I recently came across the phrase be curious, not judgmental while watching Ted Lasso give some sort of speech at a dart game. The phrase resonated with me and made me pause for a brief moment. I wondered if being curious could mean asking questions, or (on a deeper level) searching for underlying patterns, and so on.
I first came across the acronym NFT near the end of 2020, which sparked my curiosity about NFTs. A quick glimpse through my Twitter timeline, I realized NFTs stands for “non-fungible tokens.” And with over a year and a few more days, until I typed the first letter to this write-up, the only phrase that came to mind was NFTs… Where should I begin? I wondered if NFTs stand for “non-fungible tokens”, what exactly does “non-fungible” mean?
Non-fungible tokens (NFTs) are digital assets in the form of tokens, where tokens are visible or tangible representations of a thing. For an asset to be non-fungible, it means it cannot be exchanged or interchanged with similar assets of the same type or that fulfil an identical function. For example, if your plane ticket is a non-fungible asset, it means you cannot exchange it with someone else’s plane ticket, since it contains unique information like your name and destination. For NFTs, the unique information on the assets includes rich metadata, such as historical ownership details to prove ownership and provenance.
In comparison, a fungible asset is an asset that can be replaced with an asset that performs a similar function. A 100 naira note (with different unique information like the serial number etc.) can be replaced with another 100 naira note to carry out an identical function. In addition, unlike non-fungible assets, fungible assets are divisible into smaller fractional amounts. After making a purchase, you can receive fractions of a fungible asset similar to how you would receive change from cash. Aside from cash, cryptocurrencies are another example of a fungible asset. To understand NFTs better, we will need to understand blockchain technology and how important they are to NFTs.
The Blockchain Technology as a framework for NFTs
A blockchain can simply be defined as a digital record of transactions that are transparent (not hidden), accessible and permanently stored. These transactions are managed by a peer-to-peer (P2P) network and it is important to note that the permanence of these transactions is dependent on the permanency of the P2P network. A P2P network is a distributed network (like a telephone network) where the users of the network are responsible for maintaining the network. Hence it doesn’t need a central authority to give permissions, validate the authenticity or the integrity of the transactions. It is essential to note that a key feature of blockchain technology is the lack of a centralized authority; and because of the distributed nature of the network, users can exchange digital assets or cryptocurrencies.
To get a better picture of blockchain technology, we should understand that Blockchain is also not a new technology, as its origin can be traced to the year 1991. Blockchain technology grew in popularity as a result of the continued rise of Bitcoin and other cryptocurrencies. Blockchain technology is not a programming language, and it is not a machine learning technology, it is not artificial intelligence and not cryptocurrency. Blockchain is simply defined as a digital system for recording information or transactions in a way that makes it difficult to alter the transactions or hack the system. Blockchain (with a focus on NFTs) functions as an immutable digital ledger on a distributed network, allowing digital assets to be traded peer-to-peer. Once a digital asset has been traded, the transaction cannot be changed or reversed without the approval of a majority of network users. Cryptocurrencies, NFTs, and other digital assets are examples of digital assets that are currently traded using blockchain technology.
The benefits of blockchain technology have enabled the existence of NFTs, which became technically possible when the Ethereum blockchain added a new standard to support NFTs. It’s important to note that at the time of writing, most NFTs are part of the Ethereum blockchain, as the blockchain standard(s) allows NFTS to be easily transferred between different applications built on the Ethereum blockchain. Newer blockchains have also created their NFT standards like the Binance Smart Chain. These blockchains allow NFTs to be traded in open marketplaces such as OpenSea and Treasureland which are both on the Ethereum blockchain and Binance Smart Chain respectively.
Now that we’ve learned a little bit about Blockchain technology and how it has contributed to the existence of NFTs, we’ll go a little deeper into how Blockchain technology works in the context of NFTs in the section that follows.
How the Blockchain technology works
To understand how blockchain technology works, we must first understand the key elements of blockchain technology which are:
- The distributed record network — with users of the network having access to the digital records of transactions with a general knowledge that transactions are recorded only once. This means that as NFTs are traded, the transactions are available to users of the Blockchain network on which the NFTs were traded.
- The records of transactions cannot be changed as no user on the network can alter any transaction once it has been recorded on the blockchain. In case of a transaction error, a new transaction must be added to the record to reverse the record while both transactions will remain visible.
- A set of rules in the form of smart contracts that are stored and executed automatically on the blockchain. NFTs are powered by smart contracts (which manage the transferability of the NFTs and easily assign ownership). For NFTs, smart contracts act as a certificate of authenticity and ownership. It’s safe to say without blockchain technology smart contracts and NFTs will be non-existent.
The algorithms and smart contracts for a blockchain are usually dependent on the real-world use and application of blockchain technology. This has led to three types of blockchains (public, permissioned and private blockchains); and each type has its algorithms and smart contracts on how entries or transactions are added to the network.. In addition, the level of trust required and the expected threat from the blockchain’s use case and applications also determines the type of algorithm or smart contract to be used. When a transaction occurs on Blockchain technology, the aforementioned elements come into play, and the transaction is recorded as a block of data on the blockchain. This block of data can contain any type of information as well as a unique identifier that shows the reason for the transaction. And because each new block contains the identifier of the previous block, each new block is securely connected to the block before and after it.
As each block is added to the chain, it strengthens the authenticity of the previous block making sure each link is securely connected. This builds confidence in the system and removes any possibility of altering the blockchain. Each time a new block is added, the block is validated to ensure it meets the set of rules on the smart contract. The validated sequence of blocks or groups of transactions is then chained together and distributed to or made accessible among users. All of this and more prevents the sequence from changing as the chain grows. As the blocks continue to connect, they collectively form an irreversible blockchain that continues to build as each transaction occurs. In summary, a blockchain network allows users or network members to view transaction details, which increases user/member trust and confidence in the network while also making room for newer opportunities. In the next section, we will see some real-world applications of blockchain technology and some NFTs trends.
Blockchain technology applications, NFT trends and conclusion
While some blockchains are used for storing data and transactions, securing contracts, and other potential use cases, such as the rise of cryptocurrencies; the use of Blockchain technology helps to build trust, security, and privacy, particularly in areas where they are lacking; and it also helps businesses reduce costs by eliminating middlemen, while ensuring visibility and traceability of a variety of items, among many other benefits. There are an increasing number of real-world applications and use cases for blockchain technology, some of which includes;
- For payment processing and money transfers in the banking and finance industry
- To develop decentralized digital IDs to address global identity challenges
- For a data marketplace where enterprise data can be hosted, shared, and backed up
- To enable copyright and royalty transparency for musicians
- To enable artists or content creators to register their digital artworks/content, and convert them into a secure sellable asset (NFTs)
NFTs can be anything digital or anything that can be digital; this means, I could create a digital version of me and turn it into an NFT 😂. According to recent trends, NFTs appear to lean more toward digital art, though it could be used/encompasses a lot more.
- Recently, the popular Canadian artist, Tory Lanez, released three songs as NFTs, with each song having 150 NFTs each, sold at the price of 0.5 Ether. It should be noted that at the time of writing, Ether (ETH), the cryptocurrency of the Ethereum blockchain network, traded at $3767.37 to 1 ETH, which is equivalent to 1,558,523 Nigerian Naira.
- A single Bored Ape NFT was recently sold for $2.25 million in ETH, representing a collection from the collectible NFT, Bored Ape Yacht Club, which is a series of NFTs depicting bored apes in various facial expressions.
- Budweiser is also jumping on the NFT bandwagon, having recently purchased a hand-drawn beer rocket NFT for 8 ETH and registering an Ethereum domain name, beer.eth, for 30 ETH, which could be an attempt to own or create a marketplace for beer-related NFTs.
- Axie Infinity, an NFT-based online video game on the Ethereum blockchain, has racked up more than $2.5 billion of NFT transaction volume, becoming the most successful crypto game. Axie Infinity is a monster-battling game in which the monsters are NFTs that must be collected to play. Axie Infinity also uses a play-to-earn model giving their game players a chance to earn a living just by battling monsters.
- A new trend of generative artwork has seen the rise of the generative artwork NFT market. With this new trend, we see another usage of Blockchain technology which not only represents a certificate of ownership or authentication of digital artwork but can be used to create the artwork itself. Art Blocks is a major player in this space because it allows digital artwork to be minted. Art Blocks are currently ranked third in terms of sales volume on the NFT collection, with over $990,000,000 in digital artwork traded.
So far, we have been able to introduce the concept of NFTs, show the important elements of blockchain technology as well as their importance to NFTs, and finally, see some recent trends in the NFTs ecosystem. At this point, if you are not yet interested in NFTs, I recommend taking a break and returning to the beginning of this article, as I do not want you to miss out on the opportunity provided by Blockchain technology and NFTs.
If I piqued your interest in NFTs, you might be wondering, what should I do to purchase some NFTs, and how can I benefit from purchasing NFTs? I must admit that your questions are valid, and in the following part of this article, we will look at purchasing, collecting, and trading NFTs from the perspective of an individual investor.
Cheers
