What is an NFT?

Introduction

Non Fungible Tokens (“NFTs”) are unique, non-fungible tokens – digital objects residing on a blockchain. They can relate to almost any area of our lives, but most often appear as artwork, music, and as objects in blockchain-based video games and videos.

One area in which NFT has gained widespread popularity is the art world, where digital tokens sell for hundreds of thousands of dollars at major auctions and beyond. Emerging artists who used to post their work for free or sell it cheap are now realizing that they can make money from their talent with the help of blockchain technology and NFT.

NFT has developed largely due to the development of DeFi technology, namely DApps called CryptoKitties, where users can buy, trade, create and collect virtual kittens.

The NFT market is currently capitalized at over $250,000,000.

Principles of operation and scope of NFT?

NFTs differ from cryptocurrency tokens like Bitcoin in that each token is unique. In simple words, 1 Bitcoin = 1 Bitcoin, i.e. it has no uniqueness, you can replace one coin with another and you will still have 1 Bitcoin. With NFT, however, things are drastically different. Each NFT token is unique and cannot be replaced with another.

Like Bitcoin, NFTs also contain owner data to facilitate identification and transfer between token holders. Owners can also add metadata or attributes related to an asset to an NFT.

NFTs allow the transfer or ownership of any unique piece of digital data that can be tracked using the Ethereum blockchain.

As a representation of a digital or non-digital asset, an NFT is created from digital elements. NFT can, for example, represent real-world items such as legal documents, signatures, or digital art, videos, or music. So what is NFT digital art? NFT digital art is an Ethereum-based asset that reflects the ownership and authenticity of the artwork.

NFT can only have one owner at any given time. It uses a unique identifier and metadata to manage ownership, which no other token can replicate. To create the unique identifier and metadata, smart contracts are used to assign an owner and regulate the transferability of the NFT.

When someone generates or mines an NFT, they execute a code of smart contracts that follow various standards, such as ERC-721, on which the NFT concept was built. Developed by the same people who were responsible for the ERC-20 smart contract, the ERC-721 standard defines the minimum interface – ownership details, security and metadata needed to exchange and distribute tokens. Subsequently, the aforementioned standard was augmented by the ERC-1155 Standard, which emerged in response to market challenges and the need to add new capabilities to smart contracts. This was largely due to the development of blockchain games and the need to make it possible to connect multiple game items (tokens of different types) into a single NFT token.  Also, the new standard lowered the transaction and storage costs required for NFT and increased the bandwidth of the Ethereum network.

While ownership rights are transferred along with the token itself, intellectual property rights remain assigned to the creator and cannot be transferred. Notice of this can often be found on popular NFT venues such as OpenSea.

In practice, your ownership rights are limited to the ability to only transfer the NFT to another user. Conventionally speaking, tokens only exist within the virtual world, and their transfer to the physical world requires broader adoption and development of a legal and technical framework. However, even today, thanks to the development of smart contracts and DeFi protocols, you can, for example, use NFT as collateral against any of your liabilities or assets. There are already ideas about using NFT to transfer ownership of the use of smart contracts. One real working example of such smart contracts is the sale of ENS domain names (Ethereum Name Services), by which you can find a particular user on the network or a particular wallet address.

What is IPFS?

The creation of Web 3.0 requires a distributed domain name system and distributed file storage. IPFS (InterPlanetary File System) is precisely used to create a file storage system.

The idea is that there is a large number of nodes distributed in a blockchain network. Each node stores in it a part of files, which was uploaded to this network, depending on frequency of accessing this file.

For example if we want to find a particular file – we put in IRL string not the name of file but its hash. Then IPFS system creates routing in search of a particular node, which has access to a particular file.

In this way file storage is distributed and nobody knows where exactly it is, but the point is that everybody has access to it.

This is realized in practice through CDN (Content Delivery Network).

For example your business has users in different parts of the world, and the server is located in Ukraine. But if a user from the US will access your server, it will take a long time for the media file to reach him. For this purpose, there are created mirrors of static content, which do not change, but this system is centralized.

What does this system have to do with NFT? The fact is that one of the main standards for NFT is the IPFS File System. This means that every token has a string called Token UI, by which the user, by asking it, can access the image itself. In other words, the IPFS system is a content delivery network in a blockchain world.

What makes NFTs valuable?

The value of NFTs lies in the scarcity of these digital assets, which distinguishes them from cryptocurrencies. Each NFT has its own unique set of attributes – such as size, scarcity, creator, etc. – and therefore cannot be exchanged for another asset.

The factor called scarcity undoubtedly increases the value of an NFT, whether it is art or a digital collectible. But what is the relationship between a JPEG picture and scarcity? That said, the creator can always inflate its price by limiting the supply of circulated NFTs.

In fact, the price of a token is determined by the same factors as ordinary physical art. Namely, information about the creator, creation background, functionality, and of course, aesthetic appeal.

In spite of the fact that unlike casual pieces of art the digital one is available for everybody and everybody can see it in the network – the property rights for it are still reserved for you.

However, today there are already both legal and technical ways to limit access to NFT in circulation.

Conclusions

To summarize, it is important to note that NFT as a technology is only increasing its capitalization and influence on different areas of life every day, and its functionality goes beyond the scope of art and the joy of “having a picture”.

Today, NFT can serve as a means of securing financial instruments and even as a means of payment to some extent. Of course, the development of NFT technology is not going on its own, but together with other blockchain tools, such as smart contracts and decentralized finance.

But the potential of the technology is very high and the interest to it is growing day by day, both among real technologies used in life and market speculators and collectors.