Introduction

The digital age has ushered with cryptocurrencies which became an indispensable part of the modern economy. This new world, causing excitement and uncertainty in people’s minds, pushes them to research and learn in depth. Non-fungible tokens, or NFTs, which came to the fore with cryptocurrencies, have become the focus of this curiosity. People are no longer content with just skimming the surface of this new universe; they aim to take a deep dive into the complex and intriguing world of NFTs.

However, before embarking on this exploration journey, many people want to be sure about the reliability, usability, value, and future potential of this technology. How exactly do NFTs work, and how do they derive their value? Are NFTs reliable investments, and can they genuinely reshape digital ownership? This article has been written specifically to satisfy this curiosity and prepare readers for the world of NFTs. 

Blockchain and Cryptocurrency: The Backbone of NFTs

Stepping into this new era, it is essential first to familiarize yourself with the foundational concepts. However, to understand what NFTs are, you first need to grasp the basics of blockchain and cryptocurrencies.

 

Blockchain: The Foundation of Cryptocurrencies and NFTs

 

In simple terms, a blockchain is a decentralized digital ledger that securely records transactions across many computers. It is the foundation of both cryptocurrencies and NFTs.

 

 

For cryptocurrencies like Bitcoin and Ethereum, the blockchain acts as a transparent ledger, tracking the creation and transactions of these digital currencies. It prevents double-spending and allows traceability of a coin’s history.

 

 

In the context of NFTs, the blockchain plays a key role in recording the ownership and transaction history of each NFT. More importantly, it stores information that differentiates each NFT, which could range from metadata of a digital artwork to specifics of a real estate contract.

 

 

Therefore, understanding blockchain is vital, as it provides the transparent, secure framework that enables the creation, ownership, and transaction of unique digital items like NFTs.

 

 

Understanding NFTs: What Does ‘Token’ Really Mean?

 

Cryptocurrencies, like Bitcoin and Ethereum, are digital currencies operating independently of central banks. They’re secure, primarily blockchain-based, and while they were initially developed as a medium of exchange, they’ve grown into popular investment assets.

 

These cryptocurrencies are fungible, meaning each unit (Token or Coin) is identical to every other unit. It’s like cash in the digital world, where every dollar has the same value. But the term ‘non-fungible’ introduces a contrasting concept. Something that is non-fungible is unique and can’t be replaced with something else, and this unique property is what leads us to another intriguing concept derived from the same technology – the non-fungible tokens, or NFTs.

 

While cryptocurrencies have created a revolution of their own, there’s another intriguing concept derived from the same technology – the non-fungible tokens or short NFTs. Let’s now delve into understanding these unique digital assets.

 

Introducing Non-Fungible Tokens (NFTs)

Now that you have a basic understanding of blockchain, cryptocurrency, and the concept of fungibility, you can delve into non-fungible tokens or NFTs. Simply put, NFTs are digital assets representing real-world objects like art, music,  in-game items, and videos. They can also represent contracts for tangible assets such as real estate. For instance, by holding an NFT, you could technically own a house, with the NFT serving as proof of ownership in the digital world. 

 

 

NFTs are usually bought and sold online with cryptocurrencies. As of May 2023, Ethereum network dominates the NFT trading volume with an 80% market share but in terms of NFT sales, Ethereum’s share is only 5.7%. In contrast, Polygon has emerged as a strong player, capturing 27% of NFT sales and its success can be attributed to its scalability and low-cost transactions.

 

 

Among the NFT marketplaces, Blur maintains a 65% market share and generated $442 million in sales, while OpenSea holds a 27% market share with $183 million in revenue. However, OpenSea has a larger number of traders at 377,087 compared to Blur’s 36,673, indicating a significant difference in user base.

NFTs are typically encoded with the ERC-721 standard, a unique characteristic of Ethereum’s blockchain technology, which enables the creation of these non-fungible tokens. Simply put, ERC-721 is a rule that Ethereum follows to make sure each NFT is one-of-a-kind. This aspect distinguishes NFTs from fungible tokens like Bitcoin or Ethereum itself, which are interchangeable and don’t possess the unique attributes of NFTs.

 

 

This means NFTs can represent ownership over a unique item or piece of content, and this is where it gets exciting, as this opens up numerous possibilities in art, collectibles, real estate, and more.

 

 

However, an essential aspect to remember about NFTs is that the specifics of what they represent are defined in a smart contract. This is an immutable digital agreement that is stored on the blockchain. The smart contract details what owning the NFT means – whether it’s ownership of a physical item, a digital item, specific rights to a piece of content, or something else.

 

 

For instance, you might hold an NFT tied to a Van Gogh painting, but that doesn’t mean you own the actual painting itself. What you own is defined in the smart contract linked to that NFT. The contract may specify that you own the physical painting, a digital representation of it, or some rights related to it. This contract can’t be changed once it’s created, providing a measure of security and certainty.

 

 

This contract system becomes even more important when considering NFT collections, such as digital collectible cards. In this scenario, a single smart contract typically governs the entire collection, specifying the attributes and ownership details for each card within the set.

 

Demystifying NFTs: Uniqueness and Value Proposition

 

The core appeal of NFTs is their distinctiveness and the absolute ownership they offer. This distinctiveness is conferred by the information or metadata contained within them. This metadata makes each NFT different from the others. For instance, an NFT representing a digital artwork would contain data about the artwork, the artist, its creation date, and its owner. This data is permanently inscribed within the NFT and can’t be modified, ensuring that each token is truly unique.

 

 

Moreover, NFTs enable verifiable ownership and provenance. Due to the transparency and decentralized nature of the blockchain, the ownership and transaction history of each NFT can be traced back to its origin, establishing the authenticity of the digital asset. This characteristic solves a significant issue in the digital art world, where artworks can be easily copied and replicated. With NFTs, digital artists can prove rightful ownership and monetize their creations.

 

 

The capacity to convert any entity, such as artwork, collectibles, or even real estate, into a unique digital asset that possesses its own identity, history, and value proposition is a groundbreaking development. It indicates that value can now be generated, owned, and transferred in ways that are just beginning to be explored. As technology advances, the potential applications of NFTs are only bound by our innovation.

 

Demystifying NFTs: Uniqueness and Value Proposition

 

So far, we have provided a general overview of NFTs, but there is more. Next week, in our post titled ‘Journey to the Depths of NFTs’, we will take a more in-depth look at the various use cases, examples, and applications of NFTs. These will not only help us understand the various potentials of NFTs and how they are applied but will also help us better grasp the value and importance of this technology. Join us in diving deeper into this exciting intersection of technology and art and stay tuned for the next chapter.