It’s fun to talk about non-fungible tokens or NFTs because they’re the perfect example of how the impact of blockchain technology on people’s lives extends well beyond the financial market. As we’ve seen in hundreds of headlines over the past few months, they have caught the world’s attention because they are a new way of interacting with culture, music, sports and media.
This article will explain what NFTs are, how they work, how the NFT boom began, and why blockchain technology enabled NFTs to create a new economy.
Connected: A cure for copyright infringement? NFTs promise to empower creative economies
Why is there so much fuss about NFTs?
NFTs are such an exciting and fun topic because almost everyone loves music, art, games, and the internet. Every social media platform’s feeds are full of people eagerly talking about non-fungible tokens with no prior interest in crypto assets or decentralized funding. In the first half of 2021, we saw a lot of celebrities and memes advocating NFTs.
Jack Dorsey, CEO of Twitter, sold his first tweet as an NFT last March for the staggering sum of over $ 2.9 million. Edward Snowden’s NFT, a portrait of Snowden himself, sold for about $ 5.4 million, or 2,224 ethers (ETH).
The NFT of the Zoë Roth meme, better known as “Disaster Girl” due to the meme from 2005 (and beyond) of her malicious smile looking into the camera while a house is burning in the background, was sold as an NFT for 180 ETH which is nearly $ 500,000.
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In addition, companies from the traditional market have chosen to surf the NFT wave. In Brazil, for example, the first NFT collection was auctioned by Havaianas last month.
The NFT transaction volume has multiplied by more than 25 since December 2020 as NFTs find their way into people’s everyday lives and lives. It could be one of your favorite songs, a cartoon of your favorite superhero, or a tool in a game that your kids want to acquire. In the chart below, we can clearly see the increase in NFT transactions over the past six months, as well as the volume of business since the end of the third quarter before the recent pop.
What are NFTs? How do you work?
We can design an NFT as a piece of software code that verifies the nature of a non-fungible digital asset or the digital representation of the physical non-fungible asset in a digital medium. For those who prefer a more technical view:
“An NFT is a template of smart contracts that provides a standardized way to verify who owns an NFT and a standardized way of ‘moving’ non-fungible digital assets.”
In this case, any non-fungible asset can be the subject of an NFT, be it domain names, tickets to an event, digital coins in games, and even identifiers on social networks like Twitter or Facebook. All of these non-fungible digital assets could be NFTs.
An NFT has a data structure (token) that links metadata files that can be pinned to an image or file. This token is carried and modified to meet the requirements of blockchain networks such as Ethereum, Kusama and Flow, among others. The art file is uploaded to a blockchain network which creates a metadata file in the token’s data structure.
As a content creator like digital artist Beeple or the rock band Kings of Leon, you upload your art file to a platform that takes your file’s metadata and feeds it through the entire back-end process of a product, also known as your NFT.
Your NFT then receives a cryptographic hash (a key) – a tamper-proof register with the date and time stamp on the blockchain network. It is important for any artist out there to follow the precious data and see that it has not been changed at a later date.
Chain loading your art can give you a better understanding of when the art file’s metadata was tokenized. Since the artwork’s data is uploaded, nobody can access or delete it, and the chances of your artwork disappearing are virtually non-existent when your NFT is registered on a blockchain.
How has blockchain technology expanded the capabilities of NFTs?
Until 2008, traditional NFTs had no uniform representation in the digital world. As a result, they were not standardized, and the NFT markets closed and were limited to the platforms that issued and created a particular NFT.
The first NFTs in blockchains began with the advent of colored coins on the Bitcoin blockchain. Although originally designed to enable Bitcoin (BTC) transactions, their scripting language stores small amounts of metadata on the blockchain that can be used to represent asset management instructions.
On the other hand, the first NFT experiment based on the Ethereum blockchain was CryptoPunks from Larva Labs, which consisted of 10,000 collectible, “unique” punks. The fact that the punks “live” in the Ethereum network made them interoperable with digital markets and wallets.
NFTs hit the mainstream on the Ethereum blockchain in 2017 with CryptoKitties, allowing users to create digital cats and reproduce them using different pedigrees. This was a pioneering project to create a sophisticated incentive system that established that NFTs could be used as a promotional tool. This has led to increased interest in auction contracts, which has recently become one of the main mechanisms for pricing and buying NFTs.
Connected: Art rethought: NFTs are changing the collector’s market
The exciting thing about applying blockchain technology to NFTs is that it has vastly expanded its benefits and capabilities. It spawned the standardization of digital, non-fungible asset representation through the ERC-721 standard. Similar to the ERC-115 and ERC-998 standards, ERC-721 is a pattern of smart contracts on the Ethereum blockchain that provides a standardized method for verifying the owner of an NFT and a standardized method for “moving” non-fungible digital assets.
It’s worth noting that while Ethereum is currently most of the action, multiple NFT patterns are popping up on other blockchains. For example, Mythical Games’ dGoods focuses on implementing a cross-chain standard using the EOS blockchain. Also, TRON’s first NFT standard, TRC-721, was officially announced in late December 2020. The introduction of this standard is intended to help the Chinese-centered blockchain leverage various apps based on distributed ledger technology and keep pace with the growth of the Ethereum NFT sector.
Since then, an NFT registered on a blockchain has truly become a “unique” asset that cannot be counterfeited, tampered with, or forged.
Connected: Experts are discussing whether NFTs really need blockchain
What are the key benefits of blockchains for NFTs?
As explained above, the first benefit of NFTs supported by blockchain technology is standardization. In addition to standardizing the primary attributes of NFTs – such as ownership, transmission, and access control – blockchain technology enables NFTs to incorporate additional functions, such as specifications for acquiring an NFT. Other benefits include interoperability, marketability, liquidity, immutability, proven scarcity, and programmability. We will explain each one individually.
Make the NFT patterns Interoperability possible to allow the NFTs to move more easily between multiple ecosystems. In a new project, non-fungible tokens can be instantly visualized in dozens of different wallet providers, negotiable in multiple markets, and purchased in multiple virtual worlds. This interoperability is only possible because of the open patterns that blockchain technology enables, which provide a clear, consistent, and reliable application programming interface and are authorized to read and record data.
Interoperability, in turn, has the Marketability of NFTs by allowing them to freely trade in open markets. Blockchain-based NFTs allow users to move their non-fungible assets outside of their original environment. You also have the benefit of sophisticated negotiation resources like auctions and bids, as well as the ability to transact in any currency, from cryptocurrencies like Bitcoin and Ether to stablecoins and certain digital currencies from a specific application.
The immediate marketability of NFTs based on blockchains brings more liquidity in markets that can serve a larger audience, allowing significant exposure of non-fungible assets to a wider range of buyers.
The fifth and sixth benefits of using blockchain technology in NFTs are immutability and proven scarcity. This is because the smart contracts allow developers to severely restrict the supply of an NFT and to specify long-lasting properties that cannot be changed after a token has been issued. Therefore, one can guarantee that the specific properties of an NFT will not change over time, as they are encoded in the blockchain. This is particularly interesting for the physical art market, which depends on the proven scarcity of an original piece.
An interesting development in this new NFT world based on blockchain has arisen due to recent trends and new markets, such as programmable art, which allows collectors to intervene in the original design of the artwork.
In the market for the arts represented by NFT, immutability and scarcity are essential. In the digital art market, the advantage is Programmability could be something to consider. Examples of programmability can be found at Async Art, a platform for negotiating and creating NFTs that allows owners to change their images at any time. Another example of the programmability feature is the ability of a song to change its composition. This means that the music can sound different every time it is listened to. These two examples are possible by dividing a piece into separate layers called stems. Each stem has several variants for its new owner to choose from. This way, a single Async Music track could contain many exclusive combinations of sounds.
Many people still need to understand the dimension of the NFT boom and how blockchain is revolutionizing the way we consume art. Perhaps the subject deserves a more detailed discussion.
The hole-in-one of NFTs, however, is the programmability of smart contracts on the blockchain, which always guarantees the content creator a reward when their work is negotiated.
Suppose a certain piece of content (music, art, domain name, photo of a goal by Pelé, etc.) is done hundreds of times. In this case, the content creator receives a commission.
This could completely change the dynamics of copyright and intellectual property, because if “income sharing” is programmed into the NTF’s smart contract code, content creators will no longer have to worry about the legal ownership of their artwork.
Indeed, the markets for non-fungible tokens and blockchain technology still have a long way to go to solve scalability, marketing infrastructure and applicable jurisdiction in NFTs with decentralized storage. However, we will not lose sight of the opportunity to codify the rights of the identified digital asset behind an NFT’s transaction. This enables the emergence of new businesses and new markets, ruled not only by institutions or traditional trustworthy checkers, but by those who create the content valued in the social and productive centers.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Tatiana Revoredo is a founding member of the Oxford Blockchain Foundation and a blockchain strategist at the Said Business School at Oxford University. She is also an expert in blockchain business applications at the Massachusetts Institute of Technology and Chief Strategy Officer of The Global Strategy. Tatiana was invited by the European Parliament to the Intercontinental Blockchain Conference and by the Brazilian Parliament to the public hearing on the draft law 2303/2015. She is the author of two books: Blockchain: Tudo O Que Você Precisa Saber and Cryptocurrencies in the international scenario: What is the position of central banks, governments and authorities on cryptocurrencies?