Non-fungible token (NFT)

NFTs are used to create digital ownership and scarcity. They develop a possibility of interoperability across multiple platforms through blockchain, which acts as the management layer of NFT. Blockchain allows the exchange of an item from one party to another and enables the NFTs to be displayed in various eBay-style marketplaces. NFTs are used in specific applications to acquire unique or rare digital items, like crypto-art, crypto-collectibles, and crypto-gaming.

Blockchain had early use in the art industry, allowing individuals to own digital intellectual property with records stored in the digital blockchain roster. NFTs are used to prove ownership and authenticity of digital art. In June of 2017, a company called Larva Labs released an art collector line called CryptoPunks. The “Punks” were available free of cost for anyone with an Ethereum wallet. Only 10,000 Punks were developed, no two alike, and all were quickly claimed. Ethereum wallet holders may now sell or trade punks for Ethereum. The average punk sold for approximately 4.12E, which equated to $2,998 on December 29, 2020. CryptoPunks are just one example of rare digital art.

Interest in non-fungible tokens has grown, especially with the relative book of crypto-collectibles and NFT art. The popularity of these two uses of NFTs has caused some to view them as the only use case of this technology. However there are various other use cases for NFTs—andNFTs, and as NFTs see increased adoption, new and previously unconsidered use cases will emerge.

By far one of the most associated uses for NFTs is in digital art. NFTs can be used to make one-of-a-kind digital art items with unique and exclusive properties. Minting an NFT to represent art allows an artist to provide the consumer with proof that the NFT-based art file is the only one that exists. This provides the art NFT a level of rarity and uniqueness due to blockchain's immutability, and enables artists to get a cut of the secondary sale of digital art, as this kind of secondary royalty can be programmed as code into the NFT to send back a percentage to the original artist.

Not dissimilar to NFT art, collectible NFTs have been another popular use of NFTs. These make up a significant portion of sales on NFT marketplaces, and there can at times be a large crossover between a collectible NFT and NFT art, especially as one can be both. This use case has seen NFT collectibles that include NBA trading cards, a Binance Anniversary NFT, and Jack Dorsey's first tweet.

Static NFTs are non-fungible tokens that cannot be changed or modified after their mint. After a mint of static NFTs, they become immutable and permanent on the blockchain. Metadata attached to static NFTs, is fixed at the time of creation. As a result, such a “design” is effective in situations where the underlying data does not require changes in the future. Static NFTs are mainly used for art projects, blockchain games, photography, etc.

Dynamic NFTs are non-fungible tokens, that can be changed or upgraded after their mint. Changing a dynamic NFT implies that ONLY the metadata attached to the dynamic NFT can be changed. Thus, dynamic NFTs retain a unique token ID and contract address, being able to update the metadata in the future. Instructions and conditions for changing the metadata are written in the NFT code of the smart contract before the actual mint of this NFT.

Luxury clothing brands have begun to enter the NFT space. This has included physical assets, such as retail clothing and related accessories with digital companions as NFTs that are able to merge real-world with digital-world technology, and with increased use of augmented reality with physical couture could provide a new way of experiencing clothes with digital apparel. And in online or "metaverse" applications, a clothing NFT could be used similarsimilarly to a character skin in games.

In a decentralized finance (DeFi) scenario, NFTs can also provide financial benefits, as their value can be derived from their utility. For example, JustLiquidity created an NFT staking model, in which a user is able to stake a pair of tokens in a pool for a certain period, and can receive an NFT to access the next pool, which creates a secondary market for these NFTs based on the access they provide. Similarly, BakerySwap's NFT food combos provide increased staking rewards for holdings. By contributing, users receive an NFT that provides a variable amount of staking power which can be sold on the secondary market.

Real-world assets could be linked to NFTs to digitize the way people prove ownership. Similar to real estate, where physical property deeds are used, these could be digitized creating tokenized digital assets of these deeds. This use case has not seen as much support from regulators, but is an expected or possible development given other noted and expected applications of NFTs. It could be used for small items such as jewelry, in which an NFT can provide legitimate ownership, similar to the certificate of authenticity that comes with a genuine diamond. And in this case, the certificate would be an NFT.

Blockchain technology, and by extension NFTs, can be useful for logistics, mainly because of its immutability and transparency. It can be used to ensure supply chain data remains authentic and reliable. With essential commodities and perishable goods, it can be important to know the details related to the goods and how long they can remain usable. An NFT can also represent unique items and could contain meta-datametadata, such as the product's origin, journey, and warehouse location. One problem with the ways that have been proposed to use NFTs on a supply chain is that they require each stage to use the same infrastructure, or for different infrastructures to be interoperable.

There are various standards for non-fungible tokens, and the standards are what make NFTs valuable to consumers. Standards give developers a guarantee that the non-fungible assets will behave in a particular way and describe exactly how they will interact with the basic functionality of the specific asset.

The ERC-721 is a standard developed by the CryptoKitties developer, Axiom Zen, and was also the first standard that represented non-fungible assets. The ERC-721 standard is an inheritable Solidity smart contract, which means other developers can use the ERC-721 to create and develop new compliant contracts that fit their assets using the import tool from the OpenZepplin library. ERC-721 provides permissions to transfer non-fungible assets from one party to another and provides an identifier for that asset’s present owner.

NFT1 was introduced to the Bitcoin Cash blockchain in 2019 as a part of the Simple Ledger Protocol (SLP), which can be used to support NFTs by minting a non-divisible token supply of one without a minting baton called a Simple NFT. The specification code in Bitcoin Cash allows the grouping of many NFTs together.

While cryptocurrencies took nearly a decade to be noticed in the mainstream, NFTs only needed a couple of years, with brands such as Budweiser, Visa, and Adidas entering the space and bringing some of the attention towardsto the market. While much of the market and valuation of NFTs is driven by scarcity and subjective aesthetic preferences, other factors, such as historical significance or the blockchain they are hosted on, can impact the value of the NFT. Many NFTs are traded in collections, which are sets that, in most cases, share common features. These can include sets of collectible cards, art pieces, virtual spaces, or items in games.

In terms of minting and hosting NFTs, users have to choose which blockchain to host them on. Ethereum has been the largest and most used by market cap and transaction volume, with the blockchain intending to transition to a proof-of-stake (PoS) method to reduce energy usage and possibly reduce the fees of the blockchain. These fees can vary between $30 to $80 for transactions and around $130 for minting. This has seen many users explore other blockchains to mint NFTs, although some secondary markets can help cover a portion of fees.

Secondary sales of NFTs are a large part of the market of NFTs. Originally, when Cryptokitties emerged in 2017, the secondary sale prices were typically lower than the price of the initial sale. In 2021, the secondary sale prices had gonewent up, above initial sale prices, due to an increase in potential customers and interest. The marketplaces can allow users to mint, buy, and sell NFTs, with OpenSea emerging as a leader in secondary markets. This platform allows anyone to mint and offer an NFT for sale. However, other platforms limit the NFTs on offeroffered and the users able to mint and sell, resulting in a curated marketplace. Depending on the marketplace, the NFTs capable of being hosted can depend on the blockchain.

With the increase of money in the NFT market came an increase in companies and startupsstart-ups earning revenues and growing; although despite the size of the market, it remained top-heavy, with CryptoPunks and Bored Ape Yacht Club maintaining the majority of the market in the collectibles segment.

The controversy around NFTs developed due to the rising energy use associated with blockchain activities and transactions. Academic studies and reports have been performed and published citingcite high electricity usage directly associated with the Proof ofproof-of-work Work(PoW) validation processes used in Ethereum and Bitcoin networks. Annual greenhouse gas emissions vary depending on the application and use of renewable energy; however, concerns about emissions directly related to blockchain report the potential of emissions rising to hundreds of megatons, or the equivalent of Sweden's annual emissions. This relates to NFTs, as the Proof of WorkPoW process includes NFT transactions.

In response to public concern, Ethereum Foundation committed to moving to a less energy-intensive process called Proof of Stakeproof-of-stake validation protocol, theorized to use less than 1% of the energy levels currently used to utilize Proofproof of Workwork. The Ethereum Foundation predicts the transition to Proof of StakePoS will be complete by 2022. In the meantime, the Ethereum Foundation offers NFT purchasers the option to donate to carbon offset during each NFT purchase.

One application of blockchain technology in real estate is the use of non-fungible tokens (NFTs) to represent physical land or property. By representing physical assets as NFTs on a blockchain, it becomes possible to record and verify various attributes of the property, such as its location, price, measurement, and ownership history.