What is an NFT?
NFT stands for non-fungible token. A non-fungible token is a cryptographic token that represents something unique. NFTs can represent digital assets as well as tokenized versions of objects in the real world.
, also known as fungible tokens, where all tokens are equal, each non-fungible token is unique and limited in number. For example: If you send 1 ETH to person X and person X then send 1 ETH back to you, there is no way to know if this is the same ETH
. A distinction can be made with NFTs. Like Ethereum, an NFT is therefore a digital asset, except that a unique identifier is added to each unit.
This is exactly what makes NFTs so interesting because they are not interchangeable, they can act as proof of authenticity and ownership in the digital world. Several projects are now experimenting with NFTs for various uses, such as digital identity, diplomas, licenses, gaming, luxury goods, art and more.
How do NFTs work?
NFTs use the ERC-721 and ERC-1155 protocols, as opposed to “normal” tokens that use the ERC-20 protocol. The most prominent protocol for NFTs to date is ERC-721, the standard for issuing and trading non-replaceable assets on the Ethereum blockchain.
Yet the more recent but improved ERC-1155 is emerging. It allows for a single contract to contain both fungible and non-fungible tokens, opening up a lot of new possibilities. This protocol is especially beneficial for more complex uses, such as games.
NFTs can also be traded. You could, for example, have a painting worth € 1,000,000 to be tokenized and divide the value over 1000 NFTs. 1 NFT can then be seen as a share in the painting worth € 1000. This also makes it interesting for traders to purchase NFTs as an investment. These tokens can be traded on open markets, such as OpenSea. Here buyers and sellers come together for all kinds of Crypto Collectibles, rare digital collectables of sometimes very great value. However, it is important to note that NFTs are also sensitive to price fluctuations due to the effect of supply and demand on the market. Ultimately, the question is whether the NFTs for digital assets such as CryptoKitties and in-game items will retain their value, as they remain digital collectables that are not that useful in real life.
What are NFTs used for?
Non-fungible tokens have a wide variety of uses. For example, it is used in the gaming industry for games like Sorare to collect football pictures and CryptoKitties to become the owner of a digital cat.
However, it is also used for more serious situations, such as storing birth certificates, diplomas or IDs. These are examples of unique objects that can be tokenized to an NFT. But the previously discussed example of a painting is also a form of tokenizing to NFTs.
In the article on Coinmerce about the first VIDT
NFT use case: luxury goods, and the collaboration with Amsterdam Vintage Watches
, yet another use case for non-fungible tokens is discussed. It tells how VIDT Datalink uses NFTs as proof of authenticity and as proof of provenance.
Because each NFT is unique, it is also easy to find on the blockchain who the previous owners were, so this can serve as proof of provenance. Furthermore, the certificates of authenticity with macro photos of the specific parts of a watch, in this case, are stored in its corresponding NFT and this in turn serves as proof of authenticity.
Because NFTs cannot be replicated, this first of all causes digital scarcity. If you own a CryptoKitten, then this is your unique Kitten that no one can copy. If someone else wants this CryptoKitten, they will have to buy your NFT.
The second point that makes NFTs useful and unique is that they are managed in a decentralized manner. If CryptoKittens had been a centralized game, owned by a company, there would always have been an opportunity for the game developers to take your kitten away. You manage an NFT yourself and as long as your passwords are safe, no one can ever access it. Furthermore, the tokenization of real-world objects to NFTs creates more liquidity in the niche markets, such as that of visual art. Because it is now possible, for example, to buy part of a painting through NFTs, it will become a lot easier for sellers.
The use of NFTs as proof of authenticity and as proof of origin cannot be forgotten and is also a very valuable addition to our digital economy. This is a great asset when it comes to fighting fraud and manipulation of digital and real-world assets, certificates, licenses and more.