What is an NFT?
Cryptocurrency has a short but fast history of progress, ranging from pre-blockchain based projects like ecash and Digicash to distributed ledger technology like Bitcoin and Ethereum. Decentralized Finance is a large scope of what cryptocurrency is trying to achieve which currently helms Ethereum at its center. Things like savings accounts, decentralized exchanges, and even hedge funds are made possible by smart contracts on Ethereum and other blockchains like Polkadot.
However, smart contracts go much more beyond monetary focus. Ethereum and other blockchains of the same category can offer things like private messaging, real estate ownership in projects like RealT, and with this guide – assets called non-fungible tokens, or NFTs. This guide will show what NFTs are, how the technology works and why it’s necessary for the asset class type, the differences between the types of NFTs, and how to create and sell your own tokens, with two of these creation methods requiring no programming knowledge.
We will be walking through how to create non-fungible tokens which are deemed a value of property in lieu of being a cryptocurrency asset class. As such, value can be both created and lost. As a result, this guide is designed as an educational tool and not to be considered as financial advice.
What are NFTs, or Non-Fungible Tokens?
Non-fungible tokens are cryptographic tokens that are considered unique in value. While cryptocurrencies like Bitcoin and Ethereum are immutable within their ledger, the assets that composed the blockchains are interchangeable. For example, you can send one Bitcoin to someone and receive one back from the same person. That Bitcoin you received isn’t the same one that you sent despite having the same exact value. Non-fungible tokens differ in this way – if you send one NFT to a friend and your friend sends it back, you receive the same exact token that you originally had. NFTs are completely unique and cannot be changed in either their value attribution or digital form. In addition, if you had a piece of artwork while another person had a title to a vehicle, the value you have in your hand will differ greatly when you exchange one for another.
NFTs are hard to define by design; the standard on the Ethereum Network is still young and as such, these NFTs are more a description of a blueprint of a product instead of a product itself with a near limitless potential. The token is created by you instead of it being created for you.
Here are some examples of non-fungible tokens which may help understand what they are:
- Artwork: smart contracts allow users to upload digital pieces of creative art that they or someone else has made. This ranges anywhere from paintings, animations, photography, and anything visual. These can be coded and added to the blockchain with some marketplaces doing this automatically using common image formats like jpg. Some “crypto artwork” has been known to sell for more than $55,000 in auction.
- Collectables: this has a lot of similarities to artwork but goes outside the traditional definition of art to include digital items that are designed to be collected. One of the most common examples of this is the longstanding collectible Crypto Kitties.
- In-Game Assets: these tokens are similar to collectables but have the favorable distinction of providing supplement value to a primary source such as a MMORPG game. Sometimes these tokens can add in-game benefits as well.
- Tickets: these are NFTs that can be created for admission purposes. This allows for digital standards for airplane tickets, concerts, private events, and much more.
- Songs and Recordings: NFTs do not need to be strictly visible as these tokens are also supported as an audio format. This allows for music creators to express themselves and exchange their songs to fans or to label companies. This also allows for audio recording for messages to be exchanged between two parties.
- Licences and Certificates: NFTs create a verification of authenticity by default, making it a great option for things like licensing, certificates, and even notaries. This could theoretically be anything in the traditional non-fungible world – from driver’s licenses, marriage licenses, diplomas, health and safety certifications, a bank notary, creating a will, and so much more. Even software licenses can be considered NFTs.
- Real Estate Investing and Property Ownership: tokens can be used for the creation of deeds and for lienholder ownership. In addition to proving ownership of a property, NFTs can also help with tokenizing real estate for the purpose of real estate investing or even low income housing. One person may not be able to afford one mortgage on a house, but a handful of people may be able to afford a house by splitting one room a piece within a house, rental property, or even a hostel. Token ownership would give the possibility of fractional housing options including co-signing.
Theory and Practice Behind NFTs
NFTs create additional value in their ability to be unchanged and unique. For example, let’s say a user creates a piece of artwork and sends it to the Ethereum blockchain as a NFT. This artwork is now tokenized and cannot be re-minted. The primary benefit of having a NFT is the true value of ownership itself. The secondary benefit is the true relationship between a buyer and the creator of the asset.
- True Value of Ownership: once an NFT is created, it has an owner. This ownership is shown as an address in a key/value relationship on the blockchain that is immutable based on the functionality of the Ethereum architecture. This significance creates a ownership on a decentralized system that cannot be nullified or changed by other parties in a traditional financial setting. For example, some mortgages do not grant “true” ownership of a house. In the event of a government’s will, they can seize the home if they believe it to be in their interest to do so while conglomerates will coerce you to give it up or sell the property. Airline companies or sporting events can manipulate the terms of an admission. Songs in professional music albums are very often abused by music labels where creators get a very small amount of royalties. The “true value ownership” helps level out the playing field in this way; the ones that obtain the asset benefit from its value of owning it, while the creator still gets credit and also the knowledge of the transfer.
- Creator/Buyer Relationship: the true value of ownership helps establish the secondary benefit – the relationship itself between the current owner and the previous owner. This helps establish a link between the two for the purposes of transfer or copyright – the previous owner gave up its ownership to the current one. This can also take the form of royalties. Music writers for example can sell NFTs to music labels which gives the right to use their music for a price and thus establish a relationship.
But do NFTs solve any real world issues or is it just novel artwork with extra steps? Considering the two benefits above, they could actually solve issues that plague the current traditional system of ownership. NFTs can give substantial and immutable copyrights or possessions of artwork, photos, books, houses, and really any property. The government cannot seize an Ethereum address which holds the codified ownership like they could by seizing your property today.
Or it can just be used to make memes.
Ethereum Standards and Smart Contracts
So how are NFTs even possible? Let’s take a look at the progression of Ethereum and what it offers today in this regard.
When Ethereum was created, non-fungible tokens didn’t exist. Vitalik Buteren had the idea for Ethereum to be a cryptographic network that gave functionality, but NFTs were not officially on the table yet. Not long after, documentation arose to make it possible.
Here are some notable NFTs that have been created:
- Colored Coins (Bitcoin): technically a creation on the Bitcoin blockchain, Colored Coins was created by the ability to manipulate small parts of metadata by adjusting its color. The popularity was a niche at best, but it gave the idea that something bigger could be established in lieu of using metadata to create unique value.
- Crypto Punks: helping to inspire the current artistic trends of non-fungible tokens, these headshot style tokens are the first known and popularized NFT on the Ethereum blockchain. The largest Crypto Punk NFT sale was for 85 ETH in 2020.
- Crypto Kitties: a discussion of NFTs wouldn’t be complete without Crypto Kitties, the token that really sparked the whole movement. Although not technically the first token system to be created, it sparked the popularity of NFTs to “mainstream crypto” and generated a ton of worldwide news coverage. The people behind Crypto Kitties eventually spun into their own company called Drapper Labs which also owns another NFT collectable system called NBA Top Shot. Crypto Kitties has a verified purchase of $170,000 for a single NFT back in 2018 as its highest paid token.
- Battle Racers: many other NFTs have been created after Crypto Kittens but one that stands out well is Battle Racers, a racing car game. This NFT is extremely notable because it runs on the Decentraland platform, which of itself is stacked on top of the Ethereum blockchain, making it the first NFT to be utilized on a Layer 2 token of Ethereum. In addition, it also has a utility factor as the token can be used to affect things within the game. Users of the game can build cars, race other users, and tokenize your car to earn exclusive benefits.
- Cryptovoxels: in a similar vein to Decentraland, Cryptovoxels takes NFTs a step further to not just buy land but also stores and art galleries. One special thing about Cryptovoxels is the ability to see the world without any KYC or other confirmation – entering the world for viewing purposes is literally one click away.
- Forgotten Artifacts: although the game itself isn’t cryptography in nature, Forgotten Artifacts is a RPG that allows users to collect rare items that are NFTs built by Enjin, a token on Ethereum.
- Gods Unchained: a trading card game on the Ethereum NFT system, Gods Unchained uses cards that are 100% owned by the people that have the private keys.
- Ethereum Name Service: a system created to consolidate hash values for deposits in a simple and easy to use way, ENS lets users register their names as as such get created as a NFT in order to maintain the name service integrity. This is also one of the more notable methods to use NFTs other than simply collecting.
You may be surprised that there are different types of NFTs depending on the precise function you wish to take advantage of. Behind the scenes there are two major types of tokens – ERC-721 and ERC-1155. Let’s check out what they have in common and how they are different.
- ERC-721: the first iteration of the NFT formatting, ERC-721 is the first galvanized standard of implementing unique assets on the Ethereum mainnet which was created in January 2018. This implementation derives its interfacing based on the ERC-165 standard. In addition, it’s also required to use the wallet interface for its ERC721TokenReceiver function. The layout of the EIP is designed to create a smart contact each time a token is created.
- ERC-1155: created six months after the creation of the ERC-721 standard, the ERC-1155 is both an update and a predecessor for standardizing NFTs on Ethereum. The most important difference to ERC-1155 and to NFTs is the ability to create multiple tokens within the same contract instead of making a small contract for each token as with ERC-721. This significantly reduces the amount of time and resources needed to create a NFT. The ID of each token is allowed to represent a new configurable token type, thus making the end result more dynamic and qualities for batch transactions.
- ERC-998: a compostable for the ERC-1155 token, this implementation is a token extension for the purposes of non-fungibility. This means it can be attached to a token as a malleable sub-descriptor. For example with Crypto Kitties collectibles, the ERC-998 could be a bowl of “cat food” that is consumable or customizable with the CryptoKitties token. This could also be used to connect music labels to a creator for sharing rights.
Creating, using, and collecting NFTs also give way to needing a place to store them. The great thing about NFTs is that many crypto wallets have built in support for tokens.
Here are some of most popular ones:
- Trust Wallet: owned by Binance, Trust Wallet is one of the most versatile wallets with an easy to understand interface. The biggest drawback of Trust is that the wallet itself is not open source.
- Coinbase Wallet: formally known as Tosh Wallet, Coinbase has rebranded their wallet that allows users to have a special username for their wallet instead of an address. At the time of writing however they are only comparable with ERC-721 tokens.
- Pillar Project: a decentralized token app platform, the Pillar Project is a wallet that holds ERC-721 compatible tokens with the primary feature of having gas-free transactions between your contacts. This app also has social capabilities and a built in token swap for exchanges like 1inch Exchange.
- Enjin Wallet: one of the most feature rich wallets on the list, Enjin Wallet had partnered with Samsung to build a NFT wallet for gamers and developers. This wallet is compatible with the newer ERC-1155 standard and gives the option to make as many wallets as you need to sort out your tokens.
- MetaMask: a well known, multipurpose and open source wallet, MetaMask supports both token standards and offers a robust UI and connectivity.
NFTs are becoming the newest thing and with that there are a lot of marketplaces surfacing to help create, buy, and sell these tokens. These marketplaces have their own unique spin on how NFTs are being offered. Most of the NFTs being created is creative art, also being called “crypto art”. Here are some of the top markets for NFTs:
- Rarible: one of the newest marketplaces on this list is Rarible, a one-stop shop for NFTs that allow you to create a token in less than 5 minutes. Users can connect their wallets, upload their tokens to the RARI marketplace, and buy or sell any tokens they see. Rarible also has leaderboards with reward tokens sent to the top buyers and sellers. This marketplace is comparable with ERC-1155. One of the best parts is that no KYC data is required.
- Mintable: another marketplace that allows creation of tokens, Mintable is a way to manifest creative ideas into NFTs. In parallel with Rarible, users can create tokens very fast in around one minute. Users need to create an account to sign in.
- Open Sea: what is likely the largest marketplace on this list, Open Sea has a massive collection of rare items and other NFTs that are sorted by categories. Users can shop for collectables, trading cards, domain names, and much more. Open Sea also has developer data to help people create their own marketplace and incorporate Open Sea connectivity. Rarible is one of the bigger companies that incorporate their data.
Creating a Non-Fungible Token
In this article we have shared the ideology behind NFTs, the standards that are used on the Ethereum network, wallet support, and marketplaces that offer the ability to create, buy, and sell tokens. Now let’s put this all to work and create our first token. As a prerequisite, you will need to have an Ethereum wallet preloaded with at least 0.1 ETH and a .jpg file. For this example we will use the Rarible marketplace using the Trust Wallet. If you are unfamiliar with Trust Wallet, please reference The Daily Chain Practical Application Guide to DeFi to learn how to use it.
Let’s get started:
- Go to the Rarible website. On the top corner on a desktop (or at the bottom if you are on a mobile device) click on “Connect”.
- You will be asked to choose the method of operation to connect a wallet. Select WalletConnect and a QR code should appear. Open your Trust Wallet (or other wallet you may have picked) and scan the code.
- Rarible should automatically take you to the home screen where you can browse tokens and see the leaderboard. After you search through the main screen, click on the hamburger icon which will bring up a menu of options. Select “Create”.
- You will be sent to a screen that allows you to get started on the actual creation process. The first portion allows you to upload a .jpg or gif file from your computer or device which must be under 10mb of data. Afterward you can create the title and description of the NFT, along with any royalties you wish the owner (yourself) to receive. In addition, you will be asked for some optional information about prices and key value pairs (which you can leave blank. When this is completed, click Create.
- A series of three prompts will emerge. One will be asking you to begin the minting process, in which you can select Mint. You will then be asked to confirm this by accepting a network fee on your Trust Wallet. After that, there will be two more prompts which should be automatic.
- If the minting process is not rejected, then you have successfully created your first NFT! You can now go to your profile and see your collectibles including the one you just made, with options on the corner to view it on the Open Sea market.
You now know a good primer on what NFTs are, what they have the potential of doing, and how to create a basic NFT on Rarible.
Non-fungible tokens are really just beginning and crypto art or collectibles are really the surface of a deep ocean of possibilities. Some projects like Aleph are starting to use NFTs to transfer ownership of nodes to other users. Any project using the Ethereum network has a low barrier of entry in using NFTs for their own purpose. One day we may be using several types of tokens in our daily lives.