Non-fungible tokens (NFTs) continuously frequent media headlines in recent months. It's quite unimaginable that the term, which first came into being within the past decade, had undergone such incredible growth to become a trending sensation. In the following article, we're going to guide you through the basics about NFTs from both technical and non-technical aspects.
What is an NFT?
Non-fungible tokens (NFT) are virtual assets that represent an item. They are uniquely identifiable and utilize the immutability of blockchain networks to reliably store public records of the token and it's owner. The main purpose of NFTs is to replicate and ensure the uniqueness and scarcity of items in the digital world like how their physical counterparts do.
Early History (sub-2014)
Back in 2014, a man named Kevin McCoy created "Quantum", a video clip consisting of an octagon and animated circles, and registered it on the blockchain Namecoin. This is the first ever non-fungible and tradable digital asset with on-chain metadata.
In 2014, a platform called Counterparty was launched, self-proclaiming Bitcoin 2.0 due to it's extendibility to the Bitcoin network or more accurately, on top of it. Counterparty allows the creation of digital assets and eventually led to the creation of the first blockchain-based game Spells of Genesis. Following the creation of Rare Pepes, a meme-based NFT, controversy sparked between users due to the fact that the tokens are using up Bitcoin block space, inconveniencing people that are actually utilizing Bitcoin to do normal transactions. This laid down the trail for NFTs to shift over to Ethereum later on.
Ethereum fills in the gaps on how Bitcoin does not allow complicated calculations other than the standard Opcodes. The launch of quasi-Turing-complete EVM opens the door to a whole new set of possibilities, within which includes smart contracts, the major groundwork that token standards are dependent on.
Three months after the official launch of Ethereum in July 2015, the NFT project - Etheria was launched on the first Ethereum developer conference. Etheria offers a decentralized virtual world (like a simplified version of Sandbox) with tradable tokenized assets and estate, attracting public attention on NFTs once again.
Following the success of Rare Pepes, a new project called Cryptopunks was launched using a set of 10 thousand unique generative art pieces. Cryptopunks is the only project that is based on ERC-20, though some may consider it a hybrid of ERC-20 and ERC-721 (which was not standarized yet at that time).
ERC721 (2018 Q1)
But it was until 2017 did the public attention became widespread, ERC-721 was standardized with the Ethereum EIP721 update. CryptoKitties was one of the first projects to utilize the new standard in November 2017 before it was officially standarized, it made it's way into major news media and exploded into popularity. ERC-721 paves the way for the ease of creating NFTs, further increasing public attention on the matter.
Slowly gaining in publicity, NFTs continued to catch attention with various projects. One of the most well-known projects is Decentraland. Started back in 2017 with an initial coin offering (ICO), the blockchain-based game released the game publicly in February 2020. The game is one of the first to step into the metaverse business with blockchain-backed assets.
NFT Explosion (2021)
Following the rebranding of Facebook to Meta, the year showed a significant surge of demand in NFTs, particularly in the metaverse-related categories. Multiple EVM compatible blockchains also started to gain as well due to high transaction fees on the Ethereum chain. We can now finally say that NFTs have moved past the experimental stage, and has now become a mainstream phenomenon.
Under the Hood
An NFT consists of a unique ID and metadata on a ledger, which is not replicable and is used to manage ownership. NFTs are minted through smart contracts, code conformed to specific standards are executed. The minting process generally validates information and records information onto the ledger in the next block.
Ethereum realizes decentralized digital asset utilizing the reliability and trustlessness of public blockchains. Each public record (or token) minted is linked to an Ethereum address via unique ID, which can be transferred. This relies on how the key pairs work in asymmetric cryptography. Your address is derived from the public key, while your private key is used for signatures to proof who you are either to others or to the smart contract for implementing actions. Hence, it's ownership is easily verifiable and tradable to another user.
In addition, due to the nature of how blockchain works, each token can be traced back to it's original creator since the creator's public key is a permanent part of the token's history. This comes in particularly handy in the case of digital art, the content creator will always be remembered and the authenticity of the item can be proven.
What are NFTs used for?
The mainstream usage is for artists and content creators to monetize their work. Digital items are usually difficult to end up getting auctioned in traditional galleries or auction houses. With the utilization of NFTs, creators can sell their work directly to the consumer. Depending on how the contract is written, creators can even code a royalty fee in the contract and profit a certain percentage whenever the item is resold. This is a unique feature that does not exist in the traditional method.
There are various practical use cases other than the one mentioned above, such as ENS (NFT-based domain names), intellectual properties, supply chain, ticketing, and much more.
How do I get an NFT?
You can either purchase an NFT or mint one. Currently, the two largest marketplaces are Opensea and Rarible. Both platforms have thousands of items and do not require much technical knowledge to utilize.
As for minting, the current standard is ERC-721 or ERC-1155. It should be quite simple to deploy the contracts. We'll leave that in another article.
It's hard to imagine the extent of where the opportunities end. Not only does NFTs have the potential to simplify the ease of use for various services, but also will it increase transparency. We'll definitely see more development in this field, and who knows? Maybe within a few years, NFTs might be a technology vital to our everyday lives.