“NFT tokens have gained such popularity because they’re easy for users to understand. They understand what they’re buying and what its value is.”
– Alexander Althausen, CEO of StormGain
More likely than not, you’ve already been inundated with the hype surrounding cryptocurrencies. However, there’s a new craze on the crypto block, and to the surprise of many, it has grown into a high-demand market worth hundreds of millions of dollars! That new crypto-craze, Non-fungible tokens, aka NFTs.
Non-fungible tokens (NFTs) are digital assets that are provably unique, creating digital scarcity. They can’t be duplicated or divided. They have many use cases, including digital collectibles, music, artwork, and in-game tokens. NFTs are another example of the fast-paced change in the industry. In this guide, we explore what they are, how they work, and how they’re being used.
What is the token standard?
There are endless uses for Non-fungible tokens, including both digitally-created assets or tokenized real-world assets on the blockchain. When conceiving projects, developers must adhere to certain token standards of the blockchain to launch a successful platform.
Smart contract standards can include token standards, name registries, library/package formats, and more. By delineating standards, smart contracts must follow the requirements in order to enable a handful of basic functions like the creation of tokens, performing transactions, spending, etc.
Token standard is the ancillary of smart contract standard. For blockchain that gives agency to the smart contracts. Token standards are often included to tell people how to create, issue and deploy new tokens based on their underlying blockchain.
At the moment, Etherium is the most commonly used blockchain for building smart contracts. Ethereum has developed different kinds of standards for supporting the diversity of smart contracts.
ERC-20 is the most commonly used standard for Ethereum-based tokens. It is a technical standard for tokens issued on the Ethereum blockchain, providing a list of rules that all Ethereum-based tokens must follow.
ERC-20 is a fungible token standard. And a popular one at that. In February 2021 there were over 25,000 ERC-20 compatible tokens existing on Ethereum’s main network. With tokens’ popularity growing we can only expect this number to continue to rise.
In contrast to ERC-20 the fungible token standard, ERC-721 is a token standard that defines non-fungible tokens (NFTs) on the Ethereum blockchain. NFTs have individual characteristics that set them apart from one another. Since each NFT is so unique they are a great medium to represent collectibles, game items, digital art, event tickets, domain names, and ownership records for physical assets.
Token standards like ERC-20 and ERC-721 require a separate contract to be deployed for each token type or collection. This places a lot of redundant computing on the Ethereum blockchain and limits certain functionality. With the rise of blockchain games that use NFTs as in-game items, the explosion of contracts would introduce performance and cost problems.
ERC-1155 is a standard for contracts that manage an array of token types. Using this standard, you can transfer multiple token types (like ERC-20, ERC-721) at the same time, saving on transaction costs.
Trading of multiple tokens can be built on top of this standard and it removes the need to approve individual token contracts separately. Not to mention it’s easier to describe and mixes multiple fungible or non-fungible token types in a single contract.
What are non-fungible tokens?
Non-fungible tokens are digital assets that contain identifying information recorded in smart contracts. It’s this bank of data that makes each NFT unique, therefore, they cannot be directly replaced by another token. They cannot be swapped like for like, as no two NFTs are alike. In contrast, Banknotes can be simply exchanged one for another; if they hold the same value, there is no difference to the holder between, say, one dollar bill and another.
Bitcoin is a fungible token. You can send someone one Bitcoin and they can send one back, and you still have one Bitcoin. (Of course, the value of Bitcoin might change during the time of exchange.) You can also send or receive smaller amounts of one Bitcoin, measured in satoshis (think of satoshis as ‘cents’ of a Bitcoin) since fungible tokens can be divided.
Non-fungible tokens are not divisible, in the same way, that you cannot send someone part of a concert ticket. Part of a concert ticket wouldn’t be worth anything on its own and would not be redeemable. The unique information of a non-fungible token is stored in its smart contract and immutably recorded on that token’s blockchain.
What makes NFTs so special?
Non-fungible tokens have one-of-a-kind attributes; they are usually linked to a specific asset. They can be used to legitimize the ownership of digital items like game skins right through to the ownership of physical assets. Other tokens are fungible, in the same way as coins or banknotes. Fungible tokens are identical, they have the same attributes and value when exchanged. Non-fungible tokens and their smart contracts allow for detailed attributes to be added, like the identity of the owner, rich metadata, or secure file links. The potential of non-fungible tokens to immutably prove digital ownership is an important progression for an increasingly digital world. They could see blockchain’s promise of trustless security applied to the ownership or exchange of almost any asset.
There are hundreds of potential use cases for non-fungible tokens to be used in our everyday life. The ability to digitally verify scarcity and originality will disrupt the current online consumer behavior, arguably for the better, as people will be more consciously aware of where their money is going.