Decentralized finance (DeFi) was the key topic for much of 2020, which sparked a new alt season with many claiming that DeFi would bring mass adoption to crypto within the next few years. However, DeFi has shown a cool down in the past few months, especially with regards to trading value.
What are NFTs?
Non-fungible tokens may be next. A non-fungible token (NFT) is a digital version of a tokenized asset.
They are similar to, for example, stablecoins, but are used to represent non-fungible properties such as artwork, real estate or collectibles rather than a fiat currency. Digital games such as CryptoKitties and Decentraland are well-known applications for these tokens.
How do NFTs function?
In order to generate verifiable digital scarcity, as well as digital ownership, non-fungible tokens are used to ensure asset interoperability across multiple platforms.
NFTs are used to create unique digital objects such as crypto art, crypto-collectibles and crypto-gaming.
Crypto-collectible trading card games were the first use case for gaming-related NFTs. Projects such as Age of Chains and Rare Pepes used the Counterparty protocol to issue blockchain trading cards based on Bitcoin as early as 2016.
In addition, NFTs are used to provide authenticity and ownership to digital art. The launch of CryptoPunks on the Ethereum Blockchain in June 2017 paved the way for “rare” art.
Non-fungible tokens on the Ethereum blockchain were later used by common blockchain games such as CryptoKitties. NFTs are used to represent in-game assets and are owned by the player instead of the creator of the game.
This enables assets to be exchanged on third-party exchanges without the developer ‘s permission. Nifty Gateway, Super Rare, Recognized Origin and MakersPlace are market places for rare art. In addition, OpenSea is a marketplace specific to NFTs.
In support of the use of blockchain in gaming, clear token standards have been established. These include the CryptoKitties ERC-721 standard, and the more recent ERC-1155 standard.
A new use case for NFTs is to produce custom ERC-721 carrying Fungible Tokens (FT), which can contain cryptocurrencies, digital files and other NFTs that can be exchanged.
The Road Ahead for NFTs
NFTs have become quite popular in a variety of sector other than art. For example, NFT technology is being leveraged to build tokenized versions of athletes and celebrities, virtual space, and much more.
The fantasy soccer game Sorare saw over $220,000 in revenue in the first week of October. The decentralized platform allows players to collect “digital collectibles with a limited edition” while managing a team as well.
The NFT marketplace, OpenSea, is handling around $1.8 million in volume on their platform and the number seems to be growing. The future looks exciting for the NFT space, though some uncertainties still exist such as the usual issues of blockchain scaling and widespread adoption.