1 – NFT Definition
Let’s start with the definition of NFT, also known as “Non-Fungible Token.”
NFT refers to a digital asset associated with a token contained in a smart contract.
To simplify the concept, this token is nothing more than digital information, such as a certificate.
Any type of file can be associated with one of these tokens, thus allowing them to be registered within the blockchain as unique assets that are impossible to replicate.
This then is what makes it unique, the impossibility of being able to replace an NFT identically with another asset. While all money, banknotes, but also bitcoins, are considered fungible because two people can exchange the same amount of these assets and both will have the same initial value, NFTs are impossible to exchange identically and therefore do not have a unique value that unites them.
These assets cannot be forged because the blockchain records all transactions within it, creating a kind of repository in which all information about the assets is contained.
NFTs can be created in a single edition, so 1/1, or in multiple editions of the same.
For example, if I wanted to create a 25-edition NFT, the NFT will be created as a copy of itself 25 times, and within each digital certificate will be entered the number of the edition that corresponds to it. It is as if it were a single NFT with 25 editions of the same, as when cars or other limited edition goods are created.
The one shown in the figure is an example of an NFT created on the Ethereum network.
You can see the marketplace where it was created (in this case Foundation, FND), the smart contract address of the collection, the number of transactions made and the wallet addresses involved in them.
2 – NFT types
There are various categories of NFTs, created over the years and through user experimentation. We can divide them into five macrocategories:
- Artistic works: then divided into various subcategories, such as illustrations, 3D works, digital sculptures, etc;
- Digital assets: include the contents of a video game, such as skins, weapons and armor, or lands of a metaverse, digital real estate, avatars and so on;
- Physical assets: objects in physical form that can be houses, cars, furniture, clothes, shoes, concert tickets, basically these are all objects that exist in reality and are digitally certified through NFTs (the most concrete example is StockX which we will see in detail in another lesson);
- Collectibles: although these are real digital assets, they can be considered cross-cutting NFTs, as many collectible projects have benefits for owners, which can be unique skins in a metaverse, discounts for assets in reality, exclusive tickets to events, and so on;
- Royalties: this is a fast-growing category in the music industry as it allows artists to be able to sell NFTs of one of their songs or albums and “give away” with them a percentage of the royalties earned through music streaming.
Now let’s talk a little history.
NFTs were created in 2014, the first one, called Quantum, was a very simple digital image created in computer graphics by Kevin McCoy.
But the NFT phenomenon began to spread with the creation of OpenSea in 2017, the first NFT marketplace on the widely used Ethereum network. OpenSea is basically a website where people can connect with their Ethereum wallet and buy and sell NFTs from other users.
To give some numbers, in 2021 OpenSea had over half a million active users and over $8 billion in trading volume.
The largest category at the moment is art, which has within it a plethora of subcategories: photographs, paintings, 3D works, digital arts, digital sculptures, songs, videos, movies, and you name it.
This category currently holds the record for the highest sale to the dollar countervalue in history, achieved by artist Beeple for “The first 5000 days,” a gigantic work that captures his project of creating one piece of artwork a day for 5000 days. It was sold at auction for $69 million.
3- Pros and cons of NFTs
NFTs then, certify an object’s authenticity and so-called digital ownership, so any kind of document can become an NFT quickly and directly, without going through government agencies or bureaucratic paperwork.
The problem of copyright, however, is still very much present, as it is easy to use any kind of image that we do not have the copyright to and certify it through NFT. There is to be said, however, that by checking with verified and official social profiles, it is possible to recognize a real account from a fake one.
Then there is the problem of market fluctuation of currency value. Selling and buying NFT on the Ethereum network while the value of ETH drops by 50% in 6 months (as happened in 2021) is not sustainable for companies that want to enter the crypto and metaverse world.
However, there are absolutely positive aspects about this type of technology. First among them is the support for smart contracts, another technology in this industry that protects creators and buyers more.
A smart contract is a kind of executable program on blockchain that can be used to define specific terms, for example by stipulating that a percentage of royalties from the price of resales of a work go to the artist.
Smart contracts allow transparency and greater visibility into assets, from creation to changes of hands through resales, by being able to find out which wallet owned it and for how long.