Introduction Non Fungible Token

In brief:

 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 for digital collectibles, music, artwork, and in-game tokens.

WHAT IS FUNGIBILITY?

Fungible means changeable. It is proven that fungible assets are actually the odd ones out. A currency is a classic example of a fungible asset. Five dollars is always five dollars no matter the serial number on the specific five-dollar bill, or whether its five dollars sitting in your bank account. The ability to replace a five-dollar bill with another five-dollar bill (or five ones, for that matter) is what makes currency fungible. Fungibility refers to an asset’s ability to be exchanged with a similar asset without sacrificing its value. Fungibility also defines an asset’s characteristics, such as divisibility and value.

For example, one $10 dollar bill is identical to another $10 dollar bill in terms of value. As such, when you borrow a $10 dollar bill from someone, you don’t have to return the exact same note, since another of its kind has the same value.

In the cryptocurrency sector, one BTC has the same value as any other BTC. However, the game changes when we cross over to non-fungible tokens. An NFT crypto token has a distinct value from any other similar token. Individual characteristics dictate their uniqueness, hence, they are non-fungible, much like real-world assets like rare stones, works of art and collector luxury items.

Note that fungibility is relative ; it really only applies when comparing multiple things. Consider business class, economy class, and first-class flight tickets. Each ticket is roughly fungible within its class , but you can’t fairly swap a first- class ticket for a business class ticket. Even the chair you’re sitting in is roughly fungible with a chair of the same model, unless you’ve developed a special attachment to your particular chair.

Interestingly, fungibility can also be subjective. Back to the flight ticket example, a person who cares about sitting in a window seat and an aisle seat might not consider two economy class tickets interchangeable. Similarly, a rare penny might be worth 1 cent to me but worth much more to a coin collector. We’ll see that some of these nuances become important when representing these items on blockchains.

Cryptocurrencies, utility tokens, security tokens, privacy tokens… digital assets and their classifications are multiplying and evolving right alongside cryptographic and blockchain technology.

Non-fungible 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.

Non-fungible tokens (NFTs) are unique, digital items with blockchainmanaged ownership. Examples include collectibles, game items, digital art, event tickets, domain names, and even ownership records for physical assets.

If you’ve been living in the crypto world for a while, you’ve likely heard of the term “Non-Fungible Token”, or “NFT”. Maybe you’re a doubter, a believer, or perhaps you still don’t really know what exactly a non-fungible token is. In any case, this ebook is for you!

As a marketplace for NFTs, ‘OpenSea’ has a unique viewpoint. We have seen nearly every NFT-related project that has come online since late 2017 when the first NFT standard emerged. In fact, we’ll bet you a Gods Unchained

Card that if you ask us about an NFT project, we have heard of it and likely talked to the developers at some point! The NFT ecosystem is an integrated group of unbelievable innovators.

Basically this e-book is purported to provide an in-depth overview of nonfungible tokens, the technical anatomy of an ERC721, the history of the NFT, common misconceptions about NFTs, and the current state of the NFT market. We hope it will be relevant both to folks who are new to the space, as well as those who already know about NFTs but want to better understand the nuances of their inner workings.

A non-fungible token (NFT) is a cryptocurrency token that is indivisible and unique. One NFT cannot be interchanged with another NFT, and the whole cannot be broken down into smaller parts and used. NFTs offer myriad options for creating and trading digital assets — such as original artwork and blockchain-integrated collectible games like CryptoKitties.

NFTs are useful for proving the scarcity and provenance of rare assets, both digital and real-world.

Non-fungible tokens are mainly built on Ethereum using the ERC-721 token standard.

WHAT ARE FUNGIBLE TOKENS?

Fungible tokens are tokens that are tradable for each other, and their value remains constant. In the above example, Bitcoin is a fungible token because it has the same value regardless of its owner or history.

WHAT IS A NON-FUNGIBLE TOKEN?

‘Non-fungible assets’ are just normal stuff. On the other hand ‘Fungible assets’ are the odd ones out!

Non-fungible tokens are digital assets that contain identifying information recorded in smart contracts.

It’s this information that makes each NFT unique, and as such, they cannot be directly replaced by another token. They cannot be swapped like for like, as no two NFTs are alike. Banknotes, in contrast, 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.

Non-fungible tokens (NFT) are digital assets that represent a wide range of unique tangible and intangible items, from collectible sports cards to virtual real estate and even digital sneakers.

One of the main benefits of owning a digital collectible versus a physical collectible like a Pokemon card or rare minted coin is that each NFT contains distinguishing information that makes it both distinct from any other NFT and easily verifiable. This makes the creation and circulation of fake collectibles pointless because each item can be traced back to the original issuer.

A non-fungible token (NFT) is a cryptocurrency token that is indivisible and unique. NFTs offer myriad options for creating and trading digital assets — such as original artwork and blockchain-integrated collectible games like CryptoKitties.

Unlike regular cryptocurrencies, NFTs cannot be directly exchanged with one another. This is because no two NFTs are identical – even those that exist on the same platform, game or in the same collection. Think of them as festival tickets. Each ticket contains specific information including the purchaser’s name, the date of the event and the venue. This data makes it impossible for festival tickets to be traded with one another.

The vast majority of NFT tokens were built using one of two Ethereum token standards (ERC-721 and ERC-1155) – blueprints created by Ethereum that enable software developers to easily deploy NFTs and ensure they’re compatible with the broader ecosystem, including exchanges and wallet services like MetaMask and MyEtherWallet. Eos, Neo and Tron have also released their own NFT token standards to encourage developers to build and host NFTs on their blockchain networks.

Other key characteristics of NFTs include:

 Rare: The value of NFTs comes from their scarcity. Although NFT developers can create any amount of non-fungible tokens, they often limit the tokens to increase rarity.

 Non-interoperable: A CryptoPunk cannot be used as a character on the CryptoKitties game or vice versa. This goes for collectibles such as trading cards, too; a Blockchain Heroes card cannot be played in the Gods Unchained trading-card game.

 Indivisible: NFTs cannot be divided into smaller denominations like bitcoin satoshis. They exist exclusively as a whole item.  Indestructible: Because all NFT data is stored on the blockchain via smart contracts, each token cannot be destroyed, removed or replicated. Ownership of these tokens is also immutable, which means gamers and collectors actually possess their NFTs, not the companies that create them. This contrasts with buying things like music from the iTunes store where users don’t actually own what they’re buying, they just purchase the license to listen to the music.  Verifiable: Another benefit of storing historical ownership data on the blockchain is that items such as digital artwork can be traced back to the original creator, which allows pieces to be authenticated without the need for third-party verification.

 Unique: This is perhaps the most significant characteristic of them all. NFTs have a permanent information tab that records their uniqueness. Think of this information as a certificate of authenticity.

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 are divisible.

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.

CryptoKitties collectibles were some of the first non-fungible tokens. Each blockchain-based digital kitten is unique; if you send someone a CryptoKitty and receive a CryptoKitty from someone else, the one you receive will be a completely different CryptoKitty from the one you sent. Collecting different digital kittens is the point of the game.

The unique information of a non-fungible token, like a CryptoKitty, is stored in its smart contract and immutably recorded on that token’s blockchain. CryptoKitties were originally launched as ERC-721 tokens on the Ethereum blockchain, but have since migrated to their own blockchain, Flow, to be easier for crypto newcomers to access.

Did you know?

In late 2018, one player was so desperate to move to a “better location” in the virtual game “Decentraland” that they were ready to say goodbye to 2,800,000 MANA in order to purchase a land piece in-game. At the time of the deal, that was equivalent to over $215,200.

WHAT MAKES NFTS SO SPECIAL?

Non-fungible tokens have unique attributes; they are usually linked to a specific asset. They can be used to prove 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.

HOW ARE NON-FUNGIBLE TOKENS USED?

As well as for crypto-collectibles like CryptoKitties, non-fungible tokens can be used for digital assets that need to be differentiated from each other in order to prove their value, or scarcity. They can represent everything from virtual land parcels to artworks, to ownership licenses.

Non-fungible tokens are not traded on standard cryptocurrency exchanges, instead they are bought or sold on digital marketplaces like Openbazaar or Decentraland’s LAND marketplace.

HOW DO NFTS WORK?

Tokens like Bitcoin and Ethereum-basedERC-20 tokens are fungible. Ethereum’s non-fungible token standard, as used by platforms such as

CryptoKitties and Decentraland, is ERC-721. Non-fungible tokens can also be created on other smart-contract-enabled blockchains with non-fungible token tools and support. Though Ethereum was the first to be widely used, NEO, EOS and TRON now have NFT standards.

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 potent 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.

As is the challenge of blockchain to date, non-fungible tokens, their protocols and smart contract technology is still being developed. Creating decentralized applications and platforms for the management and creation of non-fungible tokens is still relatively complicated. There is also the challenge of creating a standard. Blockchain development is fragmented, many developers are working on their own projects. To be successful there may need to be unified protocols and interoperability.

HOW TO BUY NFT TOKENS?

Non-fungible tokens can be purchased on a huge number of NFT marketplaces, including Rarible, OpenSea, and Enjin Marketplace. Here’s how to get your digital hands on some using Rarible :

Step 1 : Head over to the Rarible website and click the ‘Connect’ button on the top right. From here, select the wallet you want to connect to the platform and log in.

You’ll need to accept the terms of service before you can log in.

In our example, we’ll connect using Metamask, a popular web and mobile wallet.

Step 2: Once logged in, search the platform for the NFT you’re looking to purchase.

In our example, we’ll show how you might purchase ‘Hand of Fate’ by Jango. The process will be similar regardless of which NFT you wish to purchase (assuming it is available to purchase outright).

Once you’ve selected the NFT you wish to purchase, click the ‘Buy now’ button.

Step 3 : A confirmation window will pop up, asking you to double-check the details of the order.

If you’re happy to continue, click the ‘Proceed to payment’ button to move ahead to the final step.

Step 4 : Your wallet click will then pop up asking you to confirm the transaction. Again, if you’re happy to continue, simply confirm the transaction and it will be processed.

Once it has confirmed, your NFT will be deposited directly to your Ethereum address and will be yours to keep.

Note : you may want to avoid buying your NFTs during peak times— otherwise you may end up with an inordinately high gas fee (as per our example below).

HOW DO YOU KNOW YOUR NFT IS AUTHENTIC?

NFT ownership is recorded on the blockchain, and that entry acts as a digital pink slip. Defining the blockchain is a whole ‘nother can of worms’.

 Where is the blockchain? It’s decentralized , so it exists across many people’s computers in encrypted bits and pieces.

WHY WOULD I WANT TO OWN AN NFT? CAN I MAKE MONEY ON IT?

One reason to buy an NFT is for its emotional value, which isn’t so different from physical objects…unless you’re a total utilitarian. No one buys lip gloss because they need it. They buy it for the way it makes them feel. The same can be true for a GIF, image, video, or other digital asset.

The other reason is because you think it’s valuable…and will only increase in value. And yes, you can make money off of an NFT by buying and reselling it for more.

ARE NFTS NEW?

They’re newly popular, but not new. Andrew Steinwold traces their origins all the way back to blockchain-backed Colored Coins in 2012, but they didn’t move into the mainstream until CryptoKitties had everyone buying virtual cats in 2017.

Recently, as Google search trends indicate, interest in NFTs has exploded. The creators of CryptoKitties started Top Shot, a platform that allows fans to buy, sell, and trade NBA highlights, and digital artwork is now being auctioned by Christie’s.

TOP NFT PROJECTS

Since the NFT subspace is growing exponentially, NFT-focused products and projects have also increased. They range from gaming networks to NTF marketplaces. Below are five of the top NFT projects today.

  1. OpenSea: This is the leading marketplace for NFT art and collectibles. Listed items range from ENS to virtual pets and plots of land. Notably, the marketplace allows purchases using several virtual currencies such as ETH and DAI .
  2. Async.Art : Async is another non-fungible token artwork marketplace that allows you to not only buy and sell your NFT but also to create one. That’s not all. The platform has some programming features that enable art creators to easily define their artwork’s appearance and behavior. In fact, it even allows buyers to buy sections or “layers” of a given artwork and customize them.
  3. CryptoKitties: Although we’ve discussed this project above, it still deserves to be on the list of top NFT projects considering it brought the whole NFT game to the limelight.
  4. Ethereum Name Service (ENS): This is a domain name service project that came to life in mid-2017. The .ETH domain names are NFTs using Ethereum’s ERC-721 standards and are tradable on NFT marketplaces.
  5. Decentraland: Decentraland is a top NFT project focusing on a distributed virtual world. Here, participants can buy virtual land. Furthermore, each “inhabitant” has a special identifying digital passport.

WHO’S MAKING WAVES IN THE NFT SPACE?

Terra Virtua

A major emerging market for NFTs is the creation of digital collectibles— similar to physical trading cards, they derive value from their scarcity. Numerous brands have started licensing their content for use in digital collectibles; one of the companies at the forefront of the movement is Terra Virtua.

Terra Virtua bills itself as the “home of digital collectibles,” enabling fans to create a digital “Fancave” where they can display their NFT assets. In September of this year, the company released a series of licensed NFTs inspired by the Godfather film trilogy.

Decentraland

NFTs are increasingly making their presence felt in the gaming space, too.

Decentraland is the world’s first fully decentralized game world, built on the

ERC-20 token MANA. Users can spend MANA to buy goods, services and 10x10m plots of virtual land, underpinned by the non-fungible LAND token. Decentraland’s ICO for the MANA token initially raised $20.7 million and sold out within five minutes. A subsequent auction of LAND saw users spend 161 million MANA to buy virtual plots—around $15 million at current prices.

The game world itself is similar to Minecraft; simple blocky graphics and user- generated creations, which include everything from art galleries (where NFTs can be displayed) to simple games built within the game world.

Decentraland supports a number of different NFTs in addition to LAND, including Axie Infinity and the ever-popular CryptoKitties.

NFTs and DeFi

Non-fungible tokens are also making waves in one of cryptocurrency’s most intriguing and innovative spaces, the decentralized finance (DeFi) space.

One example of how NFTs are being used in DeFi is Aavegotchi, an experimental startup funded by DeFi money market Aave. Aavegotchis are NFT crypto-collectibles used in a game universe; every Aavegotchi also has Aave’s aTokens staked inside them as collateral, meaning that each one generates yield on Aave. If the owner liquidates their stake, the Aavegotchi disappears.

Another service that’s aiming to bridge the DeFi and NFT communites is Rarible, a decentralized app (or dapp) that enables users to sell digital artwork in the Rarible market.

In July 2020, Rarible launched RARI, a governance token that’s used to reward creators and collectors; it can only be earned through active participation on the platform, a process Rarible terms “marketplace liquidity mining.”

WHY THEY’RE IMPORTANT:

NFTs have become hugely popular with crypto users and companies alike because of the way they revolutionized the gaming and collectibles space. Since November 2017, there has been a total of $174 million spent on NFTs.

Thanks to the advent of blockchain technology, gamers and collectors can become the immutable owners of in-game items and other unique assets as well as make money from them. In some cases, players have the ability to create and monetize structures like casinos and theme parks in virtual worlds, such as The Sandbox and Decentraland. They can also sell individual digitals items they accrue during gameplay such as costumes, avatars and in-game currency on a secondary market.

For artists, being able to sell artwork in digital form directly to a global audience of buyers without using an auction house or gallery allows them to keep a significantly greater portion of the profits they make from sales. Royalties can also be programmed into digital artwork so that the creator receives a percentage of sale profits each time their artwork is sold to a new owner.

William Shatner, best known as Captain Kirk from “Star Trek,” ventured into digital collectibles in 2020 and issued 90,000 digital cards on the WAX blockchain showcasing various images of himself. Each card was initially sold for approximately $1 and now provides Shatner with passive royalty income every time one is resold.

ADVANTAGES OF NFTS

Non-fungible tokens bring a new dimension to digital interactions. The three leading advantages of NFTs are:

  1. They’re transferable – Unlike exchange-traded fungible tokens, NFTs are bought or sold on special marketplaces. However, their value depends on their uniqueness.
  2. They’re authentic – Blockchain technology powers non-fungible tokens. Therefore, you know that your NFT is genuine, since it’s nearly impossible to create counterfeits with a decentralized immutable ledger.
  3. They preserve ownership rights – Again, this refers to an NFT’s use of decentralized platforms where no owner can alter the data once committed.

WHY DO THEY HAVE VALUE?

Like all assets, supply and demand are the key market drivers for price. Due to the scarce nature of NFTs and the high demand for them from gamers, collectors and investors, people are often prepared to pay a lot of money for them.

Some NFTs also have the potential to make their owners a lot of money. For instance, one gamer on the Decentraland virtual land platform decided to purchase 64 lots and combine them into a single estate. Dubbed “The Secrets of Satoshis Tea Garden,” it sold for $80,000 purely because of its desirable location and road access. Another investor parted with $222,000 to purchase a segment of a digital Monaco racing track in the F1 Delta Time game. The NFT representing the piece of digital track allows the owner to receive 5% dividends from all races that take place on it, including entry ticket fees.

WHAT ARE THE MOST EXPENSIVE NFTS?

Dragon the CryptoKitty continues to be one of the most expensive NFTs in the space, valued at 600 ETH.

The one-of-a-kind “1-1-1” race car from F1 Delta Time sold for 415.9 ETH in May 2019.

Alien #2089 sold for 605 ETH in January 2021. This NFT is part of the CryptoPunk collection, the first NFTs ever created. Overall, there are 10,000 different CryptoPunks and only nine Alien CryptoPunks.

An NBA Topshot digital collectible card of basketball star LeBron James sold for $100,000.

An Axie named Angel from the NFT-based game Axie Infinity sold for 300 ETH. Most discussions about non-fungible tokens begin by introducing the idea of fungibility . As already defined in the pretext section that fungibility is defined as “able to replace or be replaced by another identical item”. This might be confusing. To get a better sense of what might constitute a nonfungible asset, just think about most of the stuff you own. The chair you’re sitting in, your phone, your laptop, or anything you could go and sell on eBay, fall in the category of non-fungible things.

A non-fungible token (NFT) is a special type of cryptographic token which represents something unique; non-fungible tokens are thus not mutually interchangeable. This is in contrast to cryptocurrencies like bitcoin, and many network or utility tokens that are fungible in nature.

APPLICATIONS:

Non-fungible tokens are used to create verifiable digital scarcity, as well as digital ownership, and the possibility of asset interoperability across multiple platforms. NFTs are used in several specific applications that require unique digital items like crypto art, digital collectibles, and online gaming.

Art was an early use case for NFTs, and blockchain in general, because of its ability to provide proof of authenticity and ownership of digital art that has otherwise had to contend with the potential for mass reproduction and unauthorized distribution of art through the internet. In February 2021 a hype started when US-American digital artist beeple’s work “Everydays. The first 5000 days” was the first NFT artwork to be listed in one of the major auctions houses Christie’s. A few days before, the meme animation Nyan Cat had been sold on an internet market place for 600,000 USD.

Later, popular blockchain games like CryptoKitties made use of NFTs on the Ethereum blockchain. NFTs are used to represent in-game assets, and are controlled by the user, instead of the game developer. This lets the assets be traded on third-party marketplaces without permission from the game developer.

STANDARDS:

Specific token standards have been created to support the use of a blockchain in gaming. These include the Ethereum ERC-721 standard of CryptoKitties, and the more recent ERC-1155 standard.

ERC-721 Standard

ERC721 was the first standard for representing non-fungible digital assets. ERC721 is an inheritable Solidity smart contract standard, meaning that developers can easily create new ERC721-compliant contracts by importing it from the OpenZeppelin library.

ERC-1155 Standard

ERC1155, brings the idea of semi-fungibility to the NFT world as well as it provides a superset of ERC721 functionality, meaning that an ERC721 asset could be built using ERC1155.

GROWTH AND MAINSTREAM APPEAL:

Non-fungible tokens first became popular when CryptoKitties went viral and subsequently raised a $12.5 million investment. RareBits, a NonFungible Token marketplace and exchange, raised a $6 million investment. Gamedex, a collectible cards game platform made possible by NFTs, raised a $800,000 seed round. Decentraland, a blockchain-based virtual world, raised $26 million in an initial coin offering,[17] and had a $20 million internal economy as of September 2018. Nike holds a patent for its blockchain-based NFT-sneakers called ‘CryptoKicks’.

BLOCKCHAIN-BASED NON-FUNGIBLE TOKENS:

Just as we had digital currencies (like airline points, in-game currencies), before crypto currencies emerged, we had had non-fungible digital assets since the dawn of the internet. Domain names, event tickets, in-game items, even handles on social networks like Twitter or Facebook, are all nonfungible digital assets. They just vary in their tradability, liquidity, and interoperability.

Many of these are incredibly valuable: Epic Games made $2.4 billion in revenue selling costumes in their free-to-play game Fortnite in 2018 alone, the market for event tickets is projected to reach $68 billion in 2025, and the market for domain names continues to see solid growth.

We have tons of digital stuff, that we’ve never really possessed it.

So it’s clear that we already have tons of digital stuff. But to what extent do we “own” these digital things? If digital ownership only means that an item belongs to you and not someone else, then you really own them in some sense. But if digital ownership is more like ownership in the physical world (the freedom to hold and transfer indefinitely), this doesn’t always seem to be the case with digital assets. Rather, you own these assets in specific contexts , which may or may not make moving them around easy. For instance, try to sell a Fortnite skin on eBay, and you’ll discover the difficulty of moving digital assets from one person to another.

This is where blockchains come in! Blockchains provide a coordination layer for digital assets, giving users ownership and management permission.

Blockchains add several unique properties to non-fungible assets that change the user and developer relationships with these assets.

STANDARDIZATION

Traditional digital assets—from event tickets to domain names—have no unified representation in the digital world. A game likely represents its ingame collectibles in an entirely different way than an event ticketing system. By representing non-fungible tokens on public blockchains, developers can build common, reusable, inheritable standards relevant to all non- fungible tokens.

These include such basic primitives as ownership, transfer, and simple access control. Further information (specifications for how to display an NFT, for example) can be layered on top for rich display inside of applications.

These are similar to other building blocks of the digital world, like the JPEG or PNG file format for images, HTTP for requests between computers, and HTML / CSS for displaying content on the web. Blockchains add a layer on top that gives developers a brand new set of stateful primitives on which to build applications.

INTEROPERABILITY

Non-fungible token standards allow non-fungible tokens to move easily across multiple ecosystems. When a developer launches a new NFT project, these NFTs are immediately viewable inside dozens of different wallet providers, tradeable on marketplaces, and nowadays, displayable inside of virtual worlds. This is possible because open standards provide a clear, consistent, reliable, and permissioned API for reading and writing data.

TRADABILITY

The most attractive feature enabled by interoperability is free trade on open marketplaces. For the first time, users can move items outside of their original environments and into a marketplace where they can take advantage of sophisticated trading capabilities, like eBay-style auctions , bidding, bundling, and the ability to sell in any currency, like stablecoins an d application-specific currencies.

For game developers specifically, tradability of assets represents a transition from a closed economy to an open or free-market economy. Game developers no longer have to manage every piece of their economy i.e. from the supply of resources to pricing to capital controls. Instead, they can let free markets do the heavy lifting!

LIQUIDITY

Instant tradability of non-fungible tokens will lead to higher liquidity. NFT marketplaces can supply to a variety of audiences—from hardcore traders to more beginner players—allowing for greater exposure of the assets to a wider pool of buyers. In the same way that the ICO boom of 2017 gave birth to a new asset class driven by instantly liquid tokens, NFTs expand the market for unique digital assets.

PERSISTENCE AND PROVABLE SCARCITY

Smart contracts allow developers to place hard checks on the supply of nonfungible tokens and enforce persistent properties that cannot be modified after the NFTs are issued. For example, a developer can enforce via programming that only a specific number of a specific rare item can be created, while keeping the supply of more common items infinite. Developers can also enforce that specific properties do not change over time by encoding them on- chain. This is particularly interesting for art, which relies heavily on the provable scarcity of an original piece.

PROGRAMMABILITY

Of course, like traditional digital assets, NFTs are fully programmable. CryptoKitties (which we’ll talk about later) are baked in a breeding mechanic, directly into the contract that represents the digital cats . Many of today’s NFTs have more complex mechanics, like forging, crafting, redeeming, random generation, etc. The design space is full of possibilities.

WHAT ARE CRYPTOKITTIES?

CryptoKitties is a popular game on the ETH-powered decentralized protocol allowing the collection, purchase, sale and breeding of virtual cats. Since its much-publicized launch in 2017 at the height of that year’s bull run, the game, essentially a blockchain version of 1990s cult classic Tamagotchi (in that same vein, check out DeFi’s Aavegotchi!) has continued to act as an NFT bastion.

Notably, CryptoKitties was the first mainstream use case on the secondlargest blockchain that focused on leisure. In addition, the game opened the lid on the reach of decentralized applications (DApps) for recreational purposes. Upon its launch, CryptoKitties brought massive hype to Ethereum’s platform, which soon turned into a chorus of boos as the DApp’s popularity clogged the network, slowing down transaction confirmations and pushing up fees.

Using smart contracts, Kitties’ owners and breeders can trade their virtual cats. They don’t only draw attention, but also serious money on NFT marketplaces such as OpenSea.

If you are a cat lover and wondering how to buy CryptoKitties; it’s easy. First, you need a Firefox or Chrome browser, a MetaMask wallet and some Ethereum (ETH) coins in the wallet. Next, access the Kitties’ marketplace, choose your Kitty, pay, and it’s yours.

Dapper Labs, creators of CryptoKitties, has recently followed up their success with NBA TopShot, a digital collectibles marketplace for NBA fans.

WHAT ARE CRYPTOPUNKS?

An obscure CryptoPunks “Alien” NFT made headlines in January 2021 when it was sold for a staggering $760,000 at the time, or 605 Ethereum. CryptoPunks are considered the original NFT series and its groundbreaking project predates both the ERC-721 standard and CryptoKitties. This has made it increasingly rare, with the average selling price for one in 2020 exceeding $6,000.

NON-FUNGIBLE TOKENS: ONE OF A

KIND ASSETS FOR COLLECTIBLES

AND RARE ITEMS

FUNGIBLE AND NON-FUNGIBLE CHARACTERISTICS OF CRYPTO TOKENS:

A fungible asset refers to an asset that is interchangeable with any other like unit of that asset. For example, one bitcoin is the same as any other bitcoin in circulation — the case is the same with dollars or euros or ether. Fungible assets are also divisible, meaning they can be broken up into smaller fractions of units that share the same properties. Fungible assets are essentially indistinguishable from one other. These traits are key for any asset to be viable as a payment mechanism. On the other hand, non-fungible tokens are crypto tokens that are indivisible and unique. While NFTs are built on smart contracts just like ETH and DAI, NFT contracts contain specific information that makes each NFT different from the next. In this way, one NFT cannot be interchanged with another NFT, and the whole cannot be broken down into smaller units and used. These traits denote nonfungibility.

NFTS OFFER OPTIONS TO CREATE AND TRADE RARE AND UNIQUE DIGITAL ASSETS

NFTs are provably scarce assets. Each non-fungible token contains code that indicates it is the only asset with its specific digital identity. This is useful in creating unique digital goods, and can even be used to represent rare physical assets, whose provenance (historical record of ownership) can be tracked. The possibilities for exclusive and rare items that can be traded — such as digital art, collectibles, or game pieces — are endless. Platforms like Open Sea, Super Rare, and Nifty Gateway bring NFTs to an evergrowing consumer base.

USE CASES FOR NFTS INCLUDE:

Creating digital or crypto-collectibles

Managing ownership of digital items within blockchain-integrated games

 Proving authenticity of digital art, while allowing artists to retain their copyright and IP

 Devising a digital identity system that allows users to control their data from one place

 Allowing fractional ownership of high-value items, such as real estate. The most popular application for NFTs to date is

CryptoKitties, an Ethereum- based game that allows for the buying, selling, and breeding of adorable digital cats. CryptoKitties launched on November, 28, 2017, and within two weeks had over 150,000 users and $15 million in transactions. A single CryptoKitty was sold for $170,000, which made the platform a viral sensation, attracting a new audience of gamers to Ethereum along with global mainstream attention.

CryptoKitties was successful, but that success led to serious transaction congestion on the Ethereum network. The resulting scramble to accommodate network scalability — plus the large amounts of money being exchanged for digital cats — drove many news organizations to cover CryptoKitties. This brought significant awareness to blockchain as a technology that offers more than just cryptocurrencies.

Furthermore use cases of NFTs can be enumerated as:

GAMING

NFTs are popular in the gaming industry since these tokens solve some of its inherent problems. For example, top games such as Fortnite prohibit the sale of rare traits and accessories such as weapons and skins.

However, with NFTs, these features can easily be transferred and used in different games. As such, non-fungible tokens can help drive in-game economies.

DIGITAL ASSETS

Think of Decentraland . Here, participants can buy virtual land. Another example that is closer to home is ENS (Ethereum Name Service), which uses NFTs for its .ETH domains to facilitate buying and selling.

IDENTITY

NFTs are ideal for fighting identity theft. Examples of things that can be digitized to represent identity include academic qualifications, medical records and even our appearances.

Furthermore, digital artists can turn their work into NFTs for copyright purposes.

NFT’s use to prove identity includes converting physical game tickets into non-fungible tokens to weed out counterfeits.

COLLECTIBLES

NFTs bring a new dawn to the collectible world. Consequently, conventional collectors are now onto digital assets.

NON-FUNGIBLE TOKEN STANDARDS

Standards are part of what makes non-fungible tokens powerful. They give developers the guarantee that assets will behave in a specific way and describe exactly how to interact with the basic functionality of the assets.

ERC721

Pioneered by CryptoKitties, ERC721 w as the first standard for representing non-fungible digital assets. ERC721 is an inheritable Solidity smart contract standard, meaning that developers can easily create new ERC721-compliant contracts by importing it from the OpenZeppelin library ( we have a helpful tutorial on creating your first ERC721 contract here) . ERC721 is actually relatively simple: it provides a mapping of unique identifiers (each of which represents a single asset) to addresses, which represent the owner of that identifier. ERC721 also provides a permissioned way to transfer these assets, using the transferFrom method.

interface ERC721 {

function ownerOf(uint256 _tokenId) external view returns

(address);

function transferFrom(address _from, address _to, uint256

_tokenId) external payable;

}

If you think about it, these two methods are really all you need to represent an

NFT; firstly a way to check who owns what and secondly a way to move things around. There are a few other unnecessary elaborated features to the standard (some of which turn out to be very important for NFT marketplaces), but the core of ERC721 is quite basic.

ERC1155

ERC1155, founded by the Enjin t eam, brings the idea of semi-fungibility to the NFT world. With ERC1155, IDs not only represent single assets but classes of assets. For example, an ID might represent “swords”, and a wallet could own 1,000 of these swords. In this case, the balanceOf method would return the number of swords owned by a wallet, and a user can transfer any number of these swords by calling transferFrom with the “sword” ID.

interface ERC1155 {

function balanceOf(address _owner, uint256 _id) external view returns (address);

function transferFrom(address _from, address _to, uint256

_id, uint256 quantity) external payable;

}

One advantage of this type of system is efficiency: with ERC721, if a user wanted to transfer 1,000 swords, they would need to modify the smart contract’s state (by calling the transferFrom method) for 1,000 unique tokens. With ERC1155, the developer need only call transferFrom with quantity 1,000 and perform a single transfer operation. This increased efficiency, of course, comes with the loss of information: we can no longer trace the history of an individual sword.

Note also that ERC1155 provides a superset of ERC721 functionality, meaning that an ERC721 asset could be built using ERC1155 (you’d simply have a separate ID and quantity 1 for each asset). Due to these advantages, we’ve recently witnessed growing acceptance of the ERC1155 standard.

OpenSea recently developed a repository on Github for getting started with the ERC1155 standard.

Anatomy of the ERC20, ERC721, and ERC1155 standards. ERC20 maps addresses to amounts, ERC721 maps unique IDs to owners, and ERC1155 has a nested mapping of IDs to owners to amounts.

Composables

Composables, led by the ERC-998 standard, provide a template by which NFTs can own both non-fungible and fungible assets. There have only been several composable NFTs deployed on mainnet, but there are incredibly exciting opportunities to put them to use!

…a cryptokitty may own a scratching post and a feeding dish; the dish may contain some amount of fungible “chow” tokens. If I sell the cryptokitty, I sell all of the belongings of the cryptokitty.

NON-ETHEREUM STANDARDS

While Ethereum is where most of the action is currently happening, there are several other NFT standards emerging on other chains. DGoods, pioneered by the Mythical Games team, is focused on providing a featurerich cross- chain standard starting with EOS. The Cosmos project is also developing an NFT module that can be leveraged as part of the Cosmos SDK.

NON-FUNGIBLE TOKEN METADATA

As mentioned, the ownerOf method provides a way to look up the owner of an NFT. For example, by querying ownerOf(1500718) on the CryptoKitties smart contract, we can see that the owner of CryptoKitty #1500718 at the time of writing is an account with the address 0x6452… This can be verified by visiting their CryptoKitty on OpenSea or on CryptoKitties.co.

But how do OpenSea and CryptoKitties figure out what CryptoKitty #1500718 looks like? And what about its name and unique attributes?

Hereafter we introduce metadata . Metadata provides descriptive information for a specific token ID. In the case of the CryptoKittty, the metadata is the name of the cat, the picture of the cat, a description, and any additional traits (called “cattributes”, in the case of CryptoKitties). In the case of an event ticket, the metadata might include the date of the event and the type of ticket, in addition to a name and description. The metadata for the above cat might look something like this:

{

“name”: “Duke Khanplum”,

“image”:   https://storage.googleapis.com/ck-kittyimage/0x06012c8cf97bead5deae23707 0f9587f8e7a266d/1500718.png”,

“description”: “Heya. My name is Duke Khanplum, but I’ve always believed I’m King Henry VIII reincarnated.” }

The question becomes how and where to store this data such that it can be accessed by applications that care about the NFT.

ON-CHAIN VS. OFF-CHAIN

The first decision, for developers, to take is what metadata to represent onchain vs. off-chain. That is, do you bake the metadata directly into the smart contract representing the tokens, or do you host it separately?

On-chain Metadata

The benefits of representing metadata on-chain are:

  1. It permanently resides with the token, persisting beyond the lifecycle of any given application.
  2. It can change in accordance with on-chain logic.

Point #1 is important if assets are intended to have long-lasting value far beyond their original creation. For example, a piece of digital art is expected to persist throughout the ages, regardless of whether the original website that was used to create the art is still around. It therefore is important that its metadata persist alongside the lifecycle of the token identifier.

Additionally, on-chain logic may need to interact with the metadata . In the case of CryptoKitties, for example, the “generation” of the CryptoKitty influences how quickly a CryptoKitty can breed, and breeding all happens on- chain (higher generation cats bred more slowly). So the logic inside of the smart contract needs to be able to read the metadata from its internal state.

Off-chain Metadata

Despite these benefits, most projects store their metadata off-chain simply due to the current storage limitations of the Ethereum blockchain. The ERC721 standard, therefore, includes a method called tokenURI that developers can implement to tell applications where to find the metadata for a given item.

function tokenURI(uint256 _tokenId) public view returns (string)

The tokenURI method returns a public URL. This, in turn, returns a JSON dictionary of data, something like the example dictionary for the CryptoKitty above. This metadata should conform to the official ERC721 metadata standard for it to be picked up by applications like OpenSea. At OpenSea, we want to give developers the ability to build rich metadata that can be displayed inside of our marketplace, so we’ve added extensions to the ERC721 metadata standard that allows developers to include things like traits, animations, and background colors.

OFF-CHAIN STORAGE SOLUTIONS

If you’re storing your metadata off-chain, you have a couple of options:

Centralized servers

The simplest way to store metadata is on a centralized server somewhere, or a cloud storage solution like AWS. Of course, this has disadvantages:

  1. The developer can change the metadata accordingly.
  2. If the project goes offline, the metadata could disappear from its original source.

To solve problem #2 up to some extent, there are now several services (OpenSea included) that will cache the metadata on its own servers in order to ensure that it can be efficiently served to users even if the original hosting solution goes down.

IPFS

An increasing number of developers, particularly in the digital art space, are using the InterPlanetary File System (IPFS) to store metadata off-chain. IPFS is a peer-to-peer file storage system that allows content to be hosted across computers, such that the file is replicated in many different locations.

This ensures that

  1. The metadata is immutable, as it is uniquely addressed by the hash of the file.
  2. As long as there are nodes willing to host the data, the data will persist over time.

There are now services like Pinata that make this process simpler for developers by handling the infrastructure for deploying and managing IPFS nodes, and the highly-anticipated Filecoin network will (in theory) add a layer on top of IPFS to incentivize nodes to host files.


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