A non-fungible token, commonly known as NFT in the cryptocurrency world, is a cryptographic asset that represents ownership of something unique that cannot be interchanged.
Most NFTs are created on the Ethereum network and are represented as ERC-721 tokens, a non-fungible token standard established on the Ethereum network. Some examples of NFTs are blockchain-based art, securitized tokens such as stocks, bonds, and real estate, and collectable video game items. There are many NFT marketplaces that facilitate the trading of these assets, with most revolving around art and gaming.
What does fungibility mean in this sense? All fiat currencies, or Bitcoin, are considered fungible, meaning 1 BTC can be exchanged for any other 1 BTC, with both having the same value. Most digital blockchain tokens fall under this category of “fungible tokens”. Assets that are not fungible – such as a painting – cannot be exchanged for another painting because all paintings have different (subjective) values. NFTs (non-fungible tokens) are unique digital token variants that retain the characteristic of non-fungibility. with distinct differences between the two tokens.
Importantly, the token itself should not be confused with the asset it represents. In fact, the asset – say a piece of digital art – is not necessarily stored in the blockchain. Instead, the NFT represents something like a digital certificate that contains a link to the artwork. By owning this certificate, you are simply proving ownership of the asset it is linked to, without owning any exclusive (copyright) rights to it. The legal and regulatory implications are still largely unexplored, but the broader market is already exploring use cases beyond digital art. These include, for example, property titles for real estate or other non-digital assets (paintings).
In addition to increasing overall adoption and liquidity in digital asset markets, the following fundamental factors should be considered when looking at the extent of today’s NFT hype:
- Different market participants: NFTs are relevant to a different group of market participants, both on the issuer side (e.g., famous artists and well-known companies) and on the buyer side. NFTs have attracted a new mass audience beyond the fintech-savvy.
- Different product stage: unlike many 2017 hype projects that funded their garage startup/scam with an ICO, NFT projects today often build on an existing community (e.g., sports clubs, influencers) or products/services from existing companies (e.g., marketing tool, user interaction). As a result, NFTs are supported by more credible and established projects.
- Higher public awareness: crypto issues are already covered almost daily in the mass media, and well-known personalities from many industries are getting involved (and their communities).
- Lower barriers to entry: The user experience has improved tremendously with easy and fast fiat on- and off-ramps (e.g., through mainstream mobile apps), user-friendly wallet UIs, seamless usability, and integrations with de- and centralized marketplaces. Aside from the issue of proper security measures, access to the crypto ecosystem has never been easier, or even better, than it is today with traditional financial applications.
ERC-721 Token Standard
ERC-721 is the first NFT standard to be developed. Proposed by William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs in January 2018, ERC-721 (Ethereum Request for Comments 721) is a non-fungible token standard that implements an API for tokens in smart contracts.
It provides functions such as transferring tokens from one account to another, querying the current token balance of an account, querying the owner of a particular token, and also querying the total supply of the token in the network. In addition, it also provides some other functions, such as allowing a certain amount of tokens to be transferred from one account to a third-party account.