Learn about NFTs in a few minutes
NFTs, or non-fungible tokens, became an incredible sensation in 2021, and after that they’ve been pronounced death several times. However, NFTs are still here and the technology positions itself as one for the future. But of course not every NFT has a million dollar value. Let’s dive into 10 key things everybody should know and understand about NFTs.
There are lots of misconceptions surrounding NFTs, because not all of them are meant to make you rich. Moreover, NFTs with 1 dollar value can have plenty of utility across Web3. Yes, cheap can be good. So, let’s dive into the wonderful world of non-fungible tokens.
What is an NFT?
Non-fungible tokens, or NFTs for short, are unique digitally tokenized assets on the blockchain that represent ownership over something. As such, these NFTs hold similar qualities to physical collectibles, because they are scarce, limited in supply and verifiably authentic.
On a technical level, the NFT is a contract that gives the holder ownership over a connected media asset. In most cases, the connected media is an image stored on IPFS. However, it can also be an image stored on the blockchain. Technically, the NFT can even be proof of ownership over formal documents, such as a driver’s license or the deeds to piece of land.
Because an NFT serves as a certificate of ownership over a specific asset, it also holds a certain value. This value can be based on market sentiment, or it can even have more fundamental value.
With this out of the way, let’s dive into 10 things you really need to know about NFTs.
NFTs are limited in supply and unique
NFTs and cryptocurrencies both exist on the blockchain, but only the former is non-fungible. Where every crypto token in the total supply of a particular cryptocurrency carries the same value, and can be interchanged one to one, with NFTs this doesn’t work. Every NFT is unique, has its own meta data, and could therefore have a different value than another NFT from the same collection.
DappRadar uses machine-learning algorithms to estimate the value of individual NFTs. The AI does this by looking at recent trading activity within a collection and the metadata tied to the sold NFTs. You can find these value estimations on the project pages of NFT collections, and in your own Portfolio.
Different NFT standards
NFT standards are the underlying principles describing how NFTs function on a particular blockchain. The first standard for NFTs was the ERC-721 standard, which has now become the most popular NFT standard for assets across all EVM-compatible chains.
However, there’s a wide variety of (non-fungible) tokens standards on the market. Below we cover a few of them:
- ERC-20 – the token standard for crypto tokens on the Ethereum blockchain. Every EVM-compatible chain has tokens that are compatible with this standard, for example BNB Chain has the BEP-20 standard. You can discover ERC-20 tokens through the DappRadar Token Rankings.
- BRC-20 – The BRC-20 standard exist on the Bitcoin blockchain. These are individual satoshis, the smallest value possible on the Bitcoin network, inscribed with code, text or even an image. Thanks to the BRC-20 standard NFTs can exist on the Bitcoin blockchain.
- ERC-721 – this has become the most common NFT token standard. It allows projects to create NFT collections with limited supply, meta data and an image. Most NFT collections listed on the open market, fit into this token standard.
- ERC-1155 – another popular NFT standard would be the ERC-1155 standard. This token provides one token contract that may include a combination of fungible and non-fungible tokens. ERC-1155 describes itself as a Multi Token Standard, creating more flexibility in transferring tokens, but at a lower cost. You can say that the ERC-1155 standard combines the properties of ERC-20 and ERC-721, with reduced redundancy and simplified network approvals.
- ERC-777 – allows people to build extra functionality on top of other tokens. For example, it allows developer to build a mixer contract for improved transaction privacy, or an emergency function in case you lose your private keys.
- ERC-3664 – a token standard for the next generation of gaming, which allows NFTs to be transferred, while they can also change, upgrade and evolve over time. The Web3 game Cradles uses this token standard.
- ERC-4337 – also known as Account Abstraction. It’s a token standard that allows users to manage their entire account as if it’s an NFT. This means that accounts, and the underlying assets, can become tradable.
- ERC-4626 – serves as a standard for tokenized vaults, designed to optimize and unify the technical parameters of yield-bearing vaults.
NFTs exist on almost every blockchain
The ERC-721 NFT standard started on the Ethereum blockchain, but nowadays non-fungible tokens can be found everywhere. Nearly every blockchain tracked by DappRadar hosts NFT collections, even though their popularity may change a lot depending on the blockchain. With the introduction of Ordinals in 2023, even the Bitcoin blockchain joined the party.
DappRadar tracks NFT sales and ownership across dozens of blockchains. Simply go to the NFT Rankings and filter the data by your favorite chains.
NFTs aren’t bad for nature
Blockchain technology requires energy to operate, just like other industries need it. Criticism surrounding the energy consumption by the blockchain industry pops up once in a while, but at the same time the industry does a lot to lower its carbon footprint. New token standards get introduced to reduce the computing power required for transfers, while some blockchains stepped away from Proof-of-Work consensus to a Proof-of-Stake one. This way Ethereum reduced its carbon footprint by 99%.
NFT collections that have a high volume of sales, exist on Immutable X, Ronin Network, Flow and Polygon. These blockchains have a low carbon footprint, in some cases even a negative one thanks to support for environmental causes.
NFTs are more than million-dollar JPEGs
Through mainstream media, NFTs only make headlines when they rapidly decrease in value, when an NFT sells for millions of dollars, or when a celebrity does something. As a result, many people think NFTs are million-dollar JPEGs. Even though some NFTs may be worth over a million dollars, that’s not the actual use case for these digital assets.
NFTs can be much more than mere digital collectibles. These assets can give the holder ownership over licenses for software, music, or trading cards. NFTs can even become games on their own, or give gamers ownership over a piece of land in a virtual world.
Below a short list with some of the use cases for NFTs:
- Game items – weapons, armor, characters and cosmetic items
- PFP – the personal identity of a person within a certain community
- Access keys – giving users access to exclusive content, a community or an event
- Collectibles – comparable to sports memorabilia
- Metaverse – ownership over land or avatars in metaverse worlds and projects
- Music – a license to own, stream and perhaps earn revenue over a specific song
- Art – a license of ownership over a digital, potentially interactive, artwork
- Domains – usernames and Web3 domain names
NFTs can be cheap
While mainstream media only pays attention to NFT sales when the price goes into the millions, it’s important to note that most NFTs sell for cheap. And that’s completely fine. NFTs can have any price ranging from less than a dollar, up to millions of dollars.
The price difference is attributed to many factors, including the utility and the meta data of the NFT, and the quality and reputation of the project. Prices can skyrocket based on the law of scarcity.
Axie Infinity is one of the most popular projects in Web3, and at the time of writing the average price of an NFT on the Axie Marketplace sits at $17.86. In the sports platform NBA Top Shot, the average NFT sells for $9.19, while the average price on CryptoPunks Marketplace goes beyond $163,000.
Below you can see Gods Unchained trading cards selling for just a few cents on the IMX marketplace.
NFTs can be interoperable
Interoperability is the ability for disparate systems and entities to interface seamlessly, which is one of the touted qualities of NFTs. NFTs usually have utility in one product, but can also be used in others.
Metaverse avatars like ImmaDegen or Clone X are a good example. You can use these avatars as a profile picture, but also use them as a playable character in Oncyber, Hyperfy, Mocaverse and other VRM compatible metaverse worlds.
Interoperability also goes further. Where your normal game items can’t do anything outside a game, NFTs can be used in financial services. NFT holders can create liquidity by taking out a loan on their NFT through services like SudoSwap, Blur Lend, and NFTfi.
NFT metadata can disappear
As mentioned before, an NFT is just a contract that says that ‘the holder of the NFT’ owns a digital object ‘located here’. In addition, the NFT describes metadata associated with the NFT. It for example provides details about contract expiration, visual details, or other types of data. Written metadata is mostly stored on the blockchain, but can technically be stored on centralized servers as well.
In addition, the images associated with NFTs hardly ever exist on the blockchain. Often the costs for minting images to the blockchain are too high, and therefore many projects rely on either centralized servers or IPFS to store their images. This also means that projects that go bankrupt, will likely take their servers offline and stop paying for IPFS. This will then result in NFTs losing their images.
Store your NFTs wisely
Non-fungible tokens are assets on the blockchain, and like a good citizen you need to store these as safe as possible. Some dapps create a wallet in the background, but to keep as much control over your own wealth as possible, you will have to store your crypto and NFTs in your own self-custody wallet.
You own a crypto wallet when you have both the public key (your wallet address, for example 0xabs123def456ghi7890) and the private key. This private key is crucial. It’s a string of numbers and letters, which you should never ever share with anybody.
Common practise would be to use a software wallet for day-to-day activities, but acquire a hardware wallet to securely store your NFTs. In addition, you could get two hardware wallets in order to increase the security on your day-to-day activities.
If you’d like to read more about NFTs and other crypto-related developments, follow DappRadar on X. You’re also welcome to join the DappRadar PRO community, participate in Discord discussions, and so on.
Why not continue your NFT journey through some of the links below:
We also advise you to continue on your path of education, and read our Ultimate Guide about NFTs.