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A Deeper Look at Non-Fungible Tokens (NFTs):
History, Creation and Marketplace

December 2022

Digital Artwork with expensive price tags: CryptoPunk #1119 sold for 400 ETH ($505608.00 USD), Bored Ape Yacht Club #8436 sold for 145 ETH ($183282.90 USD), Fidenza #723 sold for 650 ETH ($821613.00 USD). One could mistake them for silly graphic creations but these NFT Art pieces are the rage of the blockchain network. However, they are just one of the many uses of NFTs. This article will explore NFTs as a crypto asset, touch on how NFTs are formed, and discuss one of the common application of NFTs--namely NFT Art.

In the world of blockchain, a non-fungible token (NFT) falls under the category of cryptocurrency. There are two forms of cryptocurrencies: coins and tokens. An NFT is a special kind of token. It is a token carrying unique identification code and metadata which collectively distinguishes one token from another. Hence, they are labeled "non-fungible." While coins and fungible tokens are both assets, they are not uniquely identifiable. They are "fungible." Forbes writers Robyn Conti and John Schmidt explain this non-fungible characteristic best in the article "What Is An NFT? Non-Fungible Tokens Explained."

Physical money and cryptocurrencies are "fungible," meaning they can be traded or exchanged for one another. They're also equal in value- one dollar is always [equal to] another dollar; one Bitcoin is always equal to another Bitcoin. Crypto's fungibility makes it a trusted means of conducting transactions on the blockchain...Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible).

NFTs are crypto assets that can be owned. The details of this ownership is recorded on the blockchain. Like any other asset, ownership can be transferred to another which makes NFTs tradable. The digital code of an NFT can contain references to digital files such as digitized artwork, photos, videos, and audio.

What is Metadata

Metadata is "data" about data. It provides snapshot information about the data being presented. For example, information like a title, an author's name, or a description of the data are all considered metadata. Metadata can either be stored on the blockchain as part of the smart contract's encrypted code (on-chain) or outside of the blockchain (off-chain) separate from the underlying contract. The benefit of on-chain metadata is that it is included in the contract's content encryption, a major feature of the blockchain. On-chain metadata supports the uniqueness of an NFT. If, however, the holder of an NFT needs their metadata to be editable, they must have their metadata file stored off-chain. This means that the metadata cannot be a part of the contract's encryption. It is recommended that NFT holders of off-chain metadata freeze their metadata prior to listing their NFT for sale. Freezing metadata makes it uneditable. Although the NFT is still considered "off-chain", the metadata is permanently locked and stored on a decentralized file storage system.

Record of Ownership vs Legally Protected Rights

Although the ownership of an NFT is recorded in the network of a blockchain as a certificate of authenticity or proof of ownership, such proof has no inherent legal meaning. It does grant copyright, intellectual property rights, or any other legal rights to the owner with regards to any underlying asset. In fact, in the case of digital files, the files themselves may be shared or copied. Furthermore, other NFTs may reference the same underlying files. With that being said, it is the uniqueness of the NFT asset together with the proof of ownership that give NFTs their value. Basically, whomever owns rights to the underlying work, retains ownership rights of that work.

Smart Contracts: The Base of an NFT

There are two paths to creating an NFT. One path is to utilize the smart contract of a third-party marketplace and the other is to write your own smart contract. No matter which route you choose, smart contracts are at the foundation of all NFTs. Even after the creation of an NFT, smart contracts are used to transfer ownership from person to person.

I Want to Create an NFT?

The easiest way to create an NFT is to use a third-party platform, the process of minting and selling is very simple. Investopedia in its article "How to Create an NFT" outlines the process step-by-step. The steps are as follows:

Select the digital file that you want to mint
Choose a Blockchain
Set up a wallet for NFT transactions that supports the blockchain you have chosen
The NFT platform is where you actually create the NFT. (OpenSea, Solanart, or NFTPort. You can also check with crypto exchanges like Binance.)
List NFT for Sale or just hold it in your wallet.

If you want to create an NFT using your own smart contract, you should invest some time in studying smart contracts. Udemy is a great place to start. They offer both free and paid courses on smart contracts and blockchain technology.

NFT Timeline

2014- The first known NFT, Quantum, was created by Kevin McCoy and Anil Dash. Quantum consists of a video clip registered on the Namecoin blockchain. Namecoin used on-chain metadata to make the work of art a non-fungible tradable asset.
2015- Etheria, the first NFT project, was launched. The Ethereum blockchain had just been launched three months prior. All of the Etheria Projects's 457 hexagonal tile NFTs were eventually sold for a total of $1.4 million USD.
2017- The Ethereum GitHub proposed the ERC-721 standard for NFTs.
2020- NFTs experienced rapid growth during 2020 reaching $250 million USD and saw exponential growth in 2021 when more than $200 million USD were spent on NFTs in the first three months of that year. NFT-related Trademark applications went from three in 2020 to more than 1200 in 2021. In January 2022 alone, USPTO received 450 NFT-related trademark applications.
2022- On May 4, 2022, The Wall Street Journal reported that NFT tokens sales had declined 92% from September 2021.

NFT Art: One Use of Non-Fungible Tokens

Notorious Bored Ape Yacht Club

As a general matter, NFTs have many uses. It is the token's project developers who define how the token can be used. One of the possible uses of NFTs is the tokenization of artwork. NFT Art is a token like any other crypto token. However, the face of these tokens carry unique digital artwork. It is the demand for the artwork that drives the value of the NFT. Tokens have quickly become an art medium.

You may have heard about them. Bored Ape, Crypto Punks, and now Meebits. These are NFT Art assets with huge price tags. Bored Ape Yacht Club is a non-fungible token (NFT) collection of 10,000 cartoon-like apes on the Ethereum blockchain. It is one of the most renown NFT collections on the market today. According to CoinMarketCap, the estimated market cap of the collection sits at 723,962 ETH ($875M USD). The lowest selling piece in the collection is said to sell for approximately 76 ETH ($93K USD). The collection was started by Yuga Labs in April 2021.

Many artists are turning to marketplaces like OpenSea, Nifty, Magic Eden, and Mintable to gain exposure in the form of NFT Art.

NFT Marketplaces

Below is a list of NFT Marketplaces you might want to review.

For more on NFTs, read the following articles:

Fully On-Chain NFT Art: Using SVGs for Smart Contracts

What is the Difference Between a Coin and a Token?

A Guide to Understanding NFT Domains and the Decentralized Web

Exploring the ABCs of Blockchain Technology: Cryptocurrencies, NFTs, Smart Contracts, & Web3

Conclusion

Blockchain technology is strongly in place. This new asset class we call NFT has assumed an undeniable presence on the cryptographic stage. However, one thing that is not clear is whether the NFT rage will continue to rise. Considering how well NFTs have done thus far, the innovation seems well poised to hold its place in the market.

For more articles related to blockchain technology, see the following articles:

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