Non-fungible tokens

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NFT ecosystem representing NFT use cases. [1]

Non-fungible tokens, more commonly known as NFTs, are cryptographic tokens on a blockchain with unique identification codes and metadata. They let people tokenize things like art collectibles, and real estate. They can only have one official owner at a time and because they are stored on the blockchain their record of ownership can’t be altered.[2] Non-fungible is an economic term that is used to describe things that are not interchangeable for other items because they have unique properties. Fungible items however, can be exchanged for one another because they do not have unique properties.[2] Unlike cryptocurrencies, which are fungible tokens, they can’t be traded or exchanged at equal value because each is unique. [3] It is impossible for one non-fungible token to be equal to another because each token is unique due to their metadata. NFTs can be used to represent real world items like artwork, real estate, and clothing.[3]

NFTs can be made from any kind of easily reproduced digital file. NFTs are like a collectible item but instead of being a physical item, they consist of a file and digital proof that you own the original copy. Common types of NFTs are digital art, photography, music, and videos. There can also be one a kind NFTs, abbreviated as 1/1 NFT. A notable example of this is Beeple’s work called Everydays: The First 5000 Days, which sold for 69 million dollars.[4] Tweets have also been made into NFTs. Jack Dorsey, CEO of Twitter and Square, sold his first tweet as an NFT for over 2.9 million dollars.[5]

The unique id and ownership of NFTs is verified via the blockchain ledger. NFTs were first launched on the Ethereum blockchain but other blockchains including Polygon, Avalanche, and Solana now support them as well.[6]

In terms of who can create a NFT, technically anyone can. A person just has to create art or any other digital item and then put it on the blockchain through a process called minting. In blockchain, minting means, validating information, creating a new block and recording that information into the blockchain.[7] Much like when buying NFTs, you need to have a wallet containing cryptocurrency set up to mint NFTs. The fees associated with minting are called “gas fees”, the price for the energy it takes to complete the transactions. People can also attach a commission to the NFT, which will pay them every time someone buys the NFT through a resale. This royalty system is a major feature drawing creators to this space, because unlike with traditional content platforms, NFTs can be designed to pay out royalties immediately. For example, if a piece of digital art listed a 10% royalty, the creator would receive 10% of any consequent sale of that art.


Technology

Blockchains

NFT blockchains. [8]

Some blockchains that support NFTs are Ethereum, Flow, Binance Smart Chain, Cardano, Solana, Algorand, Tezos, Tron and EOS. [9] Ethereum is the most popular blockchain for NFTs and has two popular token standards, ERC-721 (used for the creation of non-fungible tokens) and ERC-1155 (used for the creation of new semi-fungible tokens). To implement smart contracts, Ethereum makes use of Solidity, an object-oriented programming language created by the Ethereum team and compiled by the Ethereum Virtual Machine (EVM). The blockchain also features its own crypto called Ether (or ETH).[9] The Ethereum transaction fee varies based on network congestion and is usually between $100 and $200 per transaction, which is rather high compared to other blockchains. Because of the high transaction (gas) fees, NFTs are emerging on Polygon and Solana. Polygon is a secondary scaling solution for the Ethereum blockchain. These types of solutions work on top of an existing blockchain network rather than using their own blockchain.[10] In this instance, Polygon works on top of Ethereum which has become expensive to use as it becomes ever more popular and therefore congested. Solana is a high throughput blockchain based on the Proof of History (PoH) and Proof of Stake (PoS) consensus.[11]

IPFS

Very little data is stored directly inside an NFT. Rather the NFT includes information on where you can find a description of the artist’s name and the title of the work, but that information is not typically on the blockchain itself[12] The actual artwork is still a link away. NFTs use a system called IPFS, or InterPlanetary File System. Rather than identifying a specific file at a specific domain, IPFS addresses let you find a piece of content so long as someone somewhere on the IPFS network is hosting it. IPFS is a peer to peer file sharing system.[12]

Arweave

Arweave is a new type of technology that uses a type of database to store data that cannot be deleted or changed, and uses economics to encourage people to store the data for long periods of time for the first time ever.[13] This combination makes either public or private data permanent. Arweave would describe itself as a "novel data storage blockchain protocol" enabling a permanent internet and creating truly permanent data storage for the first time.[13] It is a pay-once-forever storage model. Arweave is trying to solve the problem of reliable long-term data storage. The technology Arweave uses is blockweave, which is a blockchain with a twist. [13] A blockchain is a type of database that uses 'blocks' to store data immutably, which means that the information does not or can’t change. When new information is added to this database all the previous information needs to be verified by a community of computers before anything new is added to this database.This is a process for making sure the information stays the same is very secure, but it is also very time consuming and energy intensive. Arweave came up with a new process so that the whole blockchain did not need to be verified, only a randomly previously chosen block did.[13] The recall of the previous block makes a type of weave structure and thus Arweave calls it a blockweave as opposed to a blockchain.[13] The weave structure solved the problem of being able to store information in a place where it would not and could not be changed, and allowed it to be recalled quickly when needed.

NFT Marketplaces

Opensea

Opensea was founded in 2017 by Devin Finzer and Alex Atallah. It is an online marketplace for non-fungible tokens. [14] Users can generate NFTs for free on OpenSea and transfer the gas fee onto the first person who purchases the NFTs. OpenSea is based on the Ethereum ERC-721 standard and Polygon (a layer-2 scaling solution for Ethereum).[15]

Nifty Gateway

Nifty Gateway is Gemini exchange’s NFT marketplace founded in 2018.[16]

LooksRare

LooksRare is an NFT marketplace that airdropped its $LOOKS token to NFT traders on Jan. 9, 2022. In contrast to OpenSea, which keeps a 2.5% cut of all sales on its platform, all of the trading fees (currently 2%) on LooksRare are paid to $LOOKS stakers.[17]

Rarible

Rarible is both a marketplace for crypto assets, as well as a distributed network built on Ethereum that enables their trade without a middleman.[18] Rarible is a marketplace aiming to link sellers (typically content creators such as digital artists, model creators or meme makers) with buyers who can select pieces they wish to purchase.[18] It is also software allowing digital artists and creators to issue and sell custom crypto assets that represent ownership in their digital work. The tokens that creators generate on Rarible are known as non-fungible tokens (NFTs). Central to the platform is RARI, Rarible’s cryptocurrency and by owning RARI tokens, users can vote on proposals that affect the platform, moderate creators and curate featured artwork. For artists to turn their work into an NFT, creators must first “mint” a token using Rarible’s software by filling out a form on the website and attaching their image and other data, such as a listing price, that represents their work. The Rarible platform then creates a new token on the Ethereum blockchain. The NFT can be transferred between different wallets using Rarible’s software. Rarible uses the Ethereum blockchain to embed within an NFT’s code the full history of its owners and transactions.[18] Currently, when a transaction goes through, both the buyer and the seller must pay transaction fees that go to the Rarible network. On Rarible people can use royalties to set a percentage of future sales and collect them automatically by issuing a token.

Uses of NFTs

Fashion

NFTs have been used for both digital and physical fashion related items. For example, in 2021 Gucci auctioned off an NFT inspired by its fall/winter 2021 collection in an online auction hosted by Christie's, Burberry launched an exclusive line of digital accessories, and Dolce & Gabbana generated $6.1 million in sales in its auction of a nine-piece NFT collection.[19]

Games

Some popular NFT games are Axie Infinity, Sorare, Evolution Land, Gods Unchained, and Cryptokitties. Axie Infinity is currently one of the most popular NFT games at the moment. It uses NFTs to enhance its gameplay and is similar to games like Pokémon, you have to collect fantasy monsters that you can breed or trade.[20] The game’s monsters exist as NFTs. It is a play-to-earn game, where players can earn tokens. New entrants to the Axie universe must first acquire three Axie characters before they can even start playing the game. Players who are interested in Axie but who lack the financial resources to acquire the initial set of characters can essentially participate in an NFT lending and borrowing process from others who are able to acquire them. While this model of NFT renting comes in many forms, one of the most popular ways of getting access to Axie NFTs is through Yield Guild Games (YGG), one of the most successful play-to-earn gaming guilds to date.[21] Through YGG, players essentially rent NFT Axie characters, and the earnings that are acquired during the time that the individual plays with those Axies is then divided between the guild and the players themselves.[21]

POAPs

POAPs, Proof of Attendance Protocols, are NFT badges given out to attendees of both virtual and real-world events. POAPs are created with the ERC-721 standard used for NFTs. However, for an NFT to be classed as a POAP, it must be minted through the official POAP smart contract and it needs to contain metadata related to a specific time or date, up to one year in length.[22] Also, all POAPs must have an image associated with them. While POAPs were originally minted on the Ethereum main net, since October 2020, POAPs have been created and distributed on the Ethereum sidechain xDai.[22]Since xDai is designed for fast, inexpensive transactions, POAPs can be minted by issuers for very low cost. POAPs are usually distributed for free to whoever is eligible to claim them.[22] POAPs can also be migrated from xDai to Ethereum if the user pays the gas fee to do so.[22] However, due to high fees on Ethereum, most users opt to leave their POAPs on xDai where they can view them on the POAP app.

Music

Music NFTs are music tracks recorded on a blockchain in the form of unique non-fungible tokens that belong exclusively to the owner of the NFT.[23] Music NFTs can also be sold on and allow musicians to earn royalties for every secondary market sale.[23] Every fan who buys the music NFT becomes an owner of their favorite musician’s work and they are then able to store the music NFTs in their crypto wallets. If they are interested, they can sell off the NFT to a higher bidder in the future. The musician who created the NFT can earn from the re-sales of their work, which is one of the most powerful ways music NFTs can empower musicians.[23] Several musicians and bands have already released NFTs. Dj 3LAU had an NFT drop called the Ultraviolet Collection, which had a world record sale of over USD 11.6m.[23]

Art

The most popular use of NFTs is for art, whether it be photographs, generative art, or digital art. Generative avatar projects were popular in 2021, with Cryptopunks, Bored Ape Yacht Club, and Cool Cats as some of the most popular. Generative avatar projects use code to randomly generate thousands of NFTs from a set of layers representing different traits.[24]

Membership

NFTs have been used as a way of granting membership to a certain community. While some DAOs make people own a certain amount of governance tokens to join, some DAOs like Links DAO offer a membership NFT. Another example of a membership NFT is the Poolsuite NFT, released in 2021. Flyfish club also released a membership NFT in 2022 that allows token holders to become members. Flyfish Club (FFC) is the world's first member's only private dining club where membership is purchased on the blockchain as a Non-Fungible-Token (NFT) and owned by the token-holder to gain access to the restaurant and various culinary, cultural and social experiences.[25]

Ethical Issues

Climate

One of the main ethical implications of NFT art is the amount of energy consumed in the creation process. Depending on the blockchain that NFT's exist on, the amount of energy consumed can produce large amounts of carbon emissions. Ethereum, the most popular blockchain for NFTs, is built on a system called “proof of work” that is incredibly energy hungry. There’s a fee associated with making a transaction on Ethereum which is called “gas.” Proof of work acts as a sort of security system for cryptocurrencies like Ethereum and bitcoin since there’s no third party, like a bank, that oversees transactions.[26]To keep financial records secure, the system forces people to solve complex puzzles using energy-guzzling machines.[26] The creation of blockchain assets, NFTs included, uses a large amount of computing power, thus also a huge amount of energy, raising the ethical issue about the impact they could have on the environment. A site set up to calculate the carbon footprint of NFTs, calculated that a piece of NFT art named 'Coronavirus' consumed an incredible 192 kWh in its creation. That's equivalent to one European Union resident's entire energy consumption for two weeks.[27]‌ It's estimated that a 'simple' NFT GIF can create the same consumption. Artists can help, by making efforts to create carbon-neutral artwork. Beeple has promised to do this going forward, but the problem goes deeper, because of the way blockchain works.[27] Ethereum, Bitcoin and other blockchains are built on a 'proof-of-work' system, which is like a complex series of puzzles, to keep the financial records of users secure and this system uses an incredible amount of energy. In fact, the Ethereum network alone uses about the same amount of energy as the entire country of Libya.[27] A bitcoin transaction adds around 400kg of CO² to the atmosphere (assuming it’s powered by an energy mix typical of the UK, of which around two-thirds comes from fossil fuel).[28] Together, Bitcoin and Ethereum mining operations emit more than 70 million tonnes of CO² into the atmosphere.[28] ‌The estimated power needed to run the Bitcoin network across the world is 7.46 gigawatts (GW) per year. For comparison, in 2020 an average-sized nuclear plant produced around 1GW of electrical power in a year.[29] The energy required for just one bitcoin transaction could power the average US home for more than 70 days.[30] Most NFTs are currently built on the Ethereum blockchain, although this gap is shrinking as competitors like Solana and Avalanche gain in popularity.There are other blockchains, however, like Solana that use proof of History, which allows “timestamps” to be built into the blockchain itself by inserting data into the sequence by appending the hash of the data of the previously generated states. This leads to lower gas fees and less carbon emissions.[31] Ethereum has scalability, cost and speed problems. However, these are said to be addressed in the full Ethereum 2.0 upgrade currently anticipated sometime in 2022. If blockchain transactions were verified through proof of stake – a move that Ethereum is planning to make – their energy consumption could be reduced to 0.01% of its original value.[32]

Wealth Inequality

The buy-in fees of NFTs are prohibitive for many, with average mint prices being around 0.07 ETH plus gas fees. The cost to actually buy one is typically more since it’s easier to buy them on secondary markets like Opensea, rather than getting on a whitelist to buy them on the mint date.[33] This means the NFT marketplace is becoming something of a playground for the super-rich. Another ethical issue is that the majority of money being made in the NFT space is not by the artists, but rather the investors buying and selling them for a profit. NFTs are changing hands for such astronomical sums of money, and it often doesn’t go to the artist. Considering that NFTs were originally created as a way of giving control by asserting digital ownership, the idea that they are becoming increasingly elitist brings up the issue of wealth inequality in the space.

References

  1. ↑ M. (2020, October 29). NFT Ecosystem Overview. The Nifty Crypto Nomad. https://niftycryptonomad.com/nft-ecosystem-overview/
  2. ↑ 2.0 2.1 Ethereum. (2022). Non-fungible tokens (NFT). Ethereum.Org. https://ethereum.org/en/nft/
  3. ↑ 3.0 3.1 Non-Fungible Token (NFT). (2021, December 14). Investopedia. https://www.investopedia.com/non-fungible-tokens-nft-5115211
  4. ↑ Kastrenakes, Jacob. “Beeple Sold an NFT for $69 Million.” The Verge, 11 Mar. 2021, www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million.
  5. ↑ Locke, Taylor. “Jack Dorsey Sells His First Tweet Ever as an NFT for over $2.9 Million.” CNBC, 22 Mar. 2021, www.cnbc.com/2021/03/22/jack-dorsey-sells-his-first-tweet-ever-as-an-nft-for-over-2point9-million.html.
  6. ↑ April 2021, Georgia Coggan 30. “Confused about NFTs? We Explain All You Need to Know.” Creative Bloq, www.creativebloq.com/features/what-are-nfts.
  7. ↑ “What Is Minting?” Support.avax.network, support.avax.network/en/articles/5325125-what-is-minting. Accessed 11 Feb. 2022.
  8. ↑ Team, P. (2022, January 25). Top Ten Blockchains Used in NFT Development. PixelPlex. https://pixelplex.io/blog/top-ten-blockchains-for-nft-development/
  9. ↑ 9.0 9.1 Team, P. (2022b, January 25). Top Ten Blockchains Used in NFT Development. PixelPlex. https://pixelplex.io/blog/top-ten-blockchains-for-nft-development/
  10. ↑ Stevens, Robert. “Polygon and Matic: What’s the Difference?” Www.coindesk.com, 3 Jan. 2022, www.coindesk.com/learn/polygon-and-matic-whats-the-difference/. Accessed 11 Feb. 2022.
  11. ↑ “What Is Solana? Learn Everything about the Ethereum Rival.” Blockworks, 7 Feb. 2022, blockworks.co/what-is-solana-everything-you-need-to-know-about-the-ethereum-rival/. Accessed 11 Feb. 2022.
  12. ↑ 12.0 12.1 Kastrenakes, J. (2021, March 25). Your million-dollar NFT can break tomorrow if you’re not careful. The Verge. https://www.theverge.com/2021/3/25/22349242/nft-metadata-explained-art-crypto-urls-links-ipfs
  13. ↑ 13.0 13.1 13.2 13.3 13.4 Jones, Wayne. “What Is Arweave?” ArDrive, 11 Jan. 2021, ardrive.io/what-is-arweave/. Accessed 11 Feb. 2022.
  14. ↑ Ehrlich, S. (2021, July 8). NFT Marketplace CEO Explains Why The Industry Is Moving Beyond Ideological Purists. Forbes. https://www.forbes.com/sites/stevenehrlich/2021/07/06/nft-marketplace-ceo-explains-why-the-industry-is-moving-beyond-ideological-purists/?sh=34dd1e331fc3
  15. ↑ Author, G. (2022, January 4). How to Create and Sell NFTs for Free. PetaPixel. https://petapixel.com/2021/11/24/how-to-create-and-sell-nfts-for-free/
  16. ↑ Nifty Gateway - Collect Digital Art. (2022). Gemini. https://www.gemini.com/nifty-gateway
  17. ↑ Y. (2022, January 21). LooksRare Surges to $7B Valuation as Torrid Volumes Fuel Staking Rewards. The Defiant. https://thedefiant.io/looksrare-volume-surging/
  18. ↑ 18.0 18.1 18.2 “What Is Rarible? (RARI) | Kraken.” Www.kraken.com, www.kraken.com/en-us/learn/what-is-rarible-rari.
  19. ↑ Cohn, D. A. (2021, November 1). NFT Trends in Fashion. POPSUGAR Fashion. https://www.popsugar.com/fashion/nft-trends-in-fashion-48578224
  20. ↑ Ashley, J. (2022, January 27). Top 5 NFT Games – Unique titles offering a universe of content. Esports.Net. https://www.esports.net/news/top-5-nft-games/
  21. ↑ 21.0 21.1 Attention Required! | Cloudflare. (2022). NFT Renting Poised to Supercharge Growth in Play-to-Earn Games. https://cryptoslate.com/nft-renting-poised-to-supercharge-growth-in-play-to-earn-games/
  22. ↑ 22.0 22.1 22.2 22.3 Craig, T. (2021, September 5). What Are POAPs, and Why Should You Collect Them? Crypto Briefing. https://cryptobriefing.com/what-are-poaps-and-why-should-you-collect-them/
  23. ↑ 23.0 23.1 23.2 23.3 Lielacher, A. (2022, January 14). How Music NFTs Could Disrupt the Music Industry. Cryptonews. https://cryptonews.com/exclusives/how-music-nfts-could-disrupt-music-industry.htm
  24. ↑ Thomas, L. (2021, December 2). 15 Top Generative Avatar Projects You Need to Know. Nft Now. https://nftnow.com/lists/top-nft-avatar-projects/
  25. ↑ Breen, A. (2022, January 26). Gary Vaynerchuk to Open World's First NFT Restaurant in NYC. Entrepreneur. https://www.entrepreneur.com/article/415203
  26. ↑ 26.0 26.1 Calma, J. (2021, March 15). The climate controversy swirling around NFTs. The Verge. https://www.theverge.com/2021/3/15/22328203/nft-cryptoart-ethereum-blockchain-climate-change
  27. ↑ 27.0 27.1 27.2 Napoli, Robert. “Council Post: The NFT Metaverse: Building a Blockchain World.” Forbes, www.forbes.com/sites/forbestechcouncil/2021/12/27/the-nft-metaverse-building-a-blockchain-world/?sh=35f41f96531c. Accessed 11 Feb. 2022.
  28. ↑ 28.0 28.1 Stoll, Christian, et al. “The Carbon Footprint of Bitcoin.” SSRN Electronic Journal, 2019, 10.2139/ssrn.3335781. Accessed 11 May 2020.
  29. ↑ “The Bitcoin Network Now Consumes 7 Nuclear Plants Worth of Power – Mining Bitcoin News.” Bitcoin News, 25 Aug. 2020, news.bitcoin.com/the-bitcoin-network-now-consumes-7-nuclear-plants-worth-of-power/.
  30. ↑ Digiconomist. “Bitcoin Energy Consumption Index.” Digiconomist, 2021, digiconomist.net/bitcoin-energy-consumption/.
  31. ↑ Smith, J. S. A. (2021, November 30). Proof of History: How Solana brings time to crypto. Solana | News. https://solana.com/news/proof-of-history#:%7E:text=Solana%20solves%20this%20problem%20by,built%20into%20the%20blockchain%20itself.&text=Solana%20does%20this%20by%20inserting,of%20the%20previously%20generated%20states.
  32. ↑ Salami, Iwa. “Cryptocurrency, NFTs and the Metaverse Threaten an Environmental Nightmare – Here’s How to Avoid It.” The Conversation, theconversation.com/cryptocurrency-nfts-and-the-metaverse-threaten-an-environmental-nightmare-heres-how-to-avoid-it-175761.
  33. ↑ April 2021, Georgia Coggan 30. “Confused about NFTs? We Explain All You Need to Know.” Creative Bloq, www.creativebloq.com/features/what-are-nfts.
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