Firstly, let’s talk about NFTs.
NFT stands for ‘non-fungible token,’ and is a way of authenticating assets digitally. If something is non-fungible it means that it is unique and cannot be replaced with anything else. For example, bitcoin is fungible.
If you trade one bitcoin for another bitcoin you will be receiving the same thing with the same value. Whereas, an NFT can be virtually anything - a song, a piece of digital art, or even a tweet - so when you trade an NFT for another NFT you will be getting something completely different with a completely different value.
At the highest level, most NFTs are part of the Ethereum blockchain. Ethereum is a blockchain that also supports NFTs. However, Ethereum stores information, and this is what makes NFTs work differently from an ETH coin.
While NFTs are generally part of the Ethereum blockchain, there are other blockchains out there that have implemented their own versions of NFTs.
While NFTs are not a cryptocurrency, both NFTs and cryptocurrencies are all about creating trust, and trust is what allows them to function. NFTs attach scarcity, value, and trust to an asset digitally.
Much like art-collecting, the value is determined primarily by the rarity of an item. For example, there may be many copies of a Monet painting but they are nowhere near as valuable as the original.
It’s unsurprising then, that a lot of the media coverage around NFTs is related to digital art, and for a lot of people this is a gateway to the world of NFTs.
Many believe NFTs are the first step in the evolution of fine, digital art collecting, breaking down barriers, and making it possible for all, not just the super-rich.
Although NFTs of digital art are currently being sold for millions of dollars, it is entirely possible for shares to be bought in fine digital art via NFTs. So, somebody who is considerably wealthy could own a big share, and the likes of you or me can have shares in the rest.
One of the biggest concerns in fine art collecting is knowing and verifying that the artwork you are paying for is an original. NFTs provide a solution to this problem via the use of a blockchain.
Blockchains make a record every time an NFT is purchased, and this digital footprint makes it a lot harder for virtual art thieves to steal an NFT. That being said, digital items are easier to copy and spread around the internet.
NFTs are particularly appealing for artists as it opens up a market for them to sell their work, especially if they do not have the means to access an elite art world.
NFTs also cut out the middlemen when it comes to distributing and selling content. They have a feature that artists can enable which gives them a percentage every time an NFT gets sold. So if a piece of art becomes incredibly popular, the artist can reap the rewards.
It is believed that NFTs can cut out the middleman, which will change the future of music too, ensuring more profit goes to the content creators themselves.
For example, the band Kings of Leon sold their latest album as an NFT and made more than $2 million. But NFTs also have their advantages for those buying them.
For one, it lets you financially support content creators that you like and gives you basic usage rights. If you buy an NFT of a digital art piece you then have the right to post it online.
Or, if you’re into collecting, you can buy it and hope the value increases one day so you can sell it for a profit. In this way, NFTs work like any speculative asset.
But while NFTs are mainly digital for now, it is entirely possible in the future for NFTs to be physical, tangible things offline. For example, real estate may be tokenized in the future, once again allowing the average person to buy shares in real estate via NFTs.
In this way, NFTs could be paving the way for a more equal society, where everything from fine art to real estate is available to everyone, and not just confined to the world of the super-rich.
Before we get into the specifics of the ERC-721 tokens though, let’s take a look at Ethereum.
Ethereum Explained:
If you’ve heard of Ethereum you probably associate it with a cryptocurrency like Bitcoin. But calling Ethereum a cryptocurrency is a pretty general definition of what it actually is.
Ethereum is an open software platform built on blockchain technology that allows developers to build decentralized applications.
On the other hand, ‘ether’ is a cryptocurrency within the Ethereum platform that powers applications built on the Ethereum blockchain. There is some confusion between Ethereum and ether, especially because while ether is considered a cryptocurrency, it’s more like a digital commodity.
Simply put, ether is to Ethereum what gas is to cars. The Ethereum blockchain cannot run without ether. Ether powers smart contracts, runs DApps, generates tokens during ICOs, facilitates transactions on the blockchains, and is used to make payments.
But what makes Ethereum so exciting and revolutionary? Basically, Ethereum aims to change how the internet works. This is because Ethereum allows online computer systems to run independently, without a third party.
Ethereum lets software applications run on a network made up of numerous private computers. This is known as a distributed system.
Information from websites is stored on a server, a computer with a database that holds all the information on the site. If that computer crashes and is damaged all the data vanishes - along with the website.
However, blockchain technology distributes this database among a huge network of people’s computers. This makes the information on the database public and prevents the database from being shut down. As long as computers are still contributing to this network, then the database can keep on running.
This replaces centralized mega computers and cloud servers used by big corporations with a large, decentralized network of smaller computers all around the world.
Ethereum is innovative in a lot of ways, but it’s not the first of its kind. Systems like Napster or Limewire are smaller predecessors of Ethereum and were early distributed systems to share music.
Users of Limewire would upload songs that they already had downloaded on their computer for other users to download from them. However, you were not downloading the whole song from one person, but rather downloading multiple pieces of songs from multiple people, i.e. ‘file-sharing.’
What makes Ethereum so exciting is that anybody can use this new, distributed network to create and run decentralized applications without needing permission from a third party.
And while this is very exciting, you may be wondering how safe Ethereum is. If users have so much freedom, it is plausible that some users will have nefarious intentions and take advantage of the freedoms provided by Ethereum. How can this be prevented?
Blockchains:
Blockchains allow groups of different people and computers to come to decisions and agree on things even if they do not know each other.
As mentioned at the beginning of this article, these systems only work if there is some degree of trust between users. This can be established via special math and careful rules, showing a record of everything that has happened that few can dispute.
For example, in Bitcoin users can agree on a list (known as a ledger) of all the payments that have been made and to see how much money everyone has at a given time. That type of money is referred to as ‘cryptocurrency’ or ‘digital currency’ because it is tracked by a computer, and is not physical money.
Ethereum works in a similar way, but it keeps track of computer programs as well as payments. It can be used to track loans/banking, regulatory compliance, auctions, and even election results.
Ethereum aims to completely overhaul the internet and how it functions. Ethereum’s ultimate vision is a ‘World Computer.’ Basically, a huge network of private computers that run various internet applications free of third parties.
What are the benefits of Ethereum?
Now that we know a little more about how Ethereum functions, you may want to know more about its benefits. In particular, what are the benefits of removing third parties?
Well, removing third parties could make for a more secure online experience for one. As Ethereum is a computer run by a network of users, it means that no personal information of users will be stored on the central servers of large companies. So there will be no need to worry that your personal information will be hacked or sold!
Decentralization also means that no user or group of users can be excluded from applications, which opens them up to people all over the world. Certain applications will no longer be restricted based on your location.
Even the Ethereum applications themselves don’t need permission to exist which means they cannot be removed or censored from any app store.
Ethereum could prove to be particularly useful when counting election results, as Ethereum makes it virtually impossible to hack into the program or manipulate the results.
The possibilities are endless with Ethereum, as it can be used for anything you can write a computer program to do. In terms of appearance, websites or apps created by Ethereum will look like any other but will be impossible to compromise.
If built properly, not even the person who developed the application will be able to cheat them or break the rules they set!
So what is an ERC-721 token?
Now that we know a little more about how Ethereum works, we can go into detail about ERC-721 tokens and what they are.
ERC-721 is a free, open standard that describes how to build NFTs on the Ethereum blockchain. While most tokens are fungible, ERC-721 tokens are all unique. ERC-721 tokens are extremely different from tokens with the ERC20 token standard, as they are standards for fungible tokens that are interchangeable.
In the ERC20 token standard, developers can create a number of tokens within one contract but in the ERC-721 token standard, each token within the contract has a different value. It is a standard interface for NFTs and is a subset of Ethereum tokens.
What is the standard of ERC-721?
Like other token standards before it, the ERC-721 standard outlines a set of common rules that all tokens can follow on the Ethereum network for consistent results. Token standards must specify how a token is created, transferred, how ownership is decided and how it’s burned.
ERC-721 is an important and exciting development because of the new use cases it enables, as well as its ability to be integrated into ecosystem infrastructure. A common interface makes it easier for exchange and wallet operators to implement and makes NFTs much more valuable.
Once assimilated into the ecosystem they can become much more liquid, allowing anyone to own NFT assets. So the dream of buying real estate with NFTs may be closer to becoming reality than previously thought!
To see the success of ERC-721 tokens in action, we can look to their use in online gaming. NFTs have not only spawned a type of collectible, digital asset but also created a new infrastructure for blockchain-based games. A successful mixture of the two is the application, Cryptokitties.
Cryptokitties pioneered the collectible use case and showed just how much value we place in rare, digitally scarce goods. As it leverages the ERC-721 token standard and is on the Ethereum network, this assures owners that their assets can’t be copied or stolen.
Another game that leverages the ERC-721 token standard is Decentraland. It allows users to purchase scarce, virtual land in the metaverse by tokenizing each parcel of land.
This proves that NFTs have the potential to unleash a huge amount of liquidity in gaming assets and create new, unique gamer experiences. With NFTs, the options really are limitless!
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