A Scientific Review: How Nonfungible Tokens Work

The media has been recently buzzing about some digital artworks being sold for immeasurable sums of money. There would be nothing special in these pieces of news but for a small fact: these artworks were sold not through traditional auctions, but as non-fungible tokens with the ownership rights being registered on the blockchain.

Since this technology has grabbed the attention of the mass audience, our team at Numbrs has decided to explain in detail how it works and what perks it provides so as to help our readers stay abreast of the new inventions and probably even make some money with their help.

What are fungible tokens?

Let’s start with a simpler explanation of fungible tokens. These are the tokens that are fully interchangeable, which means that all tokens within one ecosystem have the same value and can be easily changed between one another.

Fiat currencies such as dollars and euros are the best examples of fungible items in the real world. One dollar can always be exchanged for another which makes it a perfect tool for making payments. The same applies to Bitcoin and most of the cryptocurrencies represented in the market today.

What are non-fungible tokens?

The story is different with non-fungible tokens. An NFT registered on the blockchain represents a unique asset with its own set of features that cannot be replaced by any other. Postage stamps are, perhaps, the closest analogy to NFTs in the real world – not the stamps that are sold in packs in the nearest post office, but those unique pieces that are hunted by collectors all over the world.

Combined with the key features of blockchain which are immutability, transparency, and security, this uniqueness opens up numerous possibilities in the digital space.

Token standards

The process of issuing NFTs on the blockchain is different from launching a traditional ICO based on Ethereum or any other platform. The key aspects that developers have to consider refer to the standards of tokens that one must comply with. Some of the most popular standards include:

  • ERC-20: This compilation of rules is one of the most widely used by developers. It is mostly applied when creating fungible tokens that can be used within the Ethereum ecosystem. At the time of writing, Etherscan lists more than 350k tokens that rely on this standard.
  • ERC-721: This standard is designed specifically for the registration of unique assets that cannot be changed between each other, i.e. NFTs. Tokens based on this standard contain information about their unique features in their personalized smart contracts.
  • ERC-1155: One more Ethereum-based standard has the chance to significantly change the NFT industry as a whole. It combines the features of both fungible and non-fungible tokens and contributes to the variety of NFT use cases.
  • TRC-721: TRON enables the creation of NFTs as well with the help of this standard. Combines with the high throughput capabilities of the platform and low transaction fees, it can become a good alternative to slow and costly Ethereum.

Other platforms that have added this functionality into their capabilities include NEO, Hedera Hashgraph, Cosmos, EOS, and many others, but they haven’t reached the same level of popularity as Ethereum yet. If you plan to launch your own NFT, it’s worth spending some time investigating these standards as well so as to find the one that fits your goals best.

Some use cases of NFTs

Perhaps, one of the best features that NFTs provide is the possibility to prove the ownership of a specific object in a completely transparent and immutable way. With that said, the most popular use cases of non-fungible tokens include the following options.

Collectibles and gaming elements

The industry of online games has become one of the first ones to grapes the benefits provided by the blockchain. Following the success of the game CryptoKitties that became a real sensation in 2017, a whole suite of online games has emerged enabling players to obtain and sell unique objects in the form of NFTs.

Licenses and certificates

Educational companies that provide their graduates with diplomas and certificates registered on the blockchain can help future employers to verify the authenticity of these documents.

Art

Content creators can register their works as NFTs to protect themselves from plagiarism regardless of the type of art they belong to. Music bands can register their copyrights on the blockchain and distribute licenses in the form of NFTs across their fans. One of the most outstanding pieces of news in this area refers to the digital artist Beeple who sold his collage for almost $70k having verified its originality on the blockchain.

Fractional ownership of real objects

Some objects such as real estate, expensive cars, or rare art pieces could be a great addition to the investment portfolio but for their high costs. Not every investor has a sufficient sum at hand to purchase Mona Lisa or an 18th-century mansion. Registering such objects on blockchain gives a possibility to distribute them in fractions thanks to NFT’s unlimited divisibility.

CryptoKitties: this blockchain-based game allows ‘breeding’ unique pets on blockchain and make real money by selling them on the built-in marketplace

The use cases mentioned above are just a small part of the potential that NFTs provide. As of now, the technology is mostly implemented to the objects that are accessible on the web since it provides the easiest way to verify the authenticity of digital pieces. There is yet no widely acknowledged technology that would help blockchain get as easily connected to the real world.

Still, the industry doesn’t stand still as the best minds struggle to expand its capabilities. Thus, Chainlink has recently declared its plans to build an off-chain oracle network that would gather data from the second-layer solutions which is definitely a big step in the right direction.

Is the hype around NFTs justified?

Just like blockchain in general, NFTs have certainly made some aspects of our daily economy more efficient. The fees one has to pay for buying or selling unique assets on blockchain are way lower than traditional financial institutions can offer, as well as the time needed to register the deals. However, the crypto community has been aware of all these features for a long while already.

The big headlines with big sums of money have surely contributed to the hype around this technology and brought the overall interest to a new level. But unlike many other topics that remain hot for a pretty short period of time, this one has all the chances to stay as the adoption of blockchain technology spikes with every new bullrun.

Early bitcoin holders have significantly increased their wealth over the past few years. Who knows, may investing in collectibles and art pieces may bring forth new crypto millionaires in a few years as well?