Non-Fungible Tokens (NFTs) are unique digital assets managed on a blockchain, representing ownership of items such as collectibles, in-game items, digital artwork, event tickets, domain names, and even records of physical asset ownership.
If you're already familiar with the crypto world, you've likely encountered terms like "non-fungible tokens" or "NFTs." Whether you're a skeptic, a believer, or simply curious, this guide is designed for you.
Understanding Non-Fungible Tokens
What Are Non-Fungible Assets?
Most discussions about NFTs begin with the concept of fungibility, defined as "interchangeable or replaceable by another identical item." However, this often complicates the explanation. To better understand non-fungible assets, consider the items you own daily—your chair, phone, laptop, or anything sellable on eBay. These are all non-fungible assets.
Fungible assets, on the other hand, are relatively uncommon. A classic example is currency: a $5 bill is always worth $5, regardless of its serial number or location. You can exchange it for another $5 bill (or five $1 bills) without any loss, illustrating fungibility.
It's important to note that fungibility is relative and applies only when multiple identical items exist. For instance, economy-class tickets are generally fungible, but you wouldn’t trade a first-class ticket for an economy one. Similarly, a chair might be interchangeable with an identical model unless you’ve developed a sentimental attachment to it.
Fungibility can also be subjective. Two economy-class tickets might seem identical, but a traveler may prefer a window seat over an aisle seat. Likewise, a rare penny might be worth only one cent to some but hold significant value for a coin collector. These nuances become critical when representing assets on a blockchain.
Blockchain-Based Non-Fungible Tokens
Digital non-fungible assets existed long before blockchain technology. Domain names, event tickets, in-game items, and social media accounts are all examples. However, they often lack interoperability and seamless transferability. For example, selling a Fortnite skin on eBay is nearly impossible due to technical restrictions.
Blockchain technology introduces a coordination layer for digital assets, enabling permanent ownership records and user-managed transfers. It enhances non-fungible assets with several unique properties:
Standardization
Traditional digital assets lack unified standards. Public blockchains allow developers to create reusable standards for NFTs, covering basics like ownership, transfers, and access control. Additional standards (e.g., how NFTs are displayed) can be implemented at the application layer.
Interoperability
NFT standards enable seamless transfer across ecosystems. When a developer launches a new NFT project, these assets instantly become viewable in dozens of wallets, tradable on marketplaces, and even displayable in virtual worlds.
Tradability
Interoperability allows NFTs to be freely traded on open markets. Users can transfer assets from isolated environments into markets supporting various交易方式, such as eBay-style auctions, bids, bundles, and transactions in stablecoins or application-specific currencies.
Liquidity
Instant tradability leads to higher liquidity. NFT markets cater to diverse audiences—from seasoned traders to casual gamers—exposing assets to a broader buyer base.
Immutability and Provable Scarcity
Smart contracts let developers enforce hard supply caps and immutable attributes post-issuance. For example, a developer can programmatically limit the creation of rare assets while allowing unlimited supply for common ones.
Programmability
Like traditional digital assets, NFTs are fully programmable. CryptoKitties embedded breeding mechanisms directly into their smart contracts. Today, many NFTs feature complex mechanics like forging, crafting, redemption, and random generation.
NFT Standards
Standards are a cornerstone of NFT functionality, ensuring consistent asset interactions and reliable development.
ERC721
Pioneered by CryptoKitties, ERC721 was the first standard for non-fungible digital assets. It’s an inheritable Solidity smart contract standard, allowing developers to easily create ERC721-compliant contracts by importing from libraries like OpenZeppelin. The core of ERC721 is simple: each asset has a unique identifier, and the standard maps this identifier to an address representing the owner.
ERC1155
Introduced by the Enjin team, ERC1155 incorporates semi-fungibility. Here, IDs represent asset classes rather than individual items. For example, an ID could represent "swords," and a wallet could own 1,000 such swords. This approach improves efficiency by reducing the number of required state changes for bulk transfers.
Composability
Based on the ERC-998 standard, composability allows NFTs to hold both non-fungible and fungible assets. Though few composable NFTs exist on the mainnet today, they present exciting future opportunities.
Non-Ethereum Standards
While most NFT standards are Ethereum-based, others have emerged on different blockchains. DGoods, by Mythical Games, aims to provide a feature-rich cross-chain standard starting with EOS. Cosmos is also developing an NFT module as part of its SDK.
NFT Metadata
Metadata provides descriptive information for specific token IDs, such as names, images, descriptions, and attributes. The critical question is how and where to store this data.
On-Chain vs. Off-Chain Metadata
Developers must choose between storing metadata on-chain (within the smart contract) or off-chain (on external servers).
On-Chain Metadata
Benefits include permanence (metadata coexists with the token) and the ability to interact with on-chain logic. This is crucial for assets whose long-term value depends on provable scarcity and immutability.
Off-Chain Metadata
Due to Ethereum’s storage limitations, most projects store metadata off-chain. The ERC721 standard includes a tokenURI method that returns a URL pointing to a JSON file containing metadata. This metadata should adhere to the official ERC721 metadata standard for compatibility with applications like OpenSea.
Off-Chain Storage Solutions
For off-chain storage, developers have two options:
Centralized Servers
Simple but risky: developers can alter metadata arbitrarily, and if the project shuts down, metadata may become inaccessible.
IPFS
The InterPlanetary File System (IPFS) offers a decentralized solution. Metadata stored on IPFS is immutable (addressed by content hashes) and remains accessible as long as nodes host the data. Services like Pinata simplify IPFS deployment, and Filecoin aims to incentivize node hosting.
History of NFTs (2017–2020)
Pre-CryptoKitties Era
The earliest NFTs were "colored coins" on the Bitcoin network. Rare Pepes, illustrations of the Pepe meme, were among the first NFT-like assets traded on Bitcoin. CryptoPunks, launched by Larva Labs, were the first NFTs on Ethereum, featuring 10,000 unique collectible punks.
The Rise of CryptoKitties
CryptoKitties, launched in late 2017, brought NFTs into the mainstream. This on-chain game allowed players to breed and trade unique digital cats. Speculative mechanics and viral storytelling drove its initial popularity, though interest eventually declined.
Post-CryptoKitties Developments
The period after CryptoKitties saw innovation in layer-2 games, "hot potato" games, and increased venture capital interest. Projects like Axie Infinity and Gods Unchained focused on building sustainable ecosystems.
Digital Art and Minting Platforms
Digital art emerged as a natural fit for NFTs. Platforms like SuperRare and KnownOrigin enabled artists to mint and sell digital artwork. Minting tools like Mintbase and Rarible made NFT creation accessible to non-developers.
Traditional IP and Virtual Worlds
Traditional IP owners experimented with NFTs, such as MLB’s collaboration with Lucid Sight. Virtual worlds like Decentraland and Cryptovoxels integrated NFTs for land ownership and in-world assets.
Trading Card Games and Domain Services
Games like Gods Unchained leveraged NFTs for tradable cards. Decentralized domain services like Ethereum Name Service (ENS) and Unstoppable Domains also adopted NFT standards.
Common NFT Misconceptions
Scarcity Alone Drives Demand
Demand is driven by utility and provenance—not just scarcity. Users care about an NFT’s story, history, and practical use.
Smart Contracts Guarantee Eternal Existence
While smart contracts persist, the applications and websites interfacing with them may not. A hybrid approach is often necessary for user accessibility.
Abstracting Blockchain Solves Everything
Hiding blockchain mechanics may improve usability but sacrifices interoperability with the broader NFT ecosystem.
NFT Market Overview
Current Market Size
The secondary NFT market is estimated at $2–3 million monthly. Leading projects have seen steady growth in transaction volume over the past six months.
Market Growth
The number of accounts interacting with NFTs has grown from ~8,500 in February 2018 to over 20,000 by December 2019. The market is driven by a core group of advanced users.
Sales Mechanisms
NFTs are primarily sold for ETH on decentralized exchanges. Dutch auctions and fixed-price sales are common for low-value items, while English auctions are preferred for high-value assets. Bundle sales account for a growing share of transactions.
NFT Distribution
Analysis shows both isolated and overlapping communities. While some users engage with multiple NFT projects, others remain dedicated to single ecosystems.
Frequently Asked Questions
What is an NFT?
An NFT is a unique digital asset representing ownership of items like collectibles, artwork, or virtual real estate, managed on a blockchain.
How do NFTs work?
NFTs use smart contracts to enforce ownership and transfer rules. Metadata provides details about the asset, stored either on-chain or off-chain.
Why are NFTs valuable?
Value derives from utility, provenance, and community demand. Scarcity is a factor but not the sole driver.
Can NFTs be copied?
While digital files can be copied, NFTs represent provable ownership of the original asset, authenticated via blockchain.
How do I create an NFT?
Use minting platforms like Rarible or OpenSea to upload digital content and deploy a smart contract. No coding skills are required.
Where can I buy NFTs?
NFTs are available on marketplaces like OpenSea, SuperRare, and KnownOrigin. Transactions typically require cryptocurrency.
Conclusion
NFTs represent a groundbreaking shift in digital ownership, enabling new forms of creativity, trade, and interaction. While the market is still emerging, its potential is vast. As technology and standards evolve, NFTs will likely become integral to the digital economy.