NFTs, or non-fungible tokens, are examples of digital assets.They are supported by the Ethereum blockchain. In 2021, NFTs took the market by storm. Various public figures were using it to sell or buy digital assets. Jack Dorsey sold his first tweet for around $6.9 million as an NFT. Since they are non-fungible, they are not directly interchangeable. They have unique properties, and no two NFTs are the same. Unlike fungible items, non-fungible items are scarce, have a single source of origin, and are generally indivisible. E.g., the Original Mona Lisa is one and has a single source of origin.
How does the NFT system work?
NFTs can be minted on any standard that supports smart contracting. The most commonly used standard on Ethereum for minting NFT is ERC721. ERC721 is a coin standard/blueprint that is used to create non-fungible tokens. It allows you to create contracts with distinguishable tokens with unique properties. Another coin standard is ERC1155. It creates contracts that support both fungible and non-fungible assets. An example is Cryptokitties, a blockchain game on Ethereum. It works on ERC721. It also led to the widespread popularity of NFT in the mainstream market.
Minting is a process of creating NFTs. It is not free of cost since a lot of computational effort is required to create new blocks. According to ethereum.org “The process of NFT creation broadly involves three steps:
- Creating a new block
- Validate information
- Recording information on blockchain”
Smart contracts contain all the information. They assign ownership and manage transferability of NFTs from one owner to another.
A specific number is put on the asset, and a token is assigned to it. This token identifies the asset. Therefore, the owner of NFT is the owner of the specific asset. There can be only one owner at a time. It has a unique ID and metadata that is not replicable by another NFT.
They are used to trade artwork, songs, GIFs, videos, domain names, etc. They are also used in insurance as collateral for acquiring loans. The scarcity of it can be determined by the creators of NFTs, and no intermediary is required to trade it. The transaction history of NFTs and their metadata are made public, so it’s easy to verify information related to them. There are reduced chances of fraud since all transactions and price history are made public. The ongoing transactions are legitimized by various computers or miners before they take place.
Creators receive royalties every time the NFT is resold. It gives them a better social and economic standing in society.
Since it requires a lot of electricity and power, it causes a large carbon footprint. Creators have to pay a gas fee for minting NFTs. Gas fees are the cost of necessary computational effort used to run transactions. The more congested the network gets, the higher the cost. Due to technical glitches, they do not necessarily receive royalties every time their work is resold. Although smart contracts provide public ownership, they do not hold the weight of copyright yet. Hence, outcomes requiring court settlements are still ambiguous.
The future of NFTs is rather ambiguous. Some feel that it may phase out after a couple of years, while others believe that it is just a tool to monetize psychological hype. Although one can’t be sure of the future, it is a rather believed assumption that the concept of digitization of assets and its digital trading and ownership are here to stay.