2021 saw the sky-rocketing of NFTs as the new hot trend in the crypto world. We saw people selling “tweets” for millions, bidders fighting fiercely for pixel-art portraits, and people raising virtual pets with extreme dedication and care. NFTs have become so complex there are now entire blockchains dedicated to interacting with them.
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What NFTs are
NFT stands for non-fungible token, which in turn means that they have specific, unrepeatable information and characteristics that make that token unique. They differ from a cryptocurrency in that the former are all equal. For example, if you hold 100 of any stablecoin, let’s say DAI, every single one is equivalent to the other. You could spend them and then buy some more later, and there would be no difference. Plus, anyone can mint DAI on MakerDAO.
On the other hand, when you hold an NFT, you have a token that contains specific data that no other asset has. Now, Ethereum has a token standard for NFTs, which is ERC-721. Tokens minted under this standard have distinctive metadata fields. That data is what gives them all their properties and makes them unique and irreplaceable.
If you were expecting a story about digital art, blockchain pets or virtual reality worlds, we’re sorry to disappoint you. NFTs are unique data vessels. However, there is a connection between them and these concepts. We’ll get there.
What NFTs are not
To be extremely clear and direct, we have to say that NFTs are not media. It’s essential to understand this because there are a lot of scams going on right now. When you buy an NFT, you are not acquiring ownership of any piece of art or collectible. What you’re getting is a token holding the information of that piece of media and a URL leading to it.
A collectible minted as an NFT in any blockchain does not mean that it is irreplicable, copied or deleted. Remember that these tokens are essentially data storages, which means that whilst that information is safe in the blockchain, the piece of art it leads to is not. There was a case in which a tweet was sold as an NFT and then immediately deleted. Thus, the owner was left with a token that held information and a link to a non-existing tweet. Although an uncool move by the original author of the tweet, you can’t blame him. What the buyer got was what he had bought.
Use cases for NFTs
Remember when we spoke about digital media and virtual reality? Well, as we said before, there is a use case for NFTs in these applications. Let’s do a quick overview and see how.
In the first place, as we said, NFTs are not digital art collectibles. However, their author may sell the art alongside the NFT. These situations have proven problematic as there tends to be no proof of the author owning the art they’re selling. Plus, selling the actual goods the tokens direct to should require legal documents that certify ownership transfer, which is, of course, a lot more complicated.
Regarding gaming, NFTs have proven to be a great resource. Thanks to the ERC-1155 standard, these unique tokens can interact with the blockchain and its applications. Take Axie Infinity, for example. Axie Infinity is a Pokémon-like game in which you can acquire, raise and level up your digital pet (called Axie) for fighting another trainer’s pets. The twist is that each Axie is unique and has its own stats, and players can trade them as they wish. You probably guessed it, but each Axie is an NFT that allows you to interact with the game. In this case, you don’t have to worry about legitimacy or ownership, as Axies are bound to the platform through smart contracts.
Another example of these tokens usability is Decentraland. This virtual reality game is about creating your own character and interacting with others inside the digital world. You can buy accessories and clothes to wear and also land to build your house. All of these are NFTs, as they represent a unique item or zone of the world. They come with a twist, though, as they have an expiration date after which smart contracts burn them.
Applications like these are many, and they have all implemented NFTs as a valuable solution for different applications. Sorare, CryptoKitties, ChainGuardians and Splinterlands are some other examples of what NFTs can do.
As in any new, exponentially growing market, many opportunists are looking to scam and take advantage of inexperienced newcomers. You should be extremely careful if you’re looking to acquire NFTs, especially in the collectibles/digital art sector. Remember that buying these tokens does not grant you ownership of any goods, digital or physical. At least now, risks are far greater than the benefits this type of non-fungible tokens can provide its owner.
The other side of the coin is the functionality these tokens have proven to have utility thanks to smart contract integration and their capability to carry a small set of data. These could go beyond gaming, as anyone who wants to save unique information forever in the blockchain has a use case for NFTs.
We’re merely exploring the concept of non-fungible tokens and don’t yet know the full potential they have for real applications. Until we better understand their nature, we hope this article can help you get some perspective about them and, essentially, know where you’re putting your money.