What are NFTs?

What are NFTs?

NFTs (non-fungible tokens) are a special type of digital object in the form of tokens created on a blockchain by recording metadata about texts, images, audio, digital artworks, in-game items or characters, domain names, financial instruments and club cards.

NFTs are non-fungible, which sets them apart from ordinary cryptocurrency tokens. For example, a bitcoin in one user’s wallet is equal and identical to a bitcoin in another’s. By contrast, an NFT representing a painting is not equal to a different user’s NFT, since these might be different works by different artists with different values. Even if the same artwork is represented across several tokens, they will not be alike because of differences in metadata.

Each NFT is one of a kind and exists as a single instance. Non-fungible tokens are unique— they cannot be copied. Each contains identifying information recorded in smart contracts. These data make every NFT distinct.

With NFTs, developers addressed the problem of asserting ownership over digital items and tokenised real-world objects. Information about the owner and their tokens is recorded on the blockchain. It cannot be replaced or deleted.

How did NFTs emerge?

Experiments with NFTs began with solutions such as Colored Coins (in 2013) and Counterparty (in 2014), which made it possible to tokenise assets on the Bitcoin blockchain.

In 2017 the NFT project Rare Pepe Directory—memes featuring Pepe the Frog—gained prominence. The first NFT on the Ethereum blockchain in June 2017 was Larva Labs’ project CryptoPunks, pixel portraits. Initially the 10,000 CryptoPunks were distributed for free, but as of March 2024 they are seen as valuable blockchain antiquities.

The first big hype cycle in NFTs was CryptoKitties. Launched in November 2017, the project lets users “breed” cats. A user takes two NFT cats and produces NFT offspring of varying rarity, which they can keep or sell.

Many projects began experimenting with NFT breeding mechanics, adding other game elements. For example, L2 games built by third-party developers on top of CryptoKitties emerged. The idea is that games are built for existing tokens, not the other way round. This concept is being developed by Enjin, which raised 75,000 ETH during an ICO at the end of 2017, and Eminence by Andre Cronje.

The L2 application Wrapped Kitties allows NFT cats to be wrapped into ERC-20 tokens. If a user cannot afford an expensive token, they can buy a fraction. Another project with a gaming element is Aavegotchi, which combines the lending mechanics of the Aave DeFi service and the popular Tamagotchi toy.

The tokenisation of non-fungible digital objects quickly spread to card games (Gods Unchained), RPGs (MyCryptoHeroes, Neon District), sports games (F1 Delta Time, Sorare), virtual worlds (Decentraland, Cryptovoxels), Ethereum domain names (ENS) and traditional financial instruments (yinsure).

The tokenisation of digital art received fresh impetus: creating NFTs, trading them and earning royalties became easier. All classes of digital objects are actively traded on marketplaces. The production and trading ecosystem for NFTs now includes hundreds of projects.

Where are NFTs used?

Non-fungible tokens have found uses in almost every niche. Here are some of the most popular areas.

Texts, video, images, audio. Bloggers, writers, photographers, artists and other creators can wrap works into NFTs, retaining copyrights, transferring them to aficionados and fans, and selling them on the open market.

Games, sport and advertising. This is a niche where in-game items and experiences, collectible cards of celebrities and landmark events are tokenised.

Online identity. One of the most popular segments is on-chain identity. This includes domain names tied to a crypto address, as well as tokens that confirm identity or compliance with certain registration data. This might be a right to use an application or proof of passing a KYC procedure on a centralised service.

Financial instruments and RWA assets. NFTs are used across DeFi applications. For example, they may be issued for contributing to some liquidity pools on DEX, confirming a user’s share. NFTs also serve to tokenise real-world assets (RWA), wrapping shares or other securities of traditional companies and even real estate.

Which token standards are used to issue NFTs on Ethereum?

Most non-fungible tokens are issued on Ethereum under several main standards. Standardising NFT issuance guarantees a higher degree of interoperability, enabling such tokens to move between different decentralised applications.

ERC-721 is the first and most popular NFT implementation on Ethereum, extending the base ERC-20 standard. Under it, each token type requires a separate smart contract.

Other versions followed:

ERC-998. A developing standard that allows the creation of a composable token—a digital asset that “owns” another digital asset. For example, the rights to own a game character in a computer game are represented by one non-fungible token, and the rights to its gear by another. ERC-998 makes it possible to combine them into one token.

ERC-875. Enables sending several collectible items in a single transaction.

ERC-1155. An improved standard that allows working with multiple token types via a single smart contract. Both NFTs and fungible tokens can reside on the same contract. It can store a wide range of items—from armour and weapons to magic potions and scrolls—where each item can be fungible if several instances of one type exist. If a game contains tens of thousands of elements, ERC-721 would require as many separate smart contracts. ERC-1155 also allows combining ERC-721 tokens in a single contract, each stored with its own data set. As a result, a game character can consist of all the underlying NFTs: weapons, armour, special attributes and even other ERC-20 tokens.

Blockchain Bean Asset (BBA). This Ethereum standard was created by the Blockchain Game Alliance, which includes leading game companies such as Ubisoft. Within this standard, developers intend to integrate decentralised content storage.

There are also experimental standards. One of them—ERC-404—is a hybrid of ERC-20 and ERC-721. When you buy the token, an NFT automatically appears in your wallet, allowing you to own a fractional part of a fractionalised non-fungible token.

NFTs are not limited to Ethereum—they exist across almost all modern L1 and L2 networks, including Bitcoin, Solana, NEO, EOS, Tron, Flow, Cosmos, BNB Chain, Starknet, Optimism, Arbitrum, Linea and zkSync.

How is the NFT market evolving?

Initiatives and experiments around NFTs come not only from crypto projects—traditional companies worldwide have started using non-fungible tokens too.

For example, in February 2024 investment firm VanEck launched SegMint, a platform for trading digital assets and NFTs for clients in Europe and Asia. Payments giant Mastercard participated in organising a football quiz for the UEFA Champions League 2023/2024 using NFT technology for event admission.

The video-game industry is also adopting the technology. In the Epic Games Store, a blockchain game listed that lets users own assets such as cards, callsigns and skins as NFTs.

Politicians have not stayed away either. The former US president Donald Trump has already presented three NFT collections.

Alongside success stories, there have been setbacks. In early February 2024, Blizzard’s professional esports league Overwatch Champions began banning teams sponsored by cryptocurrency exchanges, as well as NFT and AI projects. According to media reports, e-commerce giant eBay will likely shut down its NFT line in the near future. So too will the coffee chain Starbucks, which decided to wind down its NFT-based loyalty programme, Starbucks Odyssey, in March 2024.