Part I
Introduction
Non-fungible tokens - or NFTs for short – are an increasingly popular asset class. If you’re reading this, you are likely already aware that these tokens are causing quite the commotion in the crypto and non-crypto worlds alike. As a whole, the NFT industry market cap has risen from just US$31 million back in 2017 to a predicted US$315 million by the end of 2020. From this data alone, it's easy to say that NFTs are here – and they’re here to stay. In this beginner’s guide to non-fungible tokens, we explain what NFTs are, the tech behind them, and some of the emerging use cases.
What Does Non-Fungible Mean?
If something is fungible, it is mutually exchangeable. To be clearer, it can be exchanged like-for-like with an identical item. US Dollars and Euros are two examples of fungible assets. Bitcoin is a fungible asset because each bitcoin is interchangeable with another. They are identical in every way. Therefore, if something is non-fungible, it is the opposite. Non-fungible goods are truly unique. A good example of this would be a limited-edition baseball card. There is nothing it can be interchanged with on a like-for-like basis. It has its own distinctive properties, including how it has been preserved, the year it was produced, and its value generally. Non-fungible tokens are unique digital assets. They simply use the blockchain to issue and track immutable digital goods.
What are the benefits of NFTs?
Ownership
NFTs are already transforming our concept of what ownership really means . The features of blockchain technology mean that each NFT token cannot be duplicated, reproduced, or exchanged, and their ownership is immutably recorded.
Transferability
NFTs are instantly transferrable. There are an increasing number of secondary markets where NFTs can be bought and sold quickly and easily.
Authenticity
Since NFTs are based on blockchain technology, they cannot be counterfeited. This promises to overcome a long-standing problem that has plagued the art ticketing, and collectible industries. When you buy expensive physical goods, they often come with a certificate of authenticity. An NFT inherently comes with such a certificate. This gives buyers the confidence that they are getting exactly what they pay for.
A Brief History of NFTs
The early portion of the history of NFTs is really the growth of the blockchain ecosystem beyond Bitcoin. Early protocols built on top of the Bitcoin Network such as Colored Coins, Mastercoin (renamed Omni Protocol) and Counterparty enabled the creation of Non-Fungible “assets” as early as 2012. However, the Counterparty Protocol had the most prolific early editions of NFTs – with a Trading Card Game (TCG) call Shards of Genesis, which launched in 2015.
The Ethereum Network launched in Q3 2015. However, in the early days of the network, there were more significant NFT achievement back on Counterparty – which launched a series of Frog Memes known as Rare Pepes as unique digital assets. As Ethereum matured, a Pepe platform known as Peperium popped up, which was one of the first instances in which the Ethereum Network – rather than Bitcoin – facilitated NFTs.
In 2017, amidst the ICO Boom (for fungible tokens), CryptoKitties launched with unprecedented fanfare on the Ethereum Network. CryptoKitties is a blockchain-based game which allows players to buy, collect, breed, and sell virtual cats. The launch of CryptoKitties also involved the creation of the first major NonFungible Token standard, ERC721.
Since the launch of CryptoKitties, the number of use cases for NFTs has been rising steadily. However, in 2020 we witnessed a significant growth spurt in both asset types and adoption.
More details on the history of NFTs can be found here.
NFT Standards and Adoption
While it is fundamentally possible to create NFTs on nearly any blockchain network, a few have risen to the top in terms of adoption.
Ethereum – the Ethereum network boasts the broadest developer community amongst all blockchains, which also means that it has the broadest adoption for Non-fungible Tokens. Ethereum has two main standards for NFTs, ERC-721 and ERC-1155. We will write more on these standards in a subsequent piece. OpenSea, Rarible, KnownOrigin, and SuperRare are all well-known Ethereum Marketplaces for NFTs.
EOS / WAX – Both the EOS Mainnet and WAX, a platform based on a fork of EOSIO, support Non-Fungible Tokens. WAX has started its own series of marketplaces and games. Garbage Pail Kids and William Shatner both recently launched NFTs on WAX.
Others - TRON, ESO, NEO and NEM all support NFTs today. Additionally, Dapper Labs, the makers of CryptoKitties, have released their own Blockchain: Flow – with a specific focus on NFT use cases.
Why people invest in NFTs?
The simple answer here is: because they’ve proven that they work. The creation of scarce digital assets, with both collectible value and specific utility, has clear value. The surface has barely been scratched when it comes to what can and will be created using this technology.
NFTs are built on platforms which are inherently programmable. This means that these assets can be extended in many ways. As the market matures, the opportunity to collateralize loans with NFTs will arise.
As with all things digital, content is king. As more high-quality assets are tokenized, more adoption will occur.
Where is the most growth?
The Digital Art space has seen the most near-term growth and validation, particularly in 2020. Leading influencers in the blockchain space such as Anthony Pompliano are theorizing that a future digital art market could outperform the existing traditional art one. While there is a long way to go, digital mediums offer artists more opportunities for exposure, more analytics, and obviously the impossibility of counterfeiting works.
Additionally, Decentraland, a project where creators can turn digital plots of land into part of a virtual world, has had great success. Plots of LAND are traded in a virtual real estate market, while individual and corporate creators alike are participating in this new world and economy. Nearly everything in Decentraland exists as a blockchain-based asset – either fungible or non.
Who is currently involved in the space?
Several mainstream brands are beginning to experiment with NFTs alongside their products. For example, Formula 1 signed a licensing agreement with Animoca brands , which enables players to collect NFTs in a game powered by Ethereum. These NFTs include cars, parts, and drivers. One of the gaming industry’s giants, Ubisoft, released its Rabbids tokens this year – its first foray into the space. Samsung’s latest phones come with an Enjin crypto wallet for storing NFTs automatically installed.
The fashion industry has noticed their value too. With counterfeiting a common problem in the industry, Louis Vuitton have decided to combat this by applying NFTs to its products to help verify their authenticity. Turning to the world of sports, in December last year Nike received a patent for NFT-based footwear . This footwear can be “bred” and traded, with there being an option for them to be turned into shoes in the real world. The NFL and the NBA have also joined the party, signing a deal with Panini cards , the NFL and NBA have agreed to have leading American football and basketball players represented by NFT cards.
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Stay tuned for part II, where we dive more into more of the exciting projects, compelling use cases, and applications for NFTs