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What Is NFT?

In 2021, non-fungible tokens (NFT) became the top topic in the cryptocurrency community. Nowadays they are actively used by musicians, designers, artists and many other representatives of creative domains. Mysterious tokens bring their creators millions of dollars. Therefore, it is not surprising why they enjoy such great interest and now it becomes possible to buy GIFs and videos in the form of NFTs. Let’s take a closer look at non-fungible tokens, figure out what they are and what are the prospects for a new digital value. 

NFT Concept

In fact, NFT is a kind of confirmation of ownership of a certain digital object: image, music, video recording, art object and other assets. 

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If digital currencies can be figuratively called fungible (for example, 1 ETH in one user’s online wallet is equal to and in no way different from 1 ETH in another user’s wallet), 1 NFT (representing an object of art) cannot be equal to another non-fungible token. After all, these digital assets can represent the works of different creators with different values.

In addition, each non-fungible token is unique, i.e. it exists in a single copy and cannot be replicated. Each of the coins contains an ID specified in the smart contract. This ensures the uniqueness of each NFT.

Through the introduction of NFTs the developers were able to eliminate the problem of safeguarding ownership of digital objects. Full information about tokens and their holders of the ownership rights is stored in the blockchain. Therefore, they cannot be replaced or removed from the network.

How did NFT come about?

The first experiments with non-fungible tokens began after the appearance of the Colored Coins and Counterparty projects. They allowed tokenization of any assets on the Bitcoin blockchain.

The renewed interest in NFT is associated with the creation of the Rare Pepe Directory, i.e. tokenized Pepe the Frog memes that are stored on the BTC blockchain. The first project on Ethereum was CryptoPunks – a repository of pixel art images. A total of 10,000 such works were created and at first they were distributed free of charge. However, they are now considered digital antiques. 

However, the first truly hype project was CryptoKitties, which was launched in 2017. It is presented as a game. The user selects two NFT cats and breeds NFT kitties with varying degrees of rarity. The resulting offspring can be kept or sold. CryptoKitties are one of the few “ancient” projects that remain popular so far.

From then onward, many cryptocurrency projects began their own experiments with the CryptoKitties mechanics, but with the addition of new elements. This marked the onset of “second-level applications”, which are developed on the basis of CryptoKitties for already created non-fungible tokens. The top companies in this domain are Enjin (which became famous for its pompous ICO in the last months of 2017) and Eminence from the Yearn.Finance founder Andre Cronje. 

For example, the Wrapped Kitties application allows “wrapping” CryptoKitties in ERC-20 assets. If the user cannot afford an expensive token, they are offered to redeem part of it. Now the total cap of the “wrapped” NFTs exceeds $5 million and continues to grow at a rapid pace.

Another interesting project with game mechanics is Aavegotchi. It combines the legendary game and the principles of the decentralized finance service Aave.

Hot potato games are also quite popular. The bottom line is that each next token buyer must pay more for it than the previous one. This is because the asset value automatically becomes higher.

Tokenization of unique digital assets became popular very quickly. It has begun to be used in online versions of collectible card games, role-playing games, sports simulators, and blockchain based virtual worlds. Tokenization is especially actively used in relation to art objects, because it makes it easier to obtain royalties and draws more attention to the creator. 

Absolutely all types of NFTs can be traded on specialized platforms. Dozens of blockchain projects are based on the production and circulation of non-fungible tokens. The number of marketplaces will increase in the near future, so the cryptocurrency community is actively following the market trends. 

What token standards are used to issue NFTs?

Most NFTs are issued on the Ethereum platform according to several major standards. The standards for issuing non-fungible tokens guarantee stable interaction among blockchains, which in turn allows the transfer of NFTs among DeFi applications. 

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The first standard was ERC-721. It is the modified basic ERC-20 standard that requires the creation of separate smart contracts for each type of token. 

Soon after, other versions were created:

  • ERC-998 standard undergoes constant modification. It allows creating a so-called “composite” token, i.e. an asset that “owns” another digital asset. For example, one NFT gives the right to own a character from a computer game, and the rights to equipment are spelled out in another token. ERC-998 combines two coins into one.
  • ERC-875 standard allows adding multiple collectibles in one transaction.
  • ERC-1155 is another modified standard. It allows managing multiple types of NFTs through a single smart contract. However, non-fungible and ordinary tokens can be stored in one contract. Most often, assets for in-game items are created on the basis of this standard. So, if there are tens of thousands of them in the game, the first NFT standard requires the creation of the same number of smart contracts. However, ERC-1155 allows storing all ERC-721 tokens in a single contract with a unique dataset. Therefore, here you can store a character, roughly speaking, in parts.

Furthermore, active work is underway on another standard for non-fungible tokens – Blockchain Bean Asset (BBA). It is being created by the Blockchain Game Alliance, established by big players in the gaming industry. The new standard is purposed to enable future integration of decentralized storage of all types of game content. 

The existence of non-fungible tokens is not limited to Ethereum alone. Similar assets are also found on the EOS, Tron, NEO and many other cryptocurrency networks. Thus, for example, the game technology studio Mythical Games is now collaborating with blockchain developers and programmers from EOS. The collaboration is aimed at the future launch of a unique non-fungible token standard for the EOS ecosystem: dGoods.

The Tron team also invites developers to collaborate. Thus, Biscuit Labs, which earlier became famous for the creation of the EOS game Knights, is preparing for a full switchover to the TRX blockchain. This means the unification of all games, where the gamer will be able to buy and sell NFTs with both EOS and TRX. 

How does the NFT ecosystem look like?

Non-fungible token projects are most often developed on the basis of Ethereum, Flow, or WAX. For this purpose, sidechains or L2 applications can be used as well.

Token issuance platforms and marketplaces are divided into three categories:

  1. Aggregators – provide NFT turnover.
  2. Universal Issue Protocols – allow the creation of non-fungible tokens. 
  3. Niche platforms – used, for example, for pieces of art and music, or blogs.

What is the NFT’s scope of application?

Visual contentPaintings, graphics, design, photos, pictures on stock services.
Audio contentSongs, instrumental compositions, podcasts, radio broadcasts.
TextsPosts in blogs and social media, as well as instructions for various stuff.
Metaverse3D models, in-game items, maps, AR assets.
VideoMovies, TV series, streams, TV shows, videos on YouTube.
Address spaceIP addresses, domain names.

As you can see, non-fungible tokens are most often used in audiovisual content. 

However, games are another major sector that is already interested in NFTs. Especially since the gaming industry occupies the largest share in the digital economy. Therefore, the gaming industry will greatly benefit from the introduction of this type of asset, because each tokenized in-game item will become even more valuable. Eventually, this adds value to the game itself, and the developers will no longer need to puzzle over how to siphon more money from the players. 

Moreover, the very existence of NFTs and the blockchain allows the Play-to-Earn model to be brought to life. This is already happening now, as more and more distributed ledger-based gaming platforms are emerging. However, gamers are still required to use unofficial platforms to withdraw funds. 

Any blockchain-based game asset is fairly easy to buy or sell. Therefore, the future of the gaming industry lies with the blockchain. For example, some Axie Infinity players make much more money than they could have earned from a traditional job. 

What NFT marketplaces are there?

Let’s take a look at examples of the most popular platforms that allow you working with NFTs.

Token aggregators

  • Open Sea

Marketplaces/issue protocols for tokenized art objects

  • SuperRare
  • Async Art
  • Known Origin

Universal marketplaces/issue protocols

  • Rarible
  • Zora
  • Mintbase

Unique protocols for content

  • Mirror
  • Audius
  • EulerBeats

Art object marketplaces combine art galleries, auction houses, and non-fungible token issue protocols. For example, the Nifty Gateway and SuperRare platforms independently invite reputable digital artists. 

Other platforms, for example, OpenSea and Rarible, are more like the Etsy marketplace. Here digital creators can present their own works on their own. 

By the way, OpenSea is the largest market for non-fungible tokens in terms of turnover. The ERC-721 and ERC-1155 tokens have been used to create over 4 million unique digital works. 

Collectible NFTs can also be bought or sold on Auctionity. This marketplace allows buying or selling in-game items via an online auction. 

Another interesting trading platform is KnownOrigin. It was launched in 2018 specifically for the needs of designers and artists. Here users can buy objects of art, as well as authenticate and copyright their own works. All this became possible thanks to the KnownOriginDigitalAsset (KODA) token, created according to the ERC-721 standard. Currently, the KnownOrigin marketplace sells more than 19 thousand art objects. 

The Pixura project offers to create similar platforms with any NFTs according to the ERC-721 standard. It includes hundreds of templates for marketplaces with non-fungible tokens.

How do people make money on NFT?

Now let’s take a closer look at the main ways to make money on NFTs.

  1. Purchase of individual NFTs, including for the purpose of subsequent resale

    Similar assets can be bought on the aforementioned marketplaces (for example, OpenSea and Rarible). Ethereum is often used to purchase tokens. In addition, in the future it will be possible to sell digital values for a decent amount. 
  2. Purchase of internal tokens of NFT projects

    This is also possible. Thus, users can buy the Rarible project’s RARI management coins. These tokens allow participating in platform moderation and voting on new updates. 

    In addition, the audience is showing considerable interest in AXS and MEME tokens. The latter asset staking also unlocks rare collectibles and valuable digital artwork. Another interesting management token is SAND. It is an in-game currency powered by the Sandbox platform.

    Fractional ownership tokens have something to do with NFTs. These assets include NFTX coins. They allow splitting the whole NFT token into fractions, which are expressed in other ERC-20 coins. In addition, multiple users can have a share of an NFT token at once. 

    The Metapurse B20 token has a similar operating principle. It allows sharing ownership of works from The Beeple 20 Collection.
  3. Lending to users collecting NFTs

    Many collectors are actively interested in loans secured by their assets. This opportunity is offered by the NFTfi platform. If the user violates the contractual terms, the NFT is transferred to the lender along with all rights.
  4. Purchase of tokenized indices

    This is practiced by the NIFTEX startup. NIFTEX’s main goal is to bring liquidity to the NFT sphere (which CryptoPunks used to do) by creating $PUNK tokenized indices. People can manage the platform through the NFTX token. It gives the right to vote on innovations in the network.
  5. Purchase of tokenized insurance policies

    It enables to use the Yearn.Finance’s yInsure service. It offers income insurance policies that can also be sold on marketplaces.
Important! There is no single right way to accumulate NFTs and make money on them. Remember that such assets have quite a low liquidity, and the value of each digital item is subjective. Analytics services, for example, NonFungible, will help make a purchase decision.

How is the NFT industry evolving?

Over the past month, the NFTs trading volume on the largest marketplaces amounted to a record $480 million. This was facilitated by the solid interest in the industry from celebrated artists, singers and entrepreneurs, as well as the political elite. For example, Hollywood star Lindsay Lohan, US Senator Bernie Sanders and the author of animated memes Nyan Cat talked about NFT.

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Portraits of famous personalities, music albums, GIF-animations and even tweets are put up for auction in tokenized form. All this brings tens of millions of dollars. For example, lots worth $64 million were purchased in just one day on February 22, 2021. And if we add expensive lots to this amount, it will become even larger. For example, most replicas of CryptoPunks were sold for $144,000 to 642,000. The rarest picture cost almost $7 million! Quite a decent figure, isn’t it?

Hype even reached traditional auctions. For example, an NFT painting by the famous digital artist Beeple was sold for a record $69.3 million at Christie’s London auction on March 11 this year. This is the largest sum in the history of the NFT industry.

When it comes to collectibles, interest in tokenized basketball cards grew in late February 2021. For example, on February 16 and 22, the NBA TopShot marketplace was visited by a record number of users – more than 45,000! Other marketplaces are also gaining visitors. OpenSea has over 1000 visitors daily, while CryptoPunks has 350.

However, the number of transactions is closely related to attendance. For example, in late February, more than 500,000 transactions were made on NBA TopShot, over 4,000 on OpenSea, and 1,400 on CryptoPunks.

Conclusion

Non-fungible tokens can change not only the finance industry, but also the copyright sphere. It will now be much easier for creative people to control the rights to works and royalties. In addition, token operations are less expensive than those involving tangible objects. This is their main advantage. Plus, there are many ways to use tokens.

However, marketplaces and platforms for creating NFTs are in their early stages of development. Therefore, they do not offer all the functionality conceived by the developers so far. It only remains to follow the new trend that will change the idea of ​​digital assets.

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