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What Are NFTs and Why They Matter?

Brenda Kanana by Brenda Kanana
3 months ago
in Crypto Education
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What Are NFTs and Why They Matter
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Non-fungible tokens (NFTs)  have revolutionized ownership of digital assets. In contrast to other decentralized assets like Bitcoin or Ethereum, NFTs are distinctive and not separable into individual tokens. Each of the NFTs is a separate form of a digital asset that cannot be easily traded against the other one.

NFTs, which currently dominate the Ethereum blockchain, offer immutable proof of ownership and originality. This makes them ideal for art, collectibles, music, gaming stuff, and even real-world items tokenized in the digital world.

NFTs Explained Simply

An NFT is a form of digital asset that is stored on a blockchain technology platform. Every token has different attributes or properties that can distinguish it from any other token in the system. This is like an electronic mark of quality. Whereas digital images can be replicated online, ownership of the NFT attached to the file is reserved solely for a single wallet address.

Smart contracts allow for the execution of NFTs. These link contracts are embedded in the blockchain to ensure the rules governing ownership, resale, royalties, or transfer. Creators and artists employ them to keep ownership and receive a percentage each time the NFT transfers ownership.

The majority of NFTs are built on the Ethereum platform employing the ERC-721 and ERC-1155 protocols. These frameworks define how NFTs operate and integrate with wallets, marketplaces, and apps.

NFT Use Cases Are Expanding Beyond Art

NFTs were primarily recognized through digital arts and profile picture collections, particularly CryptoPunks and Bored Ape Yacht Club. However, their use has transcended the art world and expanded into further horizons. Now, musicians produce these exclusive albums, and gaming companies tokenize weapons, armor, or avatars. 

Two examples of game NFTs are Decentraland wearables and Axie infinity, and they allow players to own, trade or upgrade items, which are a part of the game and are recorded in the blockchain. Virtual real estate has also been expanding as a category over the years. 

On platforms like The Sandbox and Decentraland, users can purchase plots of land as NFTs and develop or sell them. These virtual lands are bought and expanded as actual pieces of land, indicating the growing popularity of virtual real estate.

Identity-linked NFTs are staging a comeback. Through the tokenization of personal identifiers, the users of the system need not rely on such centralized systems to verify their credentials, which enhances the issues of privacy and control. In the same way, utility NFTs are revolutionizing membership and event ticketing through the granting of access to restricted services, products, or VIP experiences.

NFT interactivity has also evolved. Static NFTs, such as the popular CryptoPunks, cannot change, while traditional NFTs are dynamic and depend on real-time data. Another example of implementing tokens is Chainlink’s VRF tokens which involve an aspect of randomness and World of Ether’s characters change in response to player actions. Most of the NFTs, such as those in Decentraland, are usable and can be modified and developed in real-time, which connects the digital world with experiential ownership.

Image : CryptoPunks

NFT Classification Goes Beyond Appearance

NFTs can be categorized based on some technical and essential features. On the technical side, the Ethereum network is home to most Non-Fungible Token-related products: ERC-721 and ERC-1155. ERC-721 supports variable tokens for assets that will be unique like Cryptokitties or digital artworks, where each token is unique. While ERC-721 creates more efficiency for non-fungible tokens, ERC-1155 sets up the efficient usage of unique and semi-unique tokens in one contract, which is very convenient for using it in gaming.

Other blockchains such as Flow, BNB Smart Chain, and Polkadot have also developed their standards for lowering gas fees to encourage more usage. Flow is also developed by Dapper Labs and NBA Top Shot, as a high-speed NFT processing focused on mainstream recovery.

Licensing also has its part to play for NFTs. Open-license NFTs, as seen in most NFT-based projects such as Bored Ape Yacht Club, enable their holders to have almost limitless branding opportunities and inspired secondary projects. The ownership of rights is retained with the copyright holder and usage is limited in the case of any closed license NFTs like NBA Top Shot. Partial licenses are justified to achieve the delicate balance that will permit certain forms of use while leaving some degree of exclusivity to the author.

NFTs Are Powering Real-World Transactions and Ownership

NFTs are no longer just digital art. They are now used for broader purposes that are classifiable under the economic and utilities, housing, insurance, and debts.

In real estate, tokenization helps transactions to be transparent. They have also included NFT-backed homes where buyers are provided with deeds as NFTs through platforms such as Propy. These tokens contain the smart contract that holds ownership details and records, transfer procedures, and past transactions on transactions in the blockchain.

Fractional ownership is another emerging segment. For instance, art pieces, houses, or even luxury yachts can be tokenized and divided into various NFTs in which an individual investor can get a fragment instead of the entire asset. This makes luxury investments easier for a wider population to achieve. Masterworks are applying NFT in the investment of works of art, while RealT is applying it in the fractional sales of properties.

NFTs can also be applied to car ownership and title registration as well. Some companies, for instance, CarForCoin, are already in the process of adopting NFTs that denote luxury automobiles. Although paper titles remain compulsory, these digital counterparts further promote effectiveness and create the possibility of the digital transfer of car ownership.

In the field of finance, NFTs are now employed to secure loans. Services like NFTfi and Pine loans target borrowing money with NFTs as collateral. Tokenized borrowers deposit tokens that are collateral, while tokenized lenders supply funds for loans. If the borrower is unable to pay as agreed or defaults, the property is automatically assigned to the lender so that the loan is safe.

NFTs also open new possibilities for insurance. There are now digital insurance platforms that operate on the blockchain, such as Etherisc, where policies can be uploaded as NFTs. These smart policies include control of claim payouts, fraud prevention, and promoting the level of transparency. Although there are still some barriers to regulation, it is an efficient solution to replace traditional models.

Even customer loyalty is evolving. Industry giants Taco Bell and Nike have used NFT to offer their customers reward programs. These NFTs provide customers with early drops, limited edition products or sneak peeks, and other similar services. Venly enables small businesses to onboard their audiences and fans while developing exclusive NFTs for the communities.

NFT History Shows Boom, Bust, and Stabilization

NFTs first originated in 2014 and gained prominence in 2017 through Rare Pepes and CryptoPunks. The market grew in 2021 as more celebrities and companies entered the market with their NFT projects. Gucci, Budweiser, and Coca-Cola were among the brands that leveraged merchandise with purchases by releasing limited editions of digital goods. However, by 2022, the market was flooded, and speculative assets declined.

The failure of major players like FTX and the collapse of TerraUSD exacerbated the situation. When prices started to fall, most NFTs declined in value. However, this crash led to a more advanced NFT sector where applications were developed and extended, and speculation was replaced by innovation.

NFTs are now moving beyond the initial mania around them. Although there are drawbacks to the current and future market, the fabric NFT is innovative and highly functional for various industries. With developing token standards, enlarged platforms, and a rising number of real-world applications, NFTs are establishing a sustainable place in digital ownership, finance, and the economy.

Tags: BitcoinBlockchainEthereumNFT
Brenda Kanana

Brenda Kanana

Brenda is a writer with three years of experience specializing in cryptocurrency, artificial intelligence, and emerging technologies. She graduated from the University of Mombasa with a degree in Psychology. She has worked with Cryptopolitan, Blockchain Reporter, and AltcoinBreaking.

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