In the world of crypto, you’ll often hear about non-fungible tokens (NFTs) — special, one-of-a-kind digital assets whose unique features make them more special than other types of coins, tokens, or cryptocurrencies. The most high-profile NFT in the world right now is CryptoKitties, but other NFTs have been gaining momentum as well. But there’s more to the story than it might appear at first glance…
What is an NFT, and what was it designed to do?
Non-fungible tokens (NFTs) are crypto collectibles, or crypto-collectibles. Each token represents a unique digital asset that is controlled by a smart contract on a blockchain. NFTs don’t work like other cryptoassets—like bitcoin and ether, which are fungible. In other words, there isn’t much value in them beyond their usefulness as a financial instrument.
Cryptocollectibles can be exchanged for goods and services, but they are also designed to be used within games, where they have special properties. For example, you might use an NFT to represent your character in a game; if you lose it or spend it on an upgrade, you lose its value forever. This makes crypto collectibles more of an investment than traditional cryptoassets.
The Anatomy of an NFT
In most cases, these assets will be ERC-721 tokens on Ethereum. ERC-721 is an open standard for non-fungible tokens. Any time you’re looking at a so-called NFT, you can check its metadata to see what exactly it is and how it works. But that’s only half of understanding a given digital good—the other half is where things get interesting.
That’s because each token has some metadata associated with it called tokenMetadata. This field is used to store information about how your token interacts with others in your ecosystem.
For example, if you want your asset to have a marketplace built around it (which many NFT projects do), then tokenMetadata might store information about how many tokens are required to buy or sell something in your marketplace, or whether you need approval from another party before someone can list their items there.
So, How Do We Use Them?
While we don’t yet know how blockchains will be used in practice, they may become more important to us than tokens. Ethereum is a global computing platform with its own native programming language—called Solidity—and it could be used for much more than just crypto transactions.
To date, developers have written software on top of Ethereum that helps run decentralized organizations and maintain actual cryptocurrencies. One example is CryptoKitties, a game where users can buy and sell digital cats using Ether. The game generated so much traffic in December 2017 that it slowed down transactions across all of Ethereum for days.
The developer behind CryptoKitties has raised $12 million from venture capitalists to build more games like it—and one day, we may find similar games running atop blockchains other than Ethereum’s.
The Implications of These Findings
While blockchain is still a relatively new technology, some of its possible implications have been discussed by experts. One is that these transaction records are permanent. Since they’re on a digital ledger, they can’t be changed or tampered with—so unlike real-world goods, once an item changes hands, it can’t be stolen back.
Another implication is that NFTs could enable microtransactions: Imagine if you bought something for $1 but didn’t need to pay until you saw whether you liked it or not. Or imagine paying for your morning coffee in installments over time instead of at one time. The ability to purchase things in small increments could change how we think about pricing and payment structures in general