Non-Fungible Tokens (NFTS) are helping digital artists make millions of dollars for their otherwise freely available work. The rise of NFTs is an interesting and intriguing phenomenon of 2021. In this blog, we will untangle all the discussion around NFTs.
Defi ecosystem has expanded at an enormous speed in the past couple of years. Nonetheless, it is the most talked-about topic in 2021 due to the rise of NFTs.
The proponents of Defi argue that cryptocurrencies and blockchain are the next technological revolution. This faith has derived the value of all popular currencies in crypto market to all-time highs in the first three months of this year.
Also Read: What Is Defi?
The Crypto market gives rise to new speculative assets/coins every other day. Nevertheless, the industry is still in its infancy. Numerous coin projects have bust within the first few months of their launch in the last decade. Moreover, the prices of digital assets have often risen due to market mania rather than any intrinsic value or utility of the asset.
NFTs also seem a mania-driven asset of the crypto market. However, analysts believe in their potential. NFTs are famous and worth millions of dollars due to the faith bestowed upon them by crypto believers.
There are two types of tokens in the crypto market. Fungible Tokens and Non-fungible tokens.
What is Fungibility?
Fungibility is the quality of an asset or financial instrument. An asset is fungible when its two units are indistinguishable from each other. In other words, the fungible asset classes have units that hold similar market value and validity. For instance, 1 Ounce of pure gold is equal in worth and validity to any other unit of 1 Ounce of pure gold. Therefore, Gold is a fungible asset.
The units of the fungible asset class do not have to be identical. For example, a 50-dollar bill can be transacted for 5 ten-dollar bills. Both of them have similar functionality and underlying value. In this case, the US dollar is a fungible asset.
Commodities, precious metals, cryptocurrencies and others are all fungible asset classes.
There are two types of tokens in crypto market fungible vs. non-fungible.
In cryptocurrency’s lexicon, a token is a representation of something of value. It can be utilized in multiple ways in the crypto market. Many crypto ventures are launched with companies offering free tokens at the start. Some use cases of tokens are as follow:
- It can be used for exchanging value in economic settings.
- Some tokens are a store of value like Bitcoin.
- A token can give you access to Dapp (Decentralized App).
Fungible tokens can be interchanged with tokens of the same type or class. For example, One bitcoin on the blockchain is equal in value, functionality and technology to any other unit of one bitcoin. So, it doesn’t matter where the coin is mined.
Non-Fungible Tokens (NFTs):
Before getting into non-fungible tokens, let’s take a look at Non-fungible assets.
A non-fungible asset is something that represents a unique ownership or value. Collectables like car, house or Picasso’s original paintings are examples of non-fungible assets. Let’s say you borrow your friend’s car for two days. At the time of return, you give him some other car of the same model. Is it fair to your friend? Not at all. Car is a non-fungible asset. Therefore, you cannot interchange it for some other unit of the same asset class.
A non-fungible token is a cryptographic token that derives its value from some underlying, real-world asset. Each non-fungible token is unique. Furthermore, it is used as proof of ownership on the blockchain network. Nyan Cat is an example of NFT.
Read More: Fungible Vs. Non-Fungible Token
What Makes A Non-Fungible Token Unique?
In the previous section, we defined NFTs as unique. Here are some of the attributes that make NFTs distinguishable from other digital assets classes.
Scarcity drives value to an asset. When a single piece of art has high demand in the market then its price inevitably soars. Digital artists can make their desirable items rare and sell them at a high price. Moreover, the transaction of the limited item is verifiable on the blockchain.
Unlike the US dollar and Bitcoin, NFTs are indivisible. Going back to the car example, you cannot give the borrowed car back to your friend in pieces and think that it holds the same value. NFTs can only be transferred as a single unit.
Interoperability means that you can easily transfer NFTs between applications. This function is a result of standardization.
For example, the digital art that you created can be transferred to another blockchain.
NFTs are issued on a decentralized network. There is no central authority or company issuing NFTs. The whole process of buying and selling is digital. The ownership is verifiable. Therefore, there is no need for legal work or middleman.
How Do Non-Fungible Tokens Work?
The unique information of a non-fungible token is stored on its smart contract. Moreover, the info is saved on the blockchain of the token. For instance, numerous NFTs comprise ERC 721 tokens. Each of these tokens is unique in its features and cannot be interchanged. Users of blockchain can create their own ERC-721 by writing a code on a smart chain in accordance with the given template. They can then proceed to add unique details such as the owner’s name, metadata and secure files with a link.
ERC-721 uses Ethereum’s protocols and blockchain. Multiple other blockchains with smart contracts offer their own NFT standard. Examples include Binance Smart Chain (BSC), NEO, EOS, and TRON.
A recent improved standard of ERC-1155 allows creation of both fungible and non-fungible tokens with a single smart contract.
Potential of Non-Fungible Tokens in the Defi Ecosystem:
Non-fungible tokens have huge potential in the Decentralized Finance (Defi) ecosystem. Essentially, they are speeding up the Defi adoption with applications in the real world. Here are a few examples of this disruption.
1. Digitalize Your Identity:
You can keep your identifiable information, appearance, qualification and any other information safe in digital space with the use of NFT.
You can create, sold and transfer digital collectables using NFTs. For instance, individuals can create tokenized versions of their favourite painting and sell them to interested users. A website named sorare.com is in the business of selling the tokenized version of NFTs.
The gaming industry has forever tried to incorporate monetary benefits alongside entertainment. With NFTs and Defi, users can create gaming items on platforms like Decentraland and earn profits.
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Digital artists can protect their work and copyrights by tokenizing their creations. NFTs let artists sell their work and transfer ownership in a secure way. Blockchain secures the proof of ownership.
The Rise of NFTs in the Global Crypto Market:
NFTs have been around since 2017. However, they have recently drawn the attention of the global crypto market. We can give the Post-COVID economy credit for the rise of NFTs.
The global inflation rates are soaring after the COVID-19 pandemic. Fiat currencies and other commodities are losing value at a significantly high rate. Digital currencies offer a hedge against the risk in these unprecedented times. Resultantly, investors are increasingly buying cryptocurrencies and their variants, i.e. NFTs.
2021 the year of Non-Fungible Tokens (NFTs):
Individual investors and institutions are buying bitcoin in the hope of selling them for even more profit in the future. The price of NFTs is derived from speculative mania. They are in the news everywhere. But with popularity, comes criticism.
Climate change advocates consider non-fungible tokens a disaster for the environment. The process of creating an NFT requires a lot of energy. Moreover, desire and greed will drive the ecological cost higher with passing time.
Digital artists are also sometimes at disadvantage in the internet world. A scammer can sell your art as NFT without you even knowing about it. The factor of anonymity lets the criminal get away with his rip off.
Like any class of digital assets, non-fungible Tokens in 2021 are under heavy scrutiny for their pros and cons. Meanwhile, defi sector is incessantly investing in NFTs. Therefore, the faith in non-fungible tokens is strong.
Non-fungible tokens have the potential to serve multiple sectors in the crypto market. The embrace of this technology will usher the financial industry into a new era. We will no longer need lawyers or governmental authority to keep the record of our transactions. An open, decentralized, and distributed ledger will get the job done.