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What are Non-Fungible Tokens NFTs

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DappRadar

Learn more about an industry with huge growth potential

Non-Fungible tokens or NFTs for short are completely unique digital items that are issued on a blockchain. In many ways, they hold similar qualities to items in the real-world. Think about physical goods like limited-edition trainers, or the limited edition drops by clothing brand Supreme. These digital items are distinguishable from one another by a unique number.

That number or serial number for NFTs is a token ID, which is stored on the blockchain.

The serial number works in the same way as a barcode and the code corresponds to the information about that particular item: how it looks, it’s distinguishing attributes, the artist or organization that made it, and more.

While physical goods deemed valuable such as designer clothing or specialized machinery often come with a certificate of authenticity. NFTs are their own certificates of authenticity because the creation process or smart contracts that made them are publicly available for you to view.

Digital collectibles

One of the first tangible use cases to employ NFTs were digital collectible dapps such as CryptoKitties, CryptoPunks, and Topps GPK. In 2020 this is also a space that has seen a lot of activity. Users have regular opportunities to win NFTs as they are used as ‘sign up bait’ quite often during marketing campaigns. Furthermore, users can simply purchase NFT’s.

CryptoKitties is an excellent example of this process with the added game mechanic of breeding new kitties using yours and others to create a new hybrid kitty. The new CryptoKitty will hold some attributes of its parents.

The premise of the game is to collect CryptoKitties and their traits, which determine how they look. Different CryptoKitties are not just random. Images assigned to each Kitty serial number, it is a result of “reading” the traits or digital information of that CryptoKitty from the blockchain. 

Another example worth looking at is CryptoPunks. CryptoPunks have been around for a long time. Before the big crypto bubble of 2017/18, and before CryptoKitties saw the light of day and congested the Ethereum blockchain with thousands of transactions.

CryptoPunks are 10,000 uniquely generated characters. No two are exactly alike, and each one of them can be officially owned by a single person on the Ethereum blockchain. Originally, they could be claimed for free by anybody with an Ethereum wallet, but all 10,000 were quickly claimed.

Now they must be purchased from someone via the marketplace that’s also embedded in the blockchain. Via this market, you can buy, bid on, and offer punks for sale.

What are they for?

The NFTs described above are really intended for the pleasure of collecting and financial gain. CryptoPunks is focussed on the collection and ownership of the rarest punks. Due to their unique and rare nature, those punks are rising in value in a similar way to a standard cryptocurrency token. Users are collecting, trading, buying, and selling them just like cryptocurrency tokens.

DappRadar started tracking CryptoPunks in mid-2018. For most of this time activity has been hovering around the 5 daily active users mark. Obviously, that does not constitute a huge amount of interest. Still, lots of single transactions valued above the $1,000 mark for single Punks could be observed.

Meaning, it always looked like there was a small but very dedicated group of hardcore CryptoPunks supporters. Large Publications like the New York Times and the Financial Times certainly took notice and dedicated some serious coverage.

These two examples provide easy to understand use-cases for NFTs but another entirely more complex system is emerging. Where NFTs are becoming very valuable, if not more valuable than real-world items.

Virtual Land

One of the most interesting use cases here is the dapp game Decentraland. In 2017, Decentraland raised $26 million in just over an hour with the promise of a virtual world where players could own land and build on it.

Businesses earn real money inside the virtual world by selling items. Users can visit a shop in Decentraland and buy virtual items, such as a CryptoKitty piece of art for their virtual home, or a new outfit or accessory for their in-game avatar. When talking about virtual land – each piece of land is an NFT that represents a plot of land in the virtual world. 

Vegas Plaza inside Decentraland

What makes each land NFT unique is the location. The price of each NFT is also dependant on the market. Like real estate in the real world, the price differs by location. The higher the foot traffic around your plot of land or the proximity to other high priced land, the higher it can sell for. 

For those of you that have read or watched Ernest Cline’s ‘Ready Player One,’ you might be starting to put the pieces of the puzzle together and start realizing the world we observe there is really not that far away from reality.

Art

The art world was ripe for disruption by blockchain and NFTs. Digital artists have long been searching for a way to leverage their hard work and most importantly get paid for that. Websites such as Pixabay offer artists the chance to produce work for attribution, but not financial gain.

Virtual worlds like Decentraland have exploded with activity from digital artists wanting to display their work in virtual galleries; giving viewers and potential buyers a new, interactive way to discover and buy art.

Digital artwork marketplaces like SuperRare, KnownOrigin, and more recently Nifty Gateway have emerged where artists can tokenize their artwork into NFTs, auction them and allow users to bid. If these users also happen to own virtual land, they can put these up on their walls and have people experience their collection as well. 

Another quite amazing benefit to the artists is that platforms like SuperRare offer a lifetime value to the creator. I.e the artist earns a percentage on every sale after the original first sale.

Sharding

Another development in the NFT space in 2020 has been sharding. Sharding is the process of breaking up an NFT into smaller bits. Creating the opportunity of fractional ownership of Non-Fungible Token.

The NIFTEX Platform enables the division of NFTs into fungible pieces conforming to the ERC20 standard. Those shards can be traded like any other ERC20 on the NIFTEX Exchange.

Fractionalization has many advantages. One is that it helps unlock liquidity for NFT owners, reduces the cost and access to valuable NFTs, and greatly improves the NFT market depth.

At DappRadar we got so excited about the potential of sharding we built a dedicated tracking platform – ShardMarketCap.

ShardMarketCap allows users to analyze the shards of NFTs from the Niftex exchange.

As NFTs became more valuable, the community simply found a way to allow more user access. It is this level of innovation that makes the blockchain, dapp, and NFT space so interesting to watch.

Games

The internet opened up all kinds of opportunities for gamers to make money playing games online and do what they love most. Nowadays there are professional gamers and content creators earning millions while there are plenty of stories of community members being hired by major game developers.

However, the majority of gamers will never earn a penny and will just spend money on their favorite hobby. Blockchain gaming has the powerful ability to change this and bring more power to the gamer.

Thanks to blockchain technology and the tokenization of game assets, game designers are now capable of assigning a certain asset to a certain player. With the tokens for these items in their wallet, players use, sell, or trade any way they want. The more time they spend in a game, the more valuable their acquired resources might become. 

In essence, a play-to-earn game is distributed freely, just like a free-to-play game. However, in the current blockchain gaming market, there are plenty of games that require an initial investment. In addition, there are games that are available freely, but basically require users to invest before they are really capable of generating value. 

With a couple of thousand users per day the current blockchain gaming market isn’t mature yet. We’re only in its infancy. In 2010 mobile gaming apps on iOS and Android generated only 816 million dollars.

Currently, the blockchain gaming market has to overcome all kinds of challenges in order to attract mainstream users. For many people obtaining any cryptocurrency is already quite a challenge, not to mention that users first need to identify themselves at an exchange before they can buy any cryptocurrency.

Final thoughts

The introduction of digital ownership through NFTs is truly exciting. Real digital ownership is around the corner and the world appears to be pivoting to a more digital life overall. In part, spurred on by the Covid-19 pandemic in 2020.

As more and more people need to protect themselves for the outside world might we live in digital habitats full time? If so, we will need things to do in these virtual worlds and NFTs can provide the perfect solution to real digital ownership.

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