Introduction to NFT (non-fungible token) and use cases
Introduction
Blockchain technology is studied in various sectors to save costs and bring high security to business operations. Its use for transparent and secure record-keeping replaces the need for third parties to govern transactions. Today blockchain use has extended from P2P payment to supply chain, IoT, and now it’s popularly used to tokenize real-world assets.
What is NFT (non-fungible token)?
Just like in the real world, no two assets can exhibit similar characteristics or value, similarly, each tokenized asset on the blockchain has unique characteristics. Since these digital assets are distinguishable from each other, they are not interchangeable and so are referred to as non-fungible tokens. Just like real assets that have a certificate of ownership, NFT tokens maintain ownership records and proof of authenticity on the blockchain.
Fungibility is a desirable property for currency to enable fee exchange. For example, Bitcoin is a fungible asset, wherein each unit is indistinguishable. Meaning 1 Bitcoin in your wallet is just as valuable as the 1 Bitcoin in my wallet.
In comparison, each NFTs are unique and therefore are not interchangeable. Let’s say I create NFT tokens for two rare items (A – Baseball card and B – Mickey Mouse, a popular Disney character) on the blockchain. Since both assets (A and B) have their own function, they drive a different value and so can’t be interchanged with each other.
How NFTs work?
Projects commonly use the ERC-721 standard for issuance of their NFTs. It has similar properties to ERC-20. The information about digital assets is saved on the same blockchain. The key difference is, ERC-721 allows tracking ownership records of each unique asset.
A more recent, improved standard is ERC-1155. This new framework allows a higher degree of interoperability, wherein these unique assets can be used between different applications (across dApps) with relative ease.
NFT use cases:
Several firms are currently experimenting with NFT for a variety of use cases, such as gaming assets, collectibles, certificates, and fine art.
(1) Digital certification is a use case that particularly interests educational institutes. By issuing certificates on the blockchain, it solves the problem of counterfeit certification or education degree.
(2) Another example is digital identity. Nike intends to use the Ethereum blockchain to generate a unique identity for its limited-edition footwear. Each digital asset on blockchain represents a unique footwear ID code and records ownership information, along with attributes of the footwear, such as- colors, styles, backgrounds, etc.
(3) Other common uses are in games where developers issue digital items (game characters and collectibles). Using blockchain to tokenize gaming assets solves the free transferability and security of rare items in the game.
(4) Another exciting use of NFTs is the tokenization of real-world assets. These NFTs represent assets from the real-world such as art, metaverse like land, real estate, etc. It guarantees the authenticity of work and tamper-proof ownership records. It can be stored and traded on a blockchain. This introduces well-needed liquidity to markets that otherwise was not possible through traditional ways.
Popular NFTs:
The most prominent catalyst for the digital asset collectible in blockchain was Cryptokitties. One of the first NFT projects launched in 2017 on the Ethereum network, the entire scope of Cryptokitties gameplay surrounds around collecting, breeding, and auctioning kitties. Since then the NFT use cases have extended from collectibles to tokenization of real-world assets.
In July 2020, the total sales volume of Ethereum-based NFT tokens crossed $100 Million.
Top 3 NFT projects based on all-time sales (in USD):
| # | NFT project | All-time sales (in USD) |
|---|---|---|
| 1 | CryptoKitties is a collectible that allows players to collect, breed, and exchange virtual cats. | $ 37,678,406 |
| 2 | Decentraland is a virtual reality world where users own and exchange pieces of virtual land. | $ 25,254,217 |
| 3 | MyCryptoHeroes is a game where players level up game characters (heroes) through quests and battles. | $ 4,909,758 |
Uprising NFT projects based on 7-day sales (in USD):
| # | NFT project | 7-day sales (in USD) |
|---|---|---|
| 1 | Crypto Punks are 10,000 uniquely generated characters, inspiring the modern CryptoArt movement. | $ 338,484 |
| 2 | Axie Infinity is a game where players battle to level-up, evolve or breed Axie (character) to create new offspring. | $ 341,387 |
| 3 | Super Rare tokenizes digital arts. Artists issue authenticated single edition digital artworks. | $ 341,387 |
Closing thoughts:
NFTs have open up blockchain technology to whole new avenues. By representing physical assets in the digital world, NFTs have the potential to be a vital part of not just the blockchain ecosystem, but the wider economy. NFT use cases are vast, and it’s quite likely that many developers will come up with new and exciting projects.
Note: NFTs can be purchased from someone via the marketplace like OpenSea, Rarible etc.
