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How NFT works technically? A complete guide to understanding what are NFTs

by Muhammad Asad
September 9, 2021
in Business
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In early 2021, NFTs generated a media frenzy, an excitement among artists and the general public, especially when auction house Christie’s sold digital artist Beeple’s NFT artwork “Everyday: the First 5,000 Days” for $69.3 million.

Everydays: The First 5000 Days by Mike Winkelmann AKA Beeple

Since news travels fast, it didn’t take long to pique the curiosity of the general public. NFTs quickly became popular. If the latter has applications in the art world, the idea is that they apply equally well in other varied fields, such as video games and sports. 

For the first time with the invention of the Bitcoin protocol in 2009, ownership of a digital asset can be transferred, without being duplicated, or going through a registry or centralized system. If Bitcoin (BTC) and most of the 10,000 other types of tokens issued via a specific blockchain are fungible, meaning that any one of these tokens can be exchanged for another; non-fungible tokens mean a unique digital asset. They are issued on a blockchain such as Ethereum, Flow, Wax, and Tezos using a smart contract and therefore rely on the intrinsic qualities of blockchains. 

What is an NFT?

NFTs can be likened to “tokens,” or digital assets, and are backed by blockchain, a storage technology dedicated to the transmission of information in a transparent, secure, and decentralized way.

These same tokens have the particularity of being unique. They can therefore authenticate a digital asset and mark it with the digital signature of its owner. Each NFT has its own identity, but also its own authenticity and can be traced.

NFT stands for non-fungible token. A fungible asset is an economic term that is usually used to describe things like real estate, or a digital file like music. These things are not interchangeable with other digital items because they have different attributes and unique properties.

Fungible items or goods can be exchanged because their value defines them, not their unique properties. For example, Bitcoin or fiat currencies like US dollars are fungible goods because 1 Bitcoin / $1 USD can be exchanged for another 1 Bitcoin / $1 USD.

In summary: an NFT is nothing more than a digital certificate that can be attached to any object, physical or virtual. 

It should be noted that, in most cases, the purchase of NFTs has absolutely no effect on the use of the object or file in question.

The buyer of an NFT corresponding to a digital work of art, for example, is in possession only of the certificate, issued by the creator of this work, attesting that he is the buyer. The NFT art in question may remain perfectly accessible online and free of charge, even when saved and shared by thousands upon thousands of Internet users (like a simple PNG image, an MP3 music file, or any digital item).

What is blockchain?

Blockchain technology is a publicly accessible, transparent, and decentralized network that serves as a record of the different transactions that are performed with cryptocurrencies (tokens are a kind of cryptocurrency, such as Bitcoin and Ether).

Therefore, it is a record in which anyone can track and verify who that token belonged to and how much it was sold for in the different transactions that took place.

This record is kept simultaneously on multiple computers around the world so that the hack or crash of one of them implies no obstacle to accessing its history from any other.

Is an NFT a smart contract?

 An NFT token is generated and managed by a “smart contract” that can be executed on the blockchain. In general, it meets the ERC-721 (Ethereum Request for Comments) specifications. In other words, NFTs are tokens that are given a unique identification (ID) number by the smart contract that generates them. 

When someone creates an NFT, they execute code stored in smart contracts that conform to the standards of the NFT token. However, all this information is automatically added to the blockchain where the NFT is being managed. 

Thus, the smart contract uniquely associates an NFT token with an Ethereum address. The address is the result of a cryptographic hash function of the public key of an encryption key pair. In the end, the holder of the private key can demonstrate that he controls the public key and is, therefore, the physical person behind the Ethereum address.

In short: NFT is a smart contract token that applies the ERC-721 or ERC-1155 specifications. Each NFT has an identifier in the smart contract. The association ” contract address” and “identifier” then becomes a globally unique identifier and a unique asset registered and searchable on the Ethereum blockchain.

What is NFT in detail?

NFTs work differently from ERC-20 standard tokens, such as Tether USD (USDT), Nexus (NEXO), and Binance Coin (BNB), in that each NFT token is completely unique and not divisible. NFTs offers the ability to assign or claim ownership of any unique piece of digital data, traceable using blockchain, such as Ethereum’s – a public ledger. An NFT is created from digital objects as a representation of digital or non-digital assets. 

By tokenizing digital content (it can be a JPEG, MP3, MP4 file, a meme, an ebook, or even a tweet), a digital certificate of ownership and authenticity is created, which indicates that this content is unique and that the NFT ownership rights are with the person who acquired it (it is important not to confuse this with copyrights, which will remain in the possession of the author of the work).

In this sense, NFT smart contracts can serve different purposes, for example, to guarantee the original artist a share of the benefits that may be produced by a future sale of tokens.

These digital assets are bought and sold on NFT markets, where their NFT creators or sellers offer them for sale at fixed prices or via auctions.

NFTs are based, as we said, on blockchain technology, which allows their traceability and does not (in theory) make them counterfeit or hacked since the blockchain is decentralized and maintained by hundreds of computers (crypto users) around the world. This same technology is what allows them to be created, bought, and sold.

They are based on two standards, Ethereum’s original ERC-721, where NFTs started moving, and the more current ERC-1155 (also within the Ethereum network), which allows working with multiple tokens at the same time through a single smart contract, unlike the original, which requires a smart contract for each token.

However, in addition to its tamper-proof, traceable, interoperable, and interchangeable nature, a non-fungible token is unique and indivisible. This uniqueness makes it possible to certify the authenticity and ownership of original objects, including digital artworks, collectibles, digital collectibles, or even domain names, claims, and even real estate.

The metadata associated with NFT provides descriptive information. For CryptoKittties for example, the metadata is the cat’s name, its photo, a description, and its additional characteristics, called “cattributes.” When the NFT is a concert ticket, the metadata refers to the date of the event and the type of ticket, as well as the name of the concert, contact details and time. 

When a collector acquires the NFT of an artist’s digital artwork, he acquires the unique token corresponding to that work. The new owner is then registered in a tamper-proof way in the token’s exchange history

Is NFT the same as cryptocurrencies?

NFTs are a type of crypto-active in that they have value in cryptocurrencies and function very similarly to them. Still, there are some differences that we will see below.

The first is in the name, NFTs are not fungible, meaning that unlike cryptocurrencies, which are fungible, they cannot be replaced by another token. To put it simply, 1 Bitcoin (BTC) or 1 Ether (ETH) has the same value as 1 BTC or 1 ETH, even when they change hands (without inserting their value into the exchange rate in other currencies). But an NFT of digital artwork is unique and its value cannot be equivalent to that of different digital artwork, because they are not the same.

The second is that NFTs are indivisible; the NFT is purchased in its entirety and cannot be divided, as may be the case with cryptocurrencies. That is, you can buy one NFT and sell that same NFT, but not its half. However, you can buy 1 BTC and sell it in two parts, 0.5 BTC each.

Finally, cryptocurrencies are a type of digital currency that can be bought, sold, or mined. NFTs are not currencies, but digital assets, and yes, they can be bought and sold, but not mined.

Can anything be an NFT?

NFTs have been used to create scarcity in unique digital artworks, sell tweets, create avatars, and fully unique digital real estate for virtual worlds and video games, but the uses are endless. They can begin to be used, for example, to generate real estate titles and let everyone know who owns a property.

NFTs are suitable for buying and selling digital art or physical art, physical collectible, digital collectible, music, trading cards, online games, tweets, domain names: the diversity of activities for which NFTs can be deployed open up prospects when the project of combining a digital good or physical asset to a single token presents interest. Jack Dorsey, the CEO, and co-founder of Twitter was illustrated by the NFT sale of his first tweet, published in 2006, for $2.9 million.

In the end, the key to NFTs is that they generate “proof of ownership,” or what is the same, certificates of ownership. The NFT shows that you own something and that something can be anything in the world.

How to buy and sell NFTs?

Now that we know what an NFT is and, at a basic level, how it works, now other questions arise such as: what is the process of buying NFTs? Can I sell NFTs? Where can they be bought? How are they paid for?

To buy NFTs you must access NFT marketplaces such as OpenSea, Rarible, SuperRare, Foundation, Binance NFT, MakersPlace, Nifty Gateway, or Valuable. On any NFT market, you access you will find NFT creators and artists who put up for sale NFT projects such as digital art, music, video, DeFi, virtual real estate, tweets, game items, metaversos, among thousands of other projects. But also NFT owners who put their NFTs up for sale on the secondary market.

NFT Sales can be made at prices set by the NFT owner or through auctions. Here you pay in cryptocurrencies, the most common one is Ether, but it is not the only cryptocurrency that can be used, so you need to have a crypto wallet like Metamask, Trust Wallet and Coinbase Wallet to perform transactions.

In the case of official products like NBA Top Shot, these have their own NFT marketplace and make the purchase process a bit easier as it can be done with a credit card and not necessarily with cryptocurrency. In this sense, it is clear that these types of collectible or more game or video game-oriented NFT products are designed to reach a more general audience.

WePlay Collectibles for example is for people who want to be part of Esports events and show that they like players and talents in a different way, in addition to merchandising. The WePlay Collectibles are part of a platform, where you can buy items with NFT technology – both digital and physical. They are rewards and items associated with a specific tournament.

Find more information about the platform and NFTs at https://weplaycollectibles.com/ 

Note: Once your NFT tokens have been purchased, please make sure that your Metamask password, as well as your wallet’s private key, are kept in a safe place.

What makes a good NFT?

NFTs are going to change the virtual world as we know it. They are already doing this in the art world, giving digital artists (3D, graphic designers, etc.) the chance to create unique pieces that many collectors are collecting.

In the gaming world, they are revolutionizing everything as well with blockchain-based games like Decentraland, where each person can have a totally unique avatar. Also, the land itself is limited and can even be rented. 

They also have value because each NFT is unique. The value is in being assured that there will be nothing like it. In the same way that the Mona Lisa has so much value because there are not 100 million Mona Lisa’s.

The controversy between NFTs and Carbon Footprint 

NFTs are a trend and it looks like they will continue to be for a while, as they are generating a lot of doubt, hype and controversy in their wake. 

Just as Bitcoin and Ethereum generate major debates about their energy consumption due to the security of the transactions on their respective networks, NFTs are not immune to these issues. 

Remember that there are several ways to secure transactions on a blockchain network, depending on whether the consensus mechanism requires proof of work (PoW) – a mechanism based on energy consumption, or proof of stake (PoS) – a mechanism based on token retention, such as the Tezos blockchain from which NFTs can also be created.

The way the Ethereum blockchain keeps your funds and assets safe currently consumes a lot of energy, but it is about to get better. With the upgrade to Ethereum 2.0 the carbon footprint of the Ethereum blockchain will be 99.9% better, making it more energy-efficient and environmentally friendly than many existing industries.

 

Muhammad Asad

Muhammad Asad

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