanges, that is, they act as intermediaries between buyers and sellers of non fungible assets. When choosing an NFT marketplace to deal with non fungible assets, you should pay close attention to its reputation and brand recognition. After all, you shall be investing your own money. Surf the internet for genuine customer reviews, how popular the service provider in your region or country, what is so specific about it, what trading volumes it handles in a day or annually, and so on and forth.

Moreover, after you definitely know what non fungible assets you want to deal with, check the website if it supports your preferred type of non fungible tokens. The choice is incredibly vast and some marketplaces may concentrate on provisioning specialized tokenized items only. As a rule, when you opt to purchase a non fungible token online via an NFT marketplace, you have to fund your account balance with crypto. Therefore, if your preferred NFT was realized on Tron or Solana blockchain protocol, make sure that you have access to the aforementioned cryptocurrencies to make your purchase of NFTs. Plus do not forget about commissions that marketplaces charge you for striking deals, be it buy or sell operations involving non fungible tokens. Here is the list of popular NFT marketplaces:

– OpenSea;

– Rarible;

– Binance;

– SuperRare;

– Nifty Gateway;

– Solanart;

– Coinbase;

How to get started with trading non fungible tokens? It is not Latin — it is as easy as falling off a log. After you made up your mind which NFT you want to purchase and the service of which marketplace you are about to use, you need to go through a quick onboarding process. Register an account with the chosen marketplace, verify your identity by completing an automated KYC check where you will be asked to suffice an ID document. Once your account is verified, you can further choose among payment options: a) you can transfer funds to your account balance; b) connect your crypto wallet or else c) you can purchase the preferred crypto using a conventional credit/debit card and make online purchases. Once your account balance is topped up, you can navigate to the NFT marketplace, use filters and select the preferred non fungible token for buying or selling in a matter of minutes. Once purchased, you can transfer the NFTs to your private wallet (be it cold or hot storage).

NFT-Backed Loans

Well, the use of non fungible tokens is really impressive because NFTs can be used as a collateral for loans. This is similar to crypto backed loans, where a borrower lends a certain amount of money by collaterizing his or her loan: a borrower uses BTC as a collateral to borrow USDT in order to trade on crypto trading platforms like Binance, Coinbase, Kraken or Poloniex. The key peculiarity of crypto backed loans is that it is entirely market driven and the value of a collateral can either increase or go down. There are even credit lines involving cryptocurrencies. Concurrently, the say mechanism has been realized with NFTs, where a person uses his or her NFT(s) as a collateral to borrow funds. That simple. Here, NFTs drive the liquidity of the capital in a safe and secure way. Just like five years ago crypto backed loans were a phenomenon, NFTs are gaining popularity in the metaverses.

Criticism Surrounding Non-Fungible Tokens

Due to the fact that the contents of non fungible tokens are viewable for the masses, any person can effortlessly copy a data file referred by the non fungible token. Some analysts even claim that purchasing and owning non fungible assets is symbolization of the societal status, expressing that a person can afford to buy and own the creative work. Next, there are environmental issues (just like as it is the case with Bitcoin, Ethereum, Litecoin, etc.) whereby the blockchain based transactions involving NFTs consume a lot of electricity and impact the greenhouse effect on the planet. Besides, there are frequent cases of plagiarism involving non-fungible tokens and permissionless copying of items and art works.

Conclusion

Well, we hope that this detailed blog article has been eye-opening for you in terms of what is a non fungible, how does it function, where to buy it, major risks involved and so on. Just like cryptocurrencies and DeFi projects, non fungible assets are making their way in the mainstream and let multiple people monetize their creativity and merchandise. About five years ago, no one even could not think that digital certificates for ownership can be a reality. But now the situation has drastically altered and NFTs are virtually everywhere and influence the tokenization of the economy to a large extent.

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