Non-fungible tokens are becoming mainstream, yet people are not aware of them fully yet. We will discuss them in detail so that you can understand their importance in the cryptocurrency community.
If you want to dive deep into the vast sea of cryptocurrency, you would need to learn the A to Z’s of it. To help you with your education, today we will be discussing NFTs, what they constitute, their advantages and disadvantages respectively.
What are NFTs?
Unlike cryptocurrency tokens, these are unique as well. These tokens can represent anything, from a cryptocurrency to a physical entity. Two standards are the building blocks of NFT (ERC-721, and ERC-1156), and developers leverage them while creating new tokens for the cryptocurrency community.
Can any token be considered as an NFT?
No, it is not that simple. An NFT should not be:
Replaceable: You can replace a dollar or a pound with a dollar or a pound, and there’s basically no difference between them. Hence, fiat money is not an NFT. Similarly, you can replace a Bitcoin with another Bitcoin. However, an NFT should be distinct from another in every sense. Therefore, an NFT must be scarce.
Divisible: A NFT will exist in the market as a single unit, they cannot be partitioned into smaller sections.
Eliminated and copied: This is a must if we want clause 1 to be true. No one can copy the characteristics of an existing NFT. This means the holder owns all the rights of this asset.
But what it should be? Other than being distinct, that is:
Verifiable: The data present within the NFT should direct people towards its rightful owner (creator), thus creating a sense of authenticity within the market sphere.
How are these tokens used?
There are numerous examples, but we will discuss the most popular one, CryptoKitties. In this Blockchain-based platform, people (designated as players) can purchase, and sell digital felines. The primary currency for these transactions is Ethereum. Generally, collectors, players, and in some cases, investors are heavily invested in the idea of having NFTs. one can choose to sell this token for huge profits.
Other examples will include:
- Players acquiring different materials within the game for the exchange of money or cryptocurrency. It can provide them with more facilities too.
- People who are looking to reach out globally, and sell their items online without using a middleman. Also, people who are looking for a way to get passive income lifelong.
- As asset tokens
- As access tokens and access transfer tokens
- As collectibles (crypto-based)
- For yield farming
How are these created?
As mentioned, ERC 721 and ERC 1156 are the basic components of these tokens. However, this is a very complicated task, especially for someone with minimal technical skills. There’s a solution to that. Several platforms allow people to create and verify these assets at a faster pace (for example 0xcert).
What are the advantages of NFTS?
- Proprietary value: It adds a degree of authority and authenticity, as it will indicate only one item. So, the chances of scams are minimal to zero.
- Customization: A person can decide which data to include within the token, and how much of it should be inside it.
- Secure trading: It offers unprecedented security, and can make the process of cryptocurrency trading efficient and faster.
Problems with NFTS
- Some people complain about the lack of user-friendliness, especially for those who do not have much knowledge about Blockchain.
- The entire process of creation and verification of these tokens can take substantial time.
- It will need a massive infrastructure to create more of these tokens
But the biggest problem is, we are not there yet to fully understand the concept and its scope.
Examples of NFTs:
- Dragon CryptoKitty
- Angel from Axie Infinity