Non-Fungible Tokens (NFTs) Basics Explained
In the cryptocurrency world, there are a number of different types of tokens. By this point, you’ve heard of Bitcoin, stablecoins, and altcoins, but you may be wondering about coins which are known as non-fungible tokens, or NFT’s. You may think that NFT’s sound like some crazy thing you would never use, but you’ll probably be shocked to find out that they may be something that you already do use, you may just not know it yet.
What is an NFT?
A non-fungible token, or NFT, is a type of token which is available for trade on a blockchain platform just like a cryptocurrency. But unlike other cryptocurrencies, NFT’s aren’t directly tradable with one another. This is because each NFT token doesn’t have an equal value. Think of NFT’s like the fine art of the cryptocurrency world. For example, in the fiat world, paintings by Picasso will be worth different amounts of money to different people. And although you may choose to buy one Picasso painting, your Picasso painting is not tradeable for another Picasso painting your friend may have. Thus, if you and your friend want to trade Picasso paintings, you will probably need a form of exchange such as the US dollar to make sure the trade is fair.
NFT’s work in exactly the same way. They are forms of digital art which exist on the blockchain but all NFTs have different values which makes them difficult to exchange. The coolest thing about NFT’s is that they cannot be replicated, and that they can be used to represent real world assets. This gives traders another way to trade physical assets thanks to the blockchain.
What Websites Use NFTs?
The most commonly known example of an NFT is a website known as Cryptokitties. On this website, you can create your own special digital kitties, and breed them with one another to make new kitties. You can then buy your kitties items, or trade them for other digital items on the site. But whatever cryptokitty you may design will be unique to you. This means that it will be difficult when you are trading with someone else to assign a value to the cryptokitty you are selling. And no two cryptokitties are the same. This makes them non-fungible tokens.
You may be wondering what the significance of some digital cats is. And, well, there isn’t much significance. Cryptokitties was more of an experiment in protocol than anything. And in the days since, NFT’s have been used for a number of real-world applications from trading artwork to real estate, and these are the uses which should matter to you.
How Are NFTs Regulated?
Of course, since all NFTs have different values, this already makes them difficult to exchange without getting all technical and discussing protocol (or without centralization). Luckily, software developers have already thought of this and developed special protocols which NFTs must adhere to in order to be built and traded on the Ethereum blockchain. The original protocol for NFTs is known as ERC-721, which just means it is the 721st regulation to be imposed on the Ethereum blockchain. But software wouldn’t be software without an update. And in recent years, a new protocol has been developed, ERC-1155, which governs the creation of new NFTs on the Ethereum blockchain.
ERC-721 Versus ERC-1155
These numbers may sound scary and imposing, but don’t worry, simply think of them as sets of regulation that NFTs must follow in order to be called NFTs. If they don’t follow one of these two protocols, then they aren’t considered NFTs.
The biggest difference between the two protocols is that ERC-721 is limited just to NFTs while ERC-1155 is a set of regulations which can be applied to create both regular tokens and NFTs. ERC-1155 also offers several improvements on the older ERC-721, namely that it allows the transfer of a number of NFTs in one transaction, while ERC-721 only allows one token to be transferred at a time. If you are looking into these two protocols as you design an NFT, you should also note that ERC-1155 can be used for multiple different types of NFTs, while ERC-721 can only be used for one. Therefore, the ERC-721 protocol behind Cryptokitties can only be used for Cryptokitties, and if you want to make Cryptodoggies, you will have to create a new ERC-721 protocol. This is not true for ERC-1155 which you can build for one type of NFT then easily use it for another, no re-design needed. This makes the ERC-1155 protocol more favored among new NFT project coders.
Why Are NFT’s Important?
You may be wondering just how NFTs apply to your life, especially if you aren’t in the market for some digital art or real estate. Think about the world around you and how digital it is becoming. How many books do you only own a digital version of? Songs? Movies? It’s likely you own digital versions of most of these possessions, at this point many people do. And the more digitized the world becomes, the more of a need there will be for NFTs when it comes to trading these items.
Think of it this way, say you own a digital copy of the movie 21, and you wish to trade it for your friend’s book Bitcoin For Dummies. Well how do you know this is a fair trade? Who decides if the movie 21 is worth the book Bitcoin For Dummies? Well this is exactly what a non-fungible token is. And as long as both of these items are built to follow the Ethereum protocol (ERC-721 or ERC-1155) you will be able to put Ether values on both the movie and book and make an exchange with your friend. NFTs are just a fancy and fair way of bartering digital goods in the modern world.
What Does All This Mean For Me?
NFTs, whether you like the idea or not, are part of the future of human society—especially as the world takes steps to becoming more digital each and every day. Thus, if you don’t understand what NFTs are, and how they work, now is the time to learn more and learn to use them to your advantage.
If you are interested in investing in the world of cryptocurrency NFTs, you can check out marketplaces such as OpenSea, SuperRare, and Rarible. Just remember that investing in NFTs can be just as risky as investing in the cryptocurrency world and that you should discuss any large investments with someone you trust before making them.
