Non-fungible Tokens (NFTs) have been gaining popularity. Here is a detailed explanation of important terms, concepts, and six key properties of the technology.
In this article, you will learn more about Non-Fungible Tokens, or NFT’s for short. We will discuss what NFT’s are, how they are created, how they are being used now, and how they can be used in the future. Detailed Terms and definitions of types of NFTs and use-cases have also been added below.
Important NFT terms and concepts include Immutability Standardization, Interoperability, Tradeability, Liquidity, Scarcity, Programmability, and Authenticity, and more. Understanding these terms will help you with the overall concept of what an NFT is and is NOT!
By the end of this article, you will begin to understand the vast and varied potential of non-fungible tokens and why they will undoubtedly become pervasive in our modern-day lives in the not-so-distant future.
Table of Contents – Explaining NFTs Concepts, Pillars and Properties
- Subjective vs Objective Value
- What is a market? The definition of a market is twofold.
- Fungible vs Non-Fungible Assets
- Definition of Tokens
- Pillar: Decentralization
- Pillar: Transparency
- Pillar: Immutability
- Property: Standardization
- Property: Interoperability
- Property: Tradeability
- Property: Liquidity
- Property: Scarcity
- Property: Programmability
- More thoughts about NFTs …
- Bullish Aspects of NFTs and Markets.
- Bearish Aspects of NFTs and Markets.
- One More Important NFT Concept
- Where Can I Purchase Non-Fungible Tokens?
- TOP TEN CRYPTO GAMES!
- Conclusion
Explaining NFT Terms and Concepts
There are key terms and concepts one must understand about NFT’s to really comprehend what there are, the uses and why we should be excited about NFT technology in the future.
Subjective vs Objective Value
Subjective Versus Objective Value – We can all pretty much agree that the air we breathe and having access to drinking water is inherently important. Air to breathe and water to drink has objective value, for the most part, meaning someone’s belief, perception, or preferences don’t really add or take away from the overall importance or value attributed to air or water. Subjective value is the idea that an item’s value to a person is dependent on that person’s beliefs, perceptions, or preferences.
For example, let’s say you have a roundtrip airplane ticket to South Africa that costs $1,200 US dollars departing tomorrow and coming back two weeks from now. If you can’t drop everything you have to go tomorrow, or if you don’t have a passport, or if you do not want to sit in an airplane for a 26-hour flight to South Africa, then the ticket does not make sense to you. Now, assuming you can and want to hop on a plane and will sit for a 26-hour flight to South Africa, and you had to sit in a middle seat, versus an aisle or window seat, this may influence your perception of the ticket’s value. Some people prefer aisle seats, while other people prefer a window seat, the location of the seat adds another subjective value layer to the ticket. Breaking down the subjective value layers of the airplane ticket to South Africa tomorrow, you’ve got the mere fact that it’s an airplane ticket, the airline, the destination, the dates of travel, and seat location. All these factors make the airplane ticket an item with subjective value. Regardless of the $1,200 cost for the ticket, everyone would place a different value on it due to the abovementioned factors.
What is a market? The definition of a market is twofold.
1. A market is a place where people can physically go, or digitally access, to basically buy, sell, exchange, or trade goods and/or services. A market can be a physical place like a grocery store, the mall, or a car dealership, or it can be a virtual environment like eBay, the Apple app store, or even a cryptocurrency exchange like Crypto.com or Coinbase.
2. The term “market” can be used to describe the existence of people who have a desire to buy, sell, exchange, or trade a specific type of product or service. This use of the term market is more abstract to describe, for example, the housing market. Believe it or not, there is a collection of people out there that wish to buy and sell houses. You can also be more specific like the Chicago housing market, or even more specifically, the Chicago condo market. People also use the term to ask if a market exists, which simply means are there enough people out there who would want to buy, sell, exchange, or trade a particular good, service, information, or currency? For example, when creating a new good or service that doesn’t currently exist, sometimes people perform market testing, which is just seeing if there are people that would want to buy the good or service, how many people there are, how much they’re willing to spend, etc. Now that we’ve basically translated these deliberately complicated finance terms, subjective value, and markets, into concepts we were already comfortable and familiar with, that being: different people are willing to spend different amounts of money on all kinds of different things they want to buy. Simple enough, right? Now, let’s learn something else we already know but didn’t realize it.
Fungible vs Non-Fungible Assets
First and foremost: What is an asset? An asset is a fancy finance term that just means something useful or valuable. It can be something physical like gold, it can be something digital like bitcoin, it can be something abstract like expertise, it can be a financial instrument like a retirement plan, and it can be anything that helps you generate income, like a computer or cell phone, for example. Next, let’s tackle the difference between fungible assets and non-fungible assets. Fungibility describes an asset’s ability to be evenly swapped with another asset of the same type. A fungible asset is something that is interchangeable.
For example, a $100 dollar bill is fungible because, if you have a $100 dollar bill, and your best friend also has a $100 dollar bill, you both could interchange the bills, or you give your friend your $100 bill and your friend gives you his $100 bill, and the value doesn’t change.
Ethereum and bitcoin are both fungible assets as well. One whole bitcoin is no different from another whole bitcoin. The same goes for Ethereum. One Ethereum is no different than another Ethereum, as the value is equal.
A non-fungible asset is something that is not interchangeable and not divisible for the most part. For example, let’s say you have a pet dog, and your friend has a pet dog, and you both swapped dogs. You can see how that transaction isn’t an equal swap of value. Even if you both had the same exact type of dog and they looked the same, each of the dogs harbors their own unique personality, memories, and abilities.
Examples of non-fungible assets are houses, used cars, and baseball cards like we looked at early. You can see how these items can’t exactly be divided evenly and retain their value like you can’t just buy half of a house, or 30% of a car, and 1/10th of a baseball card.
And it’s important to note that there are semi-fungible assets as well. An example of a semi-fungible asset is an airplane ticket. Each ticket for the plane, although look and function the same, represents a unique seat on the plane, like the specific row and aisle, versus middle, versus window seat. A concert ticket is also a semi-fungible token, as it dictates which seat you will be in for the event.
Definition of Tokens
A token is something physical or digital that can be exchanged for or represent a good, service, or another form of value or utility. In cryptocurrency and blockchain technology, tokens are representative of value like a stake, voting right, a toll, a currency, a store of value, it could represent ownership of something, or it could be multifunctional within an ecosystem. A token doesn’t have value in and of itself, the value comes from the asset it represents. Like a gift card would be an example of a token. The actual plastic card in and of itself isn’t valuable, but the card does represent the value you can exchange for whatever terms are dictated by the gift card. And when we create a token that represents a good, a service, or any of the forms of value, it’s called tokenization.
We have now covered three key concepts that strengthen your understanding of NFTs: subjective value, non-fungibility, and tokens.
Next, let’s talk about tokenization on blockchain technology.
So, what is blockchain? In its simplest form, blockchain refers to a network of computers storing records of data.
There are 3 pillars of blockchain that make it unique: Decentralization, Transparency, and Immutability. Let’s break down these 3 pillars.
Explaining NFTs Three Important Pillars
Pillar: Decentralization
The word decentralization regarding blockchain is twofold. One, it means that the data is recorded and stored on multiple devices in multiple locations around the world, as opposed to one central place. And two, decentralization also means that no one person, company, government, authority, or entity controls the data record and storage process. So instead of traditional centralized entities like the IRS, JP Morgan, or MIT recording, storing, managing, and controlling their data by following their own protocols, deciding which servers to use, where the servers are located, and using their own proprietary software and security systems to protect their data, blockchain allows for decentralized record-keeping where data is recorded, stored, and managed on a network of computers with open-source software around the world. Any changes to the blockchain protocol go through a consensus process that no one person or entity has control over. So that is the essence of the “decentralization” pillar.
Pillar: Transparency
The word transparency regarding blockchain relates to the way in which transactions are recorded on a ledger that is available for everyone to see and that is saved on a network of computers around the world, making the data impossible to change or alter. The best way to see the value of transparency in data recording, storage, and management is by comparing these two scenarios: Currently, common citizens of the United States are not privy to where and how every tax dollar is spent by the United States government. We just must take the government’s word for it. And even if the government had to show their records, it would be very easy for them to create, forge, or manipulate any data they chose to share with us, since they control their own data. Now you can see how that scenario is not transparent and not exactly trustworthy. So, let’s imagine if everyone in the United States had the ability to see a live, running ledger of where every single tax dollar was spent by the United States government at any moment in time. Scary thought, right? Basically, all US citizens could see a full disclosure of how our government is managing our money. And in this scenario, there is more trust and transparency, the 2nd pillar of blockchain technology.
Pillar: Immutability
Immutability simply means that the data recorded and stored on the blockchain cannot be changed, forged, or altered. And this is achieved through cryptography and blockchain hashing processes. If you would like to listen to a more in-depth video explaining what blockchain is and why it was developed, please check out my blockchain guide by clicking on this link. So, to summarize the 3 pillars of blockchain technology: Blockchain’s recording and storage protocols make it such that once new data is verified, it is unmodifiable, it’s distributed across a vast network of computers around the world so it’s hard to destroy, and no one person or entity controls the data or network, creating a transparent environment.
Now that you are familiar with some of blockchain’s important features, let’s talk about the tokenization of digital assets on blockchain technology in the form of Non-Fungible Tokens.
What is a non-fungible token or NFT? A non-fungible token is simply a representation of a unique digital asset that cannot be equally swapped or traded for another NFT of the same type. So non-fungible tokens can represent digital art, a ticket to an event, an in-game item, property in a virtual world, or even a real-world asset like a deed or title to actual land in the physical world. Important to pay attention because this is where the eureka moment will start to sneak up on you. Because you will see how blockchain adds unique properties to digital assets by giving people ownership, management permissions, and transferability on a decentralized, transparent, and immutable platform.
Thinking back to our baseball card bit, currently, in the game Fortnite, people can buy skins that change the way their players look, and what really blows my mind is these skins literally only change the way the digital character in the game looks I’m pretty sure; it doesn’t give the character any extra attributes or anything. Back in the day when people played a lot of video games, when you earned, won, or bought something that changed the way your character looked, typically it also came with some abilities or powers or something that gave you an edge in the game. But now people are just spending money to change their characters. if you buy a Fortnite skin and then want to turn around and sell it on eBay or something like a baseball card, you’ll see how there’s a challenge with transferring that digital asset from one person to another.
Explaining Immutability’s Six Important Properties
These 6 important properties are 1. Standardization, 2. Interoperability, 3. Tradeability, 4. Liquidity, 5. Scarcity, 6. Programmability, and Authenticity.
Blockchain technology will soon provide a coordination layer that will impart 6 important properties onto digital assets all predicated on immutability.
So now, let’s break down the 6 key properties blockchain lends to digital assets and their implications for future use-cases.
1. Standardization
Traditional digital assets currently don’t have a single foundation they can all exist on. For example, electronic tickets reside on the ticket master’s platform, while Fortnite skins reside on Fortnite’s platform, and so you have all these separate places where digital assets exist. So, by tokenizing digital assets on the blockchain, users can create non-fungible tokens with set standards and uniformity. And you can think of these standards like jpeg versus .png formats for images, or another example of a standard is the HTTP protocol computers use to communicate with each other when we access websites on the internet. So blockchain allows for standardization in the creation of NFT’s, which ensures all the aspects of NFT’s like ownership, transfers, access, and control are unified on one common system. To better understand this, imagine you buy some virtual property in Decentraland and then you buy a digital house on OpenSea.io as well as some digital artwork. These three separate non-fungible tokens on one unified network can interoperate with each other, allowing you to put the house on the property you bought and put the painting inside the house. And if Fortnite adopts the technology, you would then theoretically be able to put your fancy Fortnite skin in the closet of your digital house, or you can even leave it on the floor if you’re a dirty slob.
Do you see how these standards allow developers to build applications using the same code? Essentially, building everything on one decentralized platform, which the most common one now is the Ethereum network. There are three standards that dictate the tokenization process of NFT’s on the Ethereum blockchain: ERC-721, ERC-998, and ERC-1155. First, what does ERC means? ERC is simply an acronym that stands for “Ethereum Request for Comments.” And it is like BIP, which stands for “bitcoin improvement proposal.” Since Ethereum and bitcoin are blockchain-based technologies, there is no one person or entity that oversees deciding what new features to add, changes to make, or fixes to implement to the protocols. ERC is a process that was created as a way for people to contribute information about Ethereum or introduce new features to the Ethereum network. ERCs, or Ethereum requests for comments, are basically how developers can propose improvements to the network. The numbers 721, 998, and 115 represent the unique ID number of those proposals.
next, what is ERC-721? ERC-721 was pioneered in January 2018 by Cryptokitties, which is a game where people can trade and breed digital cats, where each cat is represented by a non-fungible token. The 721 standard allows for the creation of tokens with different values, basically non-fungible assets as mentioned earlier. Before the standard, people typically created tokens that were all equal or fungible, like Ethereum for example. You can swap one Ethereum for any other Ethereum and they’re all the same. However, since the implementation of ERC-721, developers can now deploy tokens with differing values and attributes like descriptions, quantity available, type, all from the same smart contract from which an owner can be assigned, and then the token can be transferred between users all in the same ecosystem.
Next, what is ERC-998? Imagine we have a video game character with different clothing items, weapons, and accessories, and each one of those things, like the shirt, the sword, the hat, all these items are represented by separate ERC-721 tokens. Let’s say this character in its visual totality is made up of 50 separate non-fungible tokens. If someone wanted to sell their character to someone, they would have to do 50 separate transactions to send it to someone, which would incur more transactions fees, is cumbersome, and not ideal. ERC-998 was developed and implemented to mitigate this scenario by allowing bundles of separate ERC-721 tokens to be bought and sold in one transaction. Now it is possible, and you no longer need to sell each item individually!
And finally, there is the ERC-1155 standard, which was pioneered by Enjin, an Ethereum-based platform and ecosystem developers can build applications on. This standard allows for the deployment of both fungible and non-fungible tokens from the same contract. Imagine you develop a game where every player has a pistol, and the pistols are all equal and the same. However, also within the game, there are limited unique weapons players can earn, win, buy, or trade. So maybe only 10 laser cannons exist in the entire game, and maybe there’s only one magic laser sword in the entire game. This was all made possible with the implementation of the ERC-1155 standard. Now you can see how standardization works and why it’s an important property blockchain provides for the NFT ecosystem at large.
This brings us to the next key property: Interoperability.
2. Interoperability
Interoperability just means that since all the non-fungible tokens use the same standards and operate on the same Ethereum platform, we don’t run into the issue I mentioned earlier where we have digital tickets for events on Ticket Master’s platform, while we have Fortnite skins on Fortnite’s separate platform. The interoperability property blockchain provides NFT’s allows them to be easily moved across multiple ecosystems, so when someone creates an NFT, it’s immediately viewable and tradeable on all NFT marketplaces, in virtual worlds, and other applications due to standardization of the data recorded on the blockchain.
And interoperability allowing free trade on open markets takes us to the next key property blockchain lends to NFT’s, which is Tradability.
3. Tradeability
Across the entire ecosystem, users can now create and launch NFTs that are instantly displayed on various marketplaces. On these marketplaces, people can trade, purchase, sell, buy, auction, or purchase NFT’s for cryptocurrency. It allows us to move from a closed, centralized ecosystem like eBay or Fortnite to a true, open, free-market economy. Having the ability to create, launch, and trade NFTs across the entire blockchain ecosystem will revolutionize the game development industry because virtually anyone can provide creative content for the games, so the initial game developers won’t be the only ones to contribute.
Instant trade ability brings us to the next property blockchain brings to NFT’s table: liquidity.
4. Liquidity
Fast and efficient tradeability on marketplaces will lead to high liquidity.
Liquidity is just a fancy finance term that describes the level of activity in a market, or how many people are buying and selling in the market and at what frequency. High liquidity means items in the marketplace are bought and sold frequently and fast before much price change occurs. An example of an asset with high liquidity would be bitcoin, as when you buy or sell bitcoin at market price, the transaction happens instantly because there are a lot of buyers, as well as sellers, in the market. You can sell your bitcoin for cash instantly pretty much on exchanges with high liquidity like Crypto.com or Coinbase. An example of an asset with low liquidity is a house. If you put your house up for sale, it might be days, weeks, months, or years until you are able to convert it into cash. Even if there are a lot of buyers in your housing market, it’s still not as fast to convert the asset to cash like with the tap of a finger on your phone with bitcoin. The fast and efficient trade ability of NFT’s thanks to the nature of blockchain will lead to higher liquidity in the NFT marketplaces. Another property key property is immutability. We mentioned earlier how immutability is a pillar of blockchain technology, how once data is verified and recorded to the blockchain ledger, the information cannot be changed.
The next key property blockchain brings to NFT’s table: Scarcity.
5. Scarcity is One of Kind Characteristics
Immutability is key to ensuring the authenticity of digital assets, as well as proving the scarcity of digital assets.
So, people know in your game that there is only one magic laser sword – no one can go back and change the quantity to 100 or something similar thanks to the immutability property.
The final property that blockchain brings to the table that makes NFT’s so valuable is programmability.
6. Programmability
Non-fungible tokens are fully programmable meaning that they are capable of immense complexity like forging, crafting, redeeming, random generation, and much more. The sky’s the limit, really. Now that we understand how blockchain technology adds unique, value-driving properties to non-fungible tokens, let’s talk about how NFT’s could be used in the future across multiple industries and their implications.
More thoughts about NFTs …
We are already seeing art, collectibles, domains, gaming, and virtual worlds. Staying mindful of NFTs’ core properties, that being, verifiable digital scarcity, ownership, indivisibility, interoperability, and transferability, NFTs can be used in a myriad of different ways. As mentioned earlier, the gaming industry will be drastically affected, as NFTs will make gaming more tangible and rewarding, while also fostering new economies and markets within the games themselves, allowing players to generate income from time spent in the game as well as creating and selling NFTs that enrich the game.
Game developers will start creating new incentive systems for players, which will spark value creation for game developers, publishers, and players alike. Filmmakers and musicians could register their work on the blockchain in the form of an NFT to protect it against copyright infringement, or to manage performance rights which would remove the need for intermediaries like agents and managers. Funds would go directly to the rightful creators of the content without third parties taking a share.
Since NFT’s are completely programmable, people can create non-fungible tokens that contain cryptocurrencies and digital files.
Bullish aspects of NFTs and markets.
Bullish Aspect 1: NFTs can be traded and redeemable for real-world assets. For example, if you check out the. Unisocks Exchange, a total of 315 SOCKS NFTs were created and circulated. If you bought a SOCKS NFT, you could either redeem it for a pair of socks, or trade it on the market, or continue to hold it while the price, ideally appreciates and sell or redeem when you’re ready.
Bullish Aspect 2. Almost anything in the real world can be tokenized as collectibles or similar like athletes, celebrities, and fictional characters.
Bullish Aspect 3. Proof of ownership of real-world collectibles can be easily stored or transferred and impossible to be forged.
Bullish Aspect 4. NFTs could also represent official documentation like birth certificates, academic credentials, warranties, identities, and DNA data.
Bullish Aspect 5. Depending on who created an NFT and all the previous owners, we could see value derive from an NFTs provenance.
Bullish Aspect 6. The future of crypto games in 2021: market and social trends. 2.6 billion people play video games worldwide. They’re tech-savvy people who are always looking for new ways to have fun. As a result, it should come as no surprise that many of them have jumped on the crypto bandwagon.
Bullish Aspect 7. Whatever the metaverse is, it isn’t just virtual reality, or augmented reality, or blockchain, or NFT, or virtual worlds. People are very much looking at it as a ‘Ready Player One’ thing or a virtual reality experience. Basically, it can possibly be huge!
Bullish Aspect 8. Sport NFTs are digital collectibles and trading cards of your favorite players in any sport you can imagine. NFTs in sports will be a space to follow for avid sports fans.
Like if Elon Musk created an NFT and maybe at some point in its ownership history, Vitalik Buterin owned it at some point could have some subjective value to someone. The mere concept of ownership will change drastically as NFTs make it possible to own a real-world asset that could be thousands of miles away.
Bullish Aspect 9. And undoubtedly NFTs will absolutely introduce new people to cryptocurrency and help drive the adoption of blockchain technology. Yes, these are. super exciting times we are living in, however, it won’t happen overnight.
Bearish aspects of NFTs and markets.
Bearish Aspect 1. Building decentralized applications for NFTs is challenging and time-consuming.
Bearish Aspect 2. That being the case, we do see in current applications that the user experience and user interface are not simple enough for people unfamiliar with blockchain to just jump in and start using easily.
Bearish Aspect 3. Some NFTs that are created and listed on marketplaces could experience something like the Defi food craze, where we have a YAM that went over the moon and hours later fell flat on its face hours later.
Bearish Aspect 4. So some buyers that FOMO (fear of missing out) into an emerging NFT market could be stuck with a worthless NFT when the hype fizzles out.
Bearish Aspect 5. Also, most NFT projects aren’t retaining long-term users.
Bearish Aspect 6. And since there aren’t a lot of users in NFTs right now, a lack of liquidity could stifle the growth of the NFT ecosystem.
Bearish Aspect 7. Also, although when an NFT is deployed, it’s recorded on the blockchain, it doesn’t mean users will have access to it forever.
Important Concept; Not all NFT projects will hold value, buyers must apply enough due diligence prior to buying NFTs.
One More Important NFT Concept
Not all NFT projects will hold value, buyers must apply sufficient due diligence prior to buying NFTs.
Where Can I purchase Non-Fungible Tokens?
The most popular platforms to buy NFT’s;
Opensea
WAX
Rarible
Mintable
Nifty Gateway
and even eBay
TOP TEN CRYPTO GAMES!
Alien Worlds (Metaverse)
Axie Infinity (Blockchain Game)
Battle Racers (Virtual Game)
Cryptokitties (Blockchain Game)
Evolution Land (Virtual Game)
F1 Delta Time(Collectibles)
Gods Unchained (Collectible Digital Card Trading Game)
Sorare (Nft Game)
Splinterlands (Play 2 Earn)
The Sandbox (Metaverse)
Conclusion
Once the tech has more time to develop, we will start to see a lot of progress and growth in the NFT space.
If you’re reading this article right now, you are still early to this new and exciting blockchain use case. I hope you found this video guide about what NFTs are helpful.
Find Original Published Content. HERE
Questions?
Are you beginning to understand the prospects of owning and playing with NFTs?
Do you own any NFTs right now?
What other crypto industry topics are you interested in learning more about?
