What Are Non-Fungible Tokens (NFTs) and How Do They Work?

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The fever for collecting all kind of valuable objects has always been present in the mind of human being, even since the foundation of the first civilizations.

In the old days, the object of desire could be a simple rock with unique characteristics, but over the centuries, collectibles have evolved: postage stamps, antique coins and bills, artworks and even characters from videogames and movies.

Due to the fact that a collector’s enthusiasm never ends and keeps pace with technology, we now have a new evolution: Non-Fungible tokens or NFTs.

In this article, you’ll learn everything you need to know about NFT tokens, a new type of blockchain asset that’s gaining more and more popularity among collectors and all those technology enthusiasts, the crypto world and even among many investors.

What is an NFT token and how does it work?

What Are Non-Fungible Tokens (NFTs) and How Do They Work ?

Non-Fungible tokens or NFT crypto tokens are cryptography-based tokens that exist on a blockchain and possess unique and unrepeatable characteristics.

These special tokens can be used to represent unique assets from the digital world or digital versions of objects from the physical world. In addition, they can also serve to demonstrate the authenticity and ownership of any specific asset on the blockchain — as if it were a kind of digital stamp.

You can better understand the operation of these tokens if we compare it with other fungible assets, that is, assets that can be exchanged with other assets of the same type that also have the same value.

The most popular example we can give you is the way traditional money works.

If you borrow a $100 bill from a friend, when you are going to return the money, you can do so using several bills of different denominations or another $100 bill. The value of $100 is always the same in both cases.

You can’t be substituted non-fungible assets in the same way as fungible assets because they are unique and unrepeatable.

You can find a good example of this in artworks of famous painters from the old times. We can see each of those paintings as a non-fungible token; although these are all paintings, their value and properties are unique and don’t have an equivalence in terms of value or money with other paintings, so that an exchange, in this case, is not possible.

These types of assets can then be represented in the digital world thanks to the blockchain technology in the form of tokens. This is possible thanks to the use of cryptography and data structures because it’s possible to “imprint” special marks that make each token unique and unrepeatable.

The origins of NFT crypto tokens

With the birth of Bitcoin, the so-called colored coins were also born. These were a kind of assets based on the Bitcoin blockchain as an attempt to represent real world objects in the crypto world.

However, its operation was really pretty primitive and it wasn’t until the launch of Ethereum and its ERC-721 standard that authentic NFT tokens would appear.

In fact, the first NFT project to become really popular was the Ethereum network-based game “CryptoKitties”. This game appeared in November 2017 causing a kind of a storm in the crypto world.

The game basically consists of unique and collectible digital kittens that can reproduce. Each kitten can inherit from its “parents”, part of their appearance and attributes. This, in turn, produces a diversity that makes them unique.

Such was the fever for these kittens that the price of some of them reached up to $300,000. At its peak, CryptoKitties contributed an average of 30% of the daily transaction volume, congesting the entire Ethereum network.

After this Boom, many similar games began to arrive and started dominating the DApps (decentralized apps) market, such as Axie Infinity, Gods Unchained and Decentraland. In this last game, the characters’ lands, buildings, clothing, etc., can be represented with NFT tokens.

More applications for NFT crypto tokens

An NTF-compliant blockchain is like a database that stores information about valuable things. An NFT token can then connect to any object with non-fungible characteristics, represent real-world objects using tokens, and form a world of valuable and tradable digital assets.

Here are only some examples of more practical applications for NFT crypto tokens.

Collectibles

As it happened with the CryptoKitties game, there are already many other extensions based on the old idea of collectible games.

It’s possible to store information from artworks, jewelry and other similar objects on the blockchain in the form of NFTs to motivate updates, circulation and sharing through several markets.

In this sense, NFTs are already being developed for artworks such as paintings and sculptures with professional certificates. The owner only has to show the unique information stored in form of NFT to demonstrate that he/she is the owner of such work at the exact moment he/she wants to.

It’s possible to easily trace this digital certification because the ownership of these assets is registered in the blockchain. This goes a long way towards preventing counterfeiting of artworks and other similar objects.

Videogames objects

The creation of NFTs for the different objects that we can find in games, allows these accessories to be exchanged for points or virtual currencies in the game itself, and even for real-world money.

This type of exchange is not something new in gaming, but blockchain technology is doing a great deal to rebuild and improve this online digital economy of virtual goods.

By playing the game, users can obtain items such as weapons, clothes, pets, vehicles, skins, etc. These items have their own NFT and are stored on the blockchain. In this way, all its properties and all operations related to such articles are registered in a transparent manner and there is no possibility of manipulation and cheating by other unscrupulous users.

Digital tickets

When you purchase a ticket for a musical concert or sporting event, your ticket represents your unique permission to participate in that activity at a specific time and place, and it’s not possible to convert this right into something else.

In this way, a ticket can be represented by an NFT token and in fact, it’s already being done by many companies. Using NFT ensures that each ticket is unique and valid at the time of use. This also greatly prevents the creation of false tickets.

Identity tests

It’s also possible to apply NFT to identity authentication in order to keep a complete record of personnel in organizations, both public and private.

This can apply to birth certificates, passports, driver’s licenses and other similar documents, for example. Although these types of NFTs cannot be exchanged, it’s possible to implement access control to pull out the information in them.

In this way, it’s also possible to interact with the NFTs to obtain information about any individual, such as their educational level — at the moment of a job interview — or request identity information from a doctor to verify his/her professional level.

Digital certificates

Using NFTs as a way to store information about contracts, patents and other similar documents on the blockchain, is an excellent way to prevent counterfeiting and make them traceable.

The validity of these documents can be further verified through the use of electronic signatures. The digital certificate effectively records attributes such as the value of intellectual property, copyright, etc.

NFT tokens, DeFi and new investment opportunities

The great potential of NFTs lies in their uniqueness and in their ability to represent physical goods in the digital world; in fact, it’s basically possible to represent any unique and unrepeatable asset using NFTs.

Many experts agree that the use of NFT will grow a lot in the coming years, especially in certain industries. Additionally, certain groups are currently promoting NFTs as the next big thing in the world of decentralized finance (DeFi).

During the first week of September 2020, NFT tokens posted sales worth up to $1 million. The following month, sales doubled.

According to experts, the DeFi ecosystem is helping NFTs become liquid, so they are losing that appearance of an expensive proposition. But NFT is also helping DeFi. In this last topic, NFT tokens are helping to expand the market for guarantees in DeFi loans.

A platform working with DeFi requires a guarantee. Usually, these guarantees are based on holdings in cryptocurrencies, but with the introduction of NFT, it’s now possible to use other types of assets as collateral: an artwork or real estate, for example, could be even a better option for many people.

NFT tokens also have the ability to represent more complex financial products, such as insurances or options. For example, an insurance can be converted to NFT which can then be traded on a secondary market.

Many individuals and organizations are making intensive use of NFT tokens as an exchange medium to add value to other goods.

For example, in July 2020, the painting “Picasso’s Bull” was put up for sale at an NFT art auction. The artwork was sold for $55,000. After a few days, another painting broke that record, selling for $100,000. However, other subsequent sales have already broken these records.

The total market for NFT has already exceeded $100 million in 2020, which combined with the size of the DeFi market, which is more than 4 billion right now, can give you an idea of the growth potential of this interesting combination.

You must take into account that the greater the rarity and the lower the offer of any specific good, the greater its value in the market. This is especially true for NFT tokens.

For example, an Ethereum user sold for $130,000 a Hashmasks digital art (https://cryptonews.com/news/an-nft-was-sold-for-nearly-usd-129-900-profit-9097.htm) collectible that he bought for only $130. He did this in just three days…

Where and how can you get NFT tokens?

There is an increasing number of projects on the Internet that allow the trading of NFT tokens.

Once you have found a token that you consider is valuable, you can use a physical wallet like the Trust Wallet or MetaMask to save it and try to trade it on open marketplaces like OpenSea.

These types of markets allow buyers and sellers to connect, and the value of each token is unique — its price will also be subject to offer and demand.

These are just a couple of the most popular projects that use NFT tokens as collectibles that can also be traded.

Decentraland

Decentraland is a decentralized virtual reality world in which players can buy and trade pieces of virtual land and other objects using NFTs.

Gods Unchained

It’s an online trading card game where each card is issued as an NFT token. Each card is unique, so players can own and trade them as they see fit.

My Crypto Heroes

My Crypto Heroes is an online multiplayer role-playing game where players can level up different historical heroes through a mission system. These heroes and other items are issued as Ethereum NFT tokens.

Crypto Stamps

Crypto Stamps are issued by the Austrian Postal Service and connect the digital world with the real world. These stamps are used in mail in a similar way to traditional stamps, but with the difference that they’re also stored as digital stamps on the Ethereum network. In this way, each stamp becomes a unique digital collectible.

Sorare.com

It’s a pioneering website capitalizing on the world of sports, especially soccer, through the use of NFT tokens. This company has managed to build relationships with major professional clubs to tokenize teams and players, thus offering unique collectible digital cards, greatly increasing the interest in NFTs from sports fans.

Conclusions

NFT crypto tokens allow the expand the possibilities of blockchain technology through new applications that challenge traditional ones.

Thanks to the ability to represent physical assets in the digital world, NFT-based collectibles can become an essential part of the overall blockchain ecosystem, but also contribute a lot to the overall economy.

As new ideas and innovative ways of using NFT tokens appear, the market will expand, also increasing the economic possibilities of this new track of digital life.

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