5 Things You Should Know about Non-fungible Tokens
Knowledge, NFTs

5 Things You Should Know About Non-fungible Tokens

You may have come across various items like artworks, real estate, domain names, etc. on sale online as NFTs. There are flashing news articles about X person earning Y million dollars for NFTs. This may leave you wondering about what exactly is an NFT. What is it about NFTs that is changing the entire paradigm of the crypto market? Let’s walk you through the concept of Non-Fungible Tokens (NFTs), their importance in the digital market, and how they work in the crypto industry. 

What are Non-Fungible Tokens (NFTs)?

Non-Fungible Tokens are basically digital assets whose sale and purchase are backed by blockchain technology and facilitated with the use of cryptocurrencies. Blockchains are public ledgers that keep a track of transactions related to the assets stored on them. NFTs are digital representations of unique real-world items like artworks, music records, video records, and so on. The “non-fungible” aspect of these assets suggests that these digital assets are completely unique. This means that no two NFTs can be identical and hence, can not be exchanged with one another. 

For example, all $10 bills are equivalent in their values and thus, they are fungible. Let’s take another example of Bitcoin. All the Bitcoins in the crypto market hold the same value, that is, you can exchange one bitcoin with another. But if we talk about non-fungible tokens, they can not be exchanged with other non-fungible tokens because each one of them has a different value. 

Features of NFTs

There are certain features of NFTs that make them stand out from other digital assets in the market. Some of them are listed as follows. 

Features of Non-fungible Tokens
Features of Non-fungible Tokens

1. Unique

Each NFT has its own metadata that helps in differentiating it from other NFTs. In addition to this, the metadata for one NFT can never be the same for another NFT. This helps in preserving the uniqueness of the asset. 

2. Guarantees Ownership

NFTs are stored on a network supported by blockchain technology. So, no matter where in the world you are, you can access the certificate of ownership for a given digital asset on multiple network channels and prove the ownership. 

3. Indivisible

NFTs are indivisible, that is, they can not be broken down into segments or fractions. It means that these digital assets can be sold and bought only as a whole. 

4. Fraud-Proof

Since each NFT has its own unique and non-transferable identity which is protected by blockchain technology, there are zero chances of fraud. The buyers can easily track the owner of the asset and buy it directly from them, without the involvement of intermediaries. 

5. Extensible

NFTs are extensible, which means that you can combine or breed two different NFTs in order to create a new one. It should be noted here that the third NFT will have its own metadata and other identifying factors. 

Importance of NFTs

Non-fungible tokens are a significant step forward in digitizing the physical assets and altering the infrastructure of buying and selling these assets. When combined with blockchain, this idea becomes an important driving factor in the crypto market. Here are some benefits of NFTs in the market and environment. 

Importance of Non-fungible Tokens
Importance of Non-fungible Tokens

1. Improve Market Efficiency

The existence of non-fungible tokens for physical objects streamlines the process of sale and purchase of assets and eliminates the need for intermediaries. 

2. Provide Originality 

With the increasing use of social media, the creators are likely to lose the rights to ownership of their creations. But with NFTs, the artists can protect the originality of their work and get due credits. 

3. Simplify the Business Processes

Creating an NFT for a product can help businesses track the provenance, production, and other processes in the supply chain of that product. 

4. Help in Identity Management

Taking an example of passports, they need to be shown to the security officials at the entry and exit points of international borders. By converting each passport into an NFT, the process of entry and exit for jurisdictions can be streamlined. 

5. Democratize Investing

NFTs make it easy to fractionalize a physical asset which is otherwise difficult to do in its physical form. For instance, it is possible for a real estate or artwork to have multiple owners when represented in digital form. This is extremely helpful in increasing the value of the asset. In such a setting, each owner will have a fraction of the asset. But if you try to assign multiple owners to a physical artwork or real estate, it becomes impossible. 

How Do NFTs Work?

NFTs represent digital as well as physical assets and allow the assigning and claiming of the ownership of these assets. The change of ownership is tracked by blockchain technology. An NFT can represent the following types of assets.

  1. Digitized art (music, videos, GIFs, and collectibles)
  2. Physical Items (tickets for events, token invoices, legal papers, signatures)
  3. Virtual Avatars 
  4. Designer Objects

At a given point in time, there can be only one owner of a given NFT. Unique identification codes and metadata define the ownership of the NFT. These digital assets are minted by means of smart contracts which are further used for assigning the owner and managing the transferability of the non-fungible tokens. Smart contracts also enable the addition of other detailed attributes like the owner’s identity, metadata, and file links. 

How to Mint an NFT?

Here’s the three-step process of minting an NFT. 

  1. New block creation through codes stored in smart contracts
  2. Validation of the information according to the standards
  3. Addition of information in the blockchain which is managing the NFT. 

Concluding Thoughts

In conclusion, NFTs are digital representations of physical items that offer exclusive ownership rights to the buyer of the item. The use of NFTs instead of physical objects can be a revolutionary step in the digital world. However, the developments and experiments with NFTs and blockchains are still in process. 

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