Non-Fungible Token (NFT): A comprehensive guide
Over the past decade, blockchain technology has been transforming almost every sector of our lives. Apart from growing almost exponentially, the domain has diversified manifolds during this time. Non-Fungible Tokens or NFTs are one of the most prominent outcomes of such diversification.
Presently, NFTs are quite at the center of happenings in the decentralized world of blockchain technology. It is also the subject of this article—a comprehensive guide to what NFTs are, why they matter, how they work, and more.
- What is an NFT?
- What was the first NFT?
- Which token standards do NFTs follow?
- Do other platforms support NFTs?
- How and why are NFTs trending on mainstream markets?
- Where to buy NFTs?
- Is building your own NFT complex?
What is an NFT?
So, first thing first, what are NFTs? In simple terms:
NFTs are unique and non-interchangeable tokens that can represent physical and digital assets on the blockchain. NFTs have a wide scope, including artwork, in-game assets, and collectibles.
Leveraging blockchain technology for the immutability of data, among other aspects, NFTs have been a gamechanger in preserving intellectual property rights. Additionally, there’s enhanced liquidity, verifiability, and transactability, which were until now minimal or absent for the aforementioned asset classes.
NFT vs cryptocurrency
Having said that, it’s easy for amateurs to confuse NFTs for cryptocurrencies. That’s a mistake you must avoid. In general, cryptocurrencies are fungible while NFTs, by definition, are not. Fungibility means that every unit of a given asset has the same value, making them interchangeable and sometimes divisible. For instance, if both Alice and Maria own one bitcoin each, they will have the same value.
However, this is not the case with NFTs as each token has its unique value. For some NFTs, only a single piece exists, making it extremely rare. But for others, there may be several of a certain type. Nevertheless, their uniqueness of value still applies. That is, even if Alice and Maria have the same type of NFTs, they will have different values.
What was the first NFT?
Like every decision about who came first, there’s much disagreement within the community regarding the first NFT. Now, if we go by mainstream instances of NFTs, CryptoKitties was definitely the first. Launched in October 2017, it was a game where players could rear, breed, and trade digital cats. Depending on the features, each kitty had a different value and some of them sold for over $100,000.
The basis for choosing CryptoKitties as the first NFT is viable, but many choose to differ. For them, CryptoPunks—created in June 2017—was the first NFT. Interestingly, they neither followed the basic ERC-20 standard nor were they based on ERC-721. With a limited supply of 10,000, these algorithmically generated characters became unique collectibles, some of which are now selling for as much as $7.5 million. Furthermore, there are others who trace the concept of NFTs back to Colored Coins, which were launched in 2012-13.
Which token standards do NFTs follow?
Through rapid innovations, NFTs are themselves diversifying significantly, alongside the underlying blockchain technology. Today, several leading blockchain ecosystems have a standard for NFTs. Yet, Ethereum’s standards—ERC-721 and ERC-1155—are the most commonly used, mainly due to their wide-ranging compatibility.
In January 2018, William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs introduced a new token standard by making the 721st Ethereum Improvement Proposal (EIP). It came to be known as ERC-721, which represented a means of referring to unique and identifiable real-world assets.
Realizing an integral limitation of the ERC-721 standard, Witek Radomski, Andrew Cooke, and others, proposed an evolved standard. This was a Multi Token Standard—ERC-1155—enabling a single smart contract to hold data for both fungible and non-fungible assets. Among other factors, this allowed for greater flexibility in token creation. Tokens could be more complex, without compromising on scalability.
Do other platforms support NFTs?
Yes, very much. In fact, some of them enable a better experience of creating, storing, and transferring NFTs. Consider Algorand—a forkless blockchain, enabling frictionless NFTs, while minimizing carbon footprint by optimizing CPU usage. Ethereum gave us DeFi, but this promises FutureFi.
Despite instantaneous block finality, transacting NFTs on Algorand is much cheaper—that is, only $0.011. This makes NFTs more accessible for practical, day-to-day purposes like, say, trading card games. To add, atomic transfers ensure optimal security through P2P NFT exchanges and not necessarily need proprietary marketplaces.
Leveraging Algorand Standard Assets (ASA), developers can directly build and issue NFTs on Algorand. While the platform’s advanced smart contracts mitigate risks of manipulation, its forkless nature prevents the replication of NFTs. Algorand also facilitates restricted version tokens that can only be sent to designated accounts. This is highly relevant to real estate and digital registries, among other sectors.
As the cherry on top, Algorand’s development partners further enhance the NFT-building process through broad customizations, performance boosters, and other innovations.
How and why are NFTs trending on mainstream markets?
Heads up: this section will be long, for there’s a lot happening. If you are an NFT enthusiast, that's good news.
Earlier, we mentioned that NFTs emerged due to diversification in the blockchain domain, and over time, have themselves diversified manifolds. CryptoKitties were a huge success, but the massive surge in traffic slowed down the Ethereum network. Transaction fees shot through the roof. Although inconvenient for many, this was exactly what brought NFTs to fame. Games, collectibles, and digital artwork increasingly entered the scene.
Not just that, but even famous personalities like Lindsay Lohan and Snoop Dog jumped aboard the NFT bandwagon. As this transpired, NFTs no longer remained limited to being collectibles or artwork. Driven by unprecedented possibilities, NFTs received immense positive attention from domains like F1 and NBA. Nike, as well, was among the first big corporations to endorse NFTs.
The NBA Top Shot has been designed exclusively for NBA fans, enabling them to collect and trade officially licensed videos. Ushering ‘a new era in fandom’, the platform makes highlights available to users as tradeable ‘rare moments’. Being truly rare, these NFTs claim high prices among enthusiasts. To keep up the fun and competitive spirit, users sometimes also put up their collections for display. On March 30, Dapper Labs, the creator of NBA Top Shot, as well as CryptoKitties, has closed a $305 million funding round with celebrity investors such as Michael Jordan, Kevin Durant, Alex Caruso, Will Smith, 2Chainz, and many more aboard. That put Dapper Labs at a valuation of $2.6 billion.
F1 Delta Time is an Ethereum-based game, developed by Animoca Brands and officially licensed by Formula One. Cars on this platform are NFT collectibles, as well as assets for multiplayer racing games. These are purchasable using the platform’s native crypto, namely REVV. Apart from cars, you can also buy race tracks and other assets using REVV coins. In 2020, the platform witnessed two massive NFT sales—a fraction of the F1 Grand Prix de Monaco (2020) track sold for $223,000 and the Apex Digital Car (Bahrain Edition, 2020) sold for $77,414.
In 2019, Nike got a patent for creating and selling blockchain-based, digital shoes as NFTs. Awaiting formal launch at the time of writing, Cryptokicks will hold token data and attributes of real-world shoes. Apart from being collectibles, these can also be in-game assets.
So much for brands and organizations, what about individuals and influencers? It’s better still or, at least, the same. Entrepreneur and YouTube celebrity, Gary Vaynerchuk, feels that NFTs will be more disruptive than Napster. In early 2021, he participated in Sorare’s Series A funding round, which raised over $50 million. As a platform for digital collectibles, Sorare is very much the football counterpart of NBA Top Shot. Recently, a Christiano Ronaldo card sold for $102,000. Further, the platform has built ties with big clubs like Liverpool, Real Madrid, Bayern Munich, and so on.
A longside games and merchandise, digital artwork has been one of the most prominent use-case domains for NFTs. Indeed, NFTs have substantially widened the horizons for digital artists, both in terms of visibility and liquidity. There was a time when art was difficult to sell and usually had only niche buyers. In this regard, NFTs have been liberating. Not only can budding artists sell their artwork for good value, but more and more people can also participate in the market.
Mike Winkelman, commonly known as Beeple, sold one of his artwork for a whopping $69 million. The piece, ‘Everydays: The First 5000 Days’, was auctioned on Christie’s and marked the beginning of a new era in digital art. Thereafter, some of the other pieces from this series have fetched around $350K on secondary markets. Beeple sold these through a raffle at $7 a-piece, meaning that secondary sellers received a 50,000x premium.
NFT’s success story doesn't end here though. For one, there have been several other interesting, off-beat developments as well. Jack Dorsey tokenized the first-ever tweet, which sold for a staggering $2.9 million. As per the buyer, Sina Estavi, the NFT is tantamount in value to the Mona Lisa.
As we write this article, 554,205 NFTs are in circulation, with a trading volume of over $91 million in the past 30 days. By the time you read this, the numbers will definitely be higher, and the upward trend stronger. Having grown over 2800% in 2020, NFT’s market cap in Q1, 2021, has already seen a 1,785% rise.
Where to buy NFTs?
Having read the metrics in the previous section, you’re most probably wondering about ways of getting into NFTs. After all, it’s best to make hay while the sun shines. And this sun is shining brightly.
So, if you are indeed looking to buy NFTs, this section is for you. There are several platforms, but we will discuss only some of the best in business.
Often called the ‘eBay of NFTs’, OpenSea was launched in 2017 by Alex Atallah, Devin Finer, and Joshua Wu. It’s one of the largest NFT marketplaces, where you can acquire trading cards, in-game merchandise, artworks, and sports collectibles. In March 2021, OpenSea raised $23 million as investments from leaders of the crypto market.
MakersPlace, founded by Dannie Chu, Yash Nelapati, and Ryoma Ito, is an NFT platform for buying and selling digital art. Empowering emerging digital artists, MakersPlace lets users create and sell their NFTs. One can also get artwork signed by the artists themselves, apart from buying rare pieces of art.
In early 2020, Alexei Falin and Alexander Salnikov created Rarible—a platform for selling and buying NFT-based digital images and videos. Onboarding the platform is extremely easy and it also has a wide range of functionalities for NFT makers. On this platform, you can make single-sale or multi-sale NFTs which are meant for one-time and multiple sales respectively. Buyers can also have a portfolio of tokens they own. Further, the platform’s native token, RARI, is used to incentivize usage, apart from facilitating governance.
Created by Ariel Meilich and Esteban Ordano, Decentraland is an Ethereum-powered NFT platform that capitalizes on Virtual Real Estate. The platform makes use of Virtual Reality (VR) and has a dedicated ‘Builder Tool’ for in-game asset development. Decentraland’s native token, MANA, has a current market capitalization of over $1 billion.
NBA Top Shot
The NBA-licensed NFT is among the hottest today while being available only through its own marketplace. On its own, the market capitalization is roughly estimated at $1.1 billion making it a huge ecosystem on its own. To acquire NBA’s best plays called Moments, you’ll first need to buy the native Dapper Labs token. Then, there are two options - you can either go to the marketplace and buy directly from other users or if you’re feeling lucky, you can join a drop. These virtual queues gather well over 200,000-300,000 NBA fans while there are only 10,000 or fewer packs containing moments sold.
Is building your own NFT complex?
Well, it depends. The question to ask, first, is what is the purpose of the intended NFT? Is it meant simply to be a collectible? A simple on-chain representation of an off-chain asset? If so, then it need not be very complex. Platforms like Rarible let you simply upload your document to create NFTs out of them.
However, in this case, simplicity comes at a cost—you have to compromise on the token’s scope. Now, if it’s what you intend, no problem. But there will definitely be cases where tokens need to have more functionalities, and therefore, be much more complex. In fact, as NFTs become a matter of need, rather than of luxury, they’ll get more nuanced and technical.
As more and more businesses start using NFTs, they will need to create custom tokens, and probably, even token standards. Even if we don't stretch things that far, a robust NFT-based in-game asset also needs to have several aspects and functionalities. These are definitely not easy to create and require professional expertise to avoid bugs, performance and security shortcomings, cost optimization, and so on.
On top of that, consider the enterprise-grade applicability of Algorand-powered NFTs. Remember how real estate projects can have special NFTs? Do you think developing these is simple? Not really—a single fault and the entire system could come tumbling down. You’ll need experienced blockchain developers to efficiently and effectively actualize your ideas for the custom NFT.
As a registered development partner for Algorand, Ulam Labs has the adequate resources and skill-sets to create multidimensional NFTs on Algorand. The NFTs that we build are robust and secure, but without losing their agility and scope. In practice, we simplify what is complex for you, despite not compromising on essential aspects like functionality.
If you want to build an NFT with your own marketplace, stay tuned. We’ll be soon releasing a white label solution with endless customization possibilities.