Originally and since the creation of Bitcoin, the concept of digital scarcity was introduced. Prior to this, the cost of replicating something in the digital world was close to zero. The emergence of blockchain technology has made programmable digital scarcity possible and evolved over time. So today we ask: What is digital scarcity and what does it represent? What are NFTs? Where does the concept of “crypto art” come from and what does it take to become a digital artist?
What are NFTs?
A non-fungible token or NFT (known by the acronym NFT, from non-fungible token or often also called crypto-collectible) is a digital asset that is used in several specific applications such as digital art, digital collectibles and online games. It represents something unique, which cannot be modified and is not interchangeable between one or more parties. This is in contrast to cryptocurrencies and many network or utility tokens that are fungible in nature. Unlike cryptocurrencies, where all tokens are created equal, each non-fungible token is unique and limited in quantity. The main characteristics of NFTs is that they are unique, indivisible and scarce. Non-fungible tokens are used to create verifiable digital scarcity, as well as provide digital ownership, and the possibility of interoperability of assets across multiple platforms.
Fungibility as a concept
Fungibility means that the individual units of an asset are interchangeable and indistinguishable from each other. Fiat money is the main example of this: banknotes are fungible because each unit is interchangeable with any other equivalent individual unit. This is how fungibility is a desirable feature for fiat money: it allows free exchanges and the history of each individual unit is not known. However, this is not desirable for a work or collectible. If we create digital assets similar to Bitcoin or other cryptocurrencies but add a unique individual identifier to each one, that is an NFT. What are NFTs?
A growing industry
Any digital piece that can be stored can be an NFT, from a GIF to a tweet, and although almost anyone can see it or enjoy it at a single click, only the buyer will have ownership of the document. The so-called crypto-art is the root of the origin of this type of tokens. Some artists started selling or auctioning the properties of their photos or digital artworks to obtain funding. As the issuance of NFTs becomes easier, more and more assets of this style are created and exchanged day by day. Many youtubers, artists and sports leagues are creating and marketing their own NFTs.
Traceability through the Ethereum blockchain
Another important feature of NFTs is that they are based on the blockchain, so it is possible to track the history of that NFT, who has owned it at all times from its creator to the present day. What was the process that led it to be where it is today. The Ethereum blockchain makes it possible to verify whose work or non-fungible piece it is.
Unique non-tangible works
If you buy the license to a work you cannot share it as it does not belong to multiple people, the asset is yours alone. These can be fully digital assets or tokenized versions of real-world assets. This explains the concept of the original work and one person being the sole owner of it. And how do we explain the concept of “non-tangibles”? They cannot be touched or stored in a physical place, as they are 100% digital. You can have a work of art that is only a file on your computer and that you cannot take with you, but with a digital certificate that proves that it is yours, that proves its validity and exclusivity.
How do NFTs work?
There are several schemes for the creation and issuance of NFTs. The most prominent is ERC-721, a standard for issuing and trading non-fungible assets on the Ethereum blockchain. Also, a more recent and improved one is ERC-1155; this allows a single contract to contain fungible as well as non-fungible tokens. This allows unique assets to be transferred between different applications with relative ease, opening up the game for new opportunities.
What can NFTs be used for?
Several projects are experimenting with NFTs for different use cases: fine arts, digital identity, gaming, licensing, certificates and fine arts. Non-fungible tokens are used to create verifiable digital scarcity, digital ownership and the ability for asset interoperability across multiple platforms. They are used in a number of specific applications that require unique digital items such as digital collectibles, cryptographic art and online gaming. Art has had to contend with the potential for mass reproduction and unauthorized distribution of art over the Internet, so it has been the first industry to use NFTs to provide proof of authenticity and ownership of digital art. In this way, each work is uniquely stamped, with no possibility of duplication. Also without the need for appraisal, which is a very important feature: now it no longer depends on an expert to say how much a work is worth, it is the market that decides how much it is worth. This caused a wide variety of crypto artists to emerge in the late 2020s and early 2021. While art was the start, it didn’t all stop there: later popular blockchain games made use of NFTs on the Ethereum blockchain, for example CryptoKitties. NFTs are used to represent assets in the game and are controlled by the user, not the game developer. This allows assets to be traded on third-party marketplaces without the need for the game developer to intervene. What are NFTs?
How to buy, sell and store NFTs?
Several exchanges are adapting and offering the option to exchange NFTs and there are also open marketplaces to do so, such as OpenSea. Such marketplaces connect buyers and sellers, and the value of each token is unique. As we have previously discussed, NFTs are prone to price changes in response to market supply and demand. As we previously analyzed, NFTs are mostly denominated ERC721 and ERC1155. Therefore, any wallet that accepts this network can store them.
Since NFTs are not interchangeable with each other, they can function as proof of authenticity and ownership within the digital world. This could represent the kick-off for new opportunities and possibilities so far unimagined within the ecosystem that could even expand to integration with other industries – or creation of new industries. We will continue to analyze and deepen these concepts in future blog posts about NFTs and all the opportunities they offer, don’t miss it!