Non Fungible Tokens aka NFTs, Simplified!

Digital blockchain based assets are now universal and the term cryptocurrency got major traction in recent past the users are familiar with digital wallets more so in the DEFI, the decentralized finance arena. the NFTs are playing important role to help identify the digital assets and ensure unique identifiers. The NFTs stand for non-fungible tokens, it is a type of cryptographic token on a blockchain generated pointing to a specific unique digital asset, could range from simple text file, tweet or a blog post, document, image or sound or video clip that has a digital footprint.

NFTs evolved from the ERC-721 standard. Developed by some of the same people responsible for the ERC-20 smart contract,?The basic premise of NFT is that each token is uniquely identifiable, non-interchangeable unit of data stored on any popular publicly available?blockchain, a form of digital?ledger called NFT ledger. The NFT ledgers only claims to provide a public?certificate of authenticity?or?proof of ownership to a particular digital asset but does not prevent any?sharing or copying of the underlying digital files or protect copyrights of the digital asset whatsoever, it’s a link for validation about who created this NFT and point to which digital asset, that’s it.

NFTs differ from the crypto currencies since digital currencies are fungible like each currency of specific denomination has equivalent value that of similar denomination of same currency type i.e. one INR 500 currency note is worth same value of another INR 500 currency note even though they may have different serial numbers yet traded and treated as equal; thus the term used as fungible. NFTs do not innately possess any default monetary value, they just represent digital assets with varying monetary values such as images, art, songs, documents etc and are uniquely identified. The process of turning a digital asset into an NFT is called minting, while the art created through this process is usually defined as?crypto art, the NFT always remains as a token/hash referring to the specific digital asset they are pointing / tagged to persistently.

NFTs are unique and may be purchased and sold as a unique digital assets via NFT marketplaces using blockchain based digital currencies. Like any trading platform or market, particular NFT value depends entirely on the demand and the subjective value based on buyers perception. As of Jan 2022, as per Statista, NFT sales recorded on the Ethereum blockchain for the aggregated sales value amounted to roughly 150 million U.S. dollars, is a good pointer to the magnitude of?growth and importance and the speculative nature of NFTs.

How does NFTs work?

Now that we are clear about NFTs definition and characteristics, let us dwell upon the creation and associated workflow. NFTs are created when blockchains string records of a particular?cryptographic hash, a set of characters identifying the specific digital asset, onto previous block of records?therefore creating a chain of referential data blocks, also called as a smart contract. Thus all NFTs must have a underlying blockchain for lineage and associated crypto wallet to help trade and transact. Here are the key characteristics ..

• Indivisibility?& Authenticity?– since it’s a type of cryptographic token on a blockchain we cannot divide non-fungible tokens into smaller parts, the NFT must be uniquely tagged to the digital asset it represents as a single wholesome unit. Distributed NFT blockchain makes it easy to verify the information about a token and its owner.
• Indestructibility & Provenance - As the token asset NFT is built on a blockchain, it is by nature indestructible, even if the original asset represented by the NFT is physically destroyed or seize to exist.?The referential data (i.e. chain of ownership, metadata, smart contracts etc) stored on the blockchain will remain as long as the blockchain platform exists.?
• Tradability?& Liquidity - NFTs can be traded on different crypto marketplaces. Thus, the holders can reap benefits from these advanced trading systems. Bundling, bidding, and the possibility of selling in markets offer endless opportunities to NFT owners. Due to the fact that NFTs can be traded instantly increases their liquidity yet the target audience on different NFT marketplaces may vary from new to hardcore traders thus the digital assets tagged to NFTs will be exposed to a large set of buyers.
• Scarcity & Programmability.?Being part of smart contracts, developers can cap the number and count on the supply of NFTs. They can enforce specific properties that cannot be altered after their launch/creation. Non-fungible tokens are fully programmable, just like any other digital asset. Today’s NFTs are often associated with complex mechanics, which may include crafting, forging, and random generation. The design space has endless possibilities.
• Non-interoperability?- since each NFT is unique, one cannot exchange these items. For example, Interaction with multiple ecosystems?is possible owing to ERC 721 Token ( standard creating non fungible tokens on Ethereum with properties) and its better version ERC 1155 Token ( standard for creating both fungible and non-fungible tokens). These two standards allow the creation of NFTs for digital collectibles on Ethereum blockchain aimed to support interoperability between specific usecases like games wherein user can buy both fungible tokens ( gaming points or virtual gold coins, ammunition such as bullets, arrows etc) alongside the NFTs (such as vehicles, clothing, tools, guns/weaponry) used inside the game just to cite an example.

Due to these varied set of characteristics there are multiple possibilities and innovative usecases across many industry verticals. NFTs can be traded in open marketplaces, such as OpenSea. Such markets connect buyers with sellers, with a unique value of each token NFTs are prone to price changes in response to market supply and demand and of course user perception and enable buying selling and trading the NFTs via digital currencies held in the users digital wallets. Here is a simple flow diagram to explain the process and entity relationships…

The non-fungible token is generated only once and tagged against the particular digital asset. With each trade the NFT is updated against the new smart contract on the blockchain representing each transaction and user entities involved, thus there will be many smart contracts by and between multiple buyers and seller against same NFT providing authenticity and lineage information for validation.

For each new NFT minting GAS charges are applicable from the respective blockchain, these are the charges taken by the blockchain miners ( who run the blockchain resources investing on the hardware, software and services) to run the blockchain infrastructure as fees towards usage. Each update to blockchain may attract gas charges to be paid via digital currency ( mostly cryptos) stored in users digital wallet, these digital wallets too charge the transaction fees for each trade done when one buys or sells his NFTs on the NFT marketplace. This Gas fee, or pricing value required to successfully conduct?a trade via buy or sell transaction often called executing a contract on the blockchain platform. On Ethereum platform it is priced in small fractions of the cryptocurrency ether (ETH), commonly referred to as?gwei?, the proceeds are used to allocate resources of the Ethereum virtual machine (EVM) so that decentralized applications such as?smart contracts?can self-execute in a secured but decentralized fashion. these trades further initiate debits and credits on the digital wallets and will attract transaction fees separately over and above gas changes.

Secret NFTs & NFTs on Private or Consortium Blockchains

With large scale adoption of NFTs, many users and entities are concerned about publicly available information via validations exposes NFT metadata, ownership, trade summaries, considerations of smart contracts, to overcome this exposure Secret NFTs are introduced, they bear all the characteristics of being an NFT like Uniquely identifiable, Ownable, Authentic and Tradable etc?but are designed to keep the metadata, ownership information and smart contract considerations totally private even they owners have option to regulate access control as to who cab view or access their Secret NFTs. This is indeed a next step in data privacy and digital rights protection on the public NFT platforms.

For the entities who wants to take a step further and use the NFTs in a closed loop within their private network and regulate the participants, they can build and operate their private blockchains and publish their fungible as well as non-fungible tokens that can be integrated with their internal applications, processes and stakeholders completely isolated from public exposure. The consortium can be achieved with even two participating Ethereum networks. All features and functionalities of a typical NFTs and smart contracts are available on private NFT/blockchain network with added layer of data security and integrity.

Since all NFTs are powered by blockchains, we must get a perspective on three key type of block chains and due to the varied nature of deployment the NFTs tagged or minted on them could inherit similar characteristics and governing rulesets.

• ?Private blockchain is a blockchain where write permissions are kept centralized to one single account or organization while the Read permissions may be open to public or restricted to an arbitrary extent based on usecases yet fully governed by internal stakeholders of a single entity. The NFTs tagged to these blockchains remain as valid NFTs but are restricted within the scope and purview of the ‘private’ entity and participating applications consuming them, largely the NFTs on private blockchains cannot be listed on public NFT marketplaces since private blockchain can easily, if desired, change the rules of a blockchain, revert transactions, modify balances, etc. which is not the intended principle of public blockchain.
• Consortium blockchains: a consortium blockchain is where the consensus process is controlled by a pre-selected set of whitelisted nodes called participants; for example, a consortium of few financial institutions which operates the node and of which majority must sign every block in order for the block to be valid. The right to read the blockchain may be public, or restricted to the participants, and may be considered "partially decentralized". This NFTs may be interoperable within the consortium but get limited to cryptographic verification using mechanisms such as proof of work or proof of stake as defined by the consortium operators algorithms.
• Public blockchain is exposed to public and anyone in the world can read, transact and expect to view and validate. Anyone in the world can participate in the?consensus process?for determining what blocks get added to the chain and what the current state is and are generally considered to be "fully decentralized".

NFT Usecases

Although there are number of NFT usecases and many are seen unfolding as the adoption is widely spread across multiple verticals and industries, the strategic use of the NFTs is exponential and provides opportunities for new revenue models and asset classes in the emerging digital landscape, here are few examples starting with fundamental identity management, using NFTs, each with its own unique identifying characteristics of persons, it is possible to streamline the identification all the way from birth, schooling, employment or entrepreneurship, social entitlement and citizenship, crime and?justice, all the way up to death and inheritance in real life. Expanding this use case, NFTs can be used for virtual identity management within the digital realm and associate the digital twin metaphor..

• Art & Fashion:?Tokens offer a unique way of purchasing one-of-a-kind digital collectibles with absolute certainty over their provenance making it a safe value investment for collectors. Luxury brands are starting to use digital tokens to safeguard authenticity and ownership rights while also helping solve an age-old problem - counterfeiting. Not known for ever skipping the trend train, the fashion industry has turned its perfectly coiffed head to all things blockchain, releasing exclusive NFT collections for major digital outlets. Instead of catwalks in Paris and Milano. Notably, "Louis: The Game" features 10 NFTs created by renowned digital artist Beeple, better known for kicking off the NFT craze earlier this year by selling a digital collage for an?eye-watering $69 million.
• Music:?Proving ownership of original content and tracking its use is made easier with NFTs. Creators of the original label can rely on NFTs as a transparent monetisation mechanism, in particular when it comes to royalties and usage. NFTs promise the change in the power dynamics in the favour of artists or content creators by removing the middleman.
• Healthcare – Private NFT ledgers can?store an?individual’s medical records?without compromising confidentiality or risking tampering from external sources since NFT transactions are validated on multiple nodes before being added to the?blockchain?permanently ensuring that every record is accurate and secure from malicious attempts at manipulation and available online in case of medical emergency to track patient history and any medical procedures undergone.
• Patents and intellectual rights protection:?Tokenized certifications come with inherent legal safeguards to preserve the authenticity of documents and add transparency to processes, ownership of an IP can be distinguished, especially with the timestamps and can be used to protect and certify?innovation or invention sighted thereof.
• Real estate:?NFTs can be used as registries that can establish clear property rights and enable ownership to be easily established and transferred, NFTs could be used to transfer land?deeds, building plan approvals and provide proof of ownership and even?keep track of changes in?property value?over time.
• Education - NFTs are also a good way to represent?academic credentials. NFTs can provide proof of attendance, degree earned, and other important information which will be stored on the NFT blockchain that cannot be altered or hacked into. NFTs can create immutable records for courses taken by issuing tokens for each course completed along with verifying any credentials earned through smart?contract?verification.
• Gaming & Virtual Reality :?Gaming economies are nothing new. And since many online games have already had their own economies, using blockchain to tokenize gaming assets is taking only a step further. NFTs allow sports biggest moments and memorabilia to be tokenized and exchanged between fans, collectors and investors. Users can monetize their creations, including avatars and virtual land, and unleash their creativity and monetize accordingly.

In Summary, NFTs are essentially digital form of our everyday, real-life unique items or entities whose authenticity, ownership and transaction records are registered on blockchain and traded via digital currencies powered by blockchain technology making it nearly impossible to alter, copy or even hacked.

This seems the USP for large scale adoption of NFTs across multiple industries usecases mobilizing new revenues for the digital commerce of digital assets and even Indian government acknowledged it as an asset class with a proposed tax structure on the associated trade gains thereof. NFTs have opened up new, real time, and affordable ways for customers to access their preferred brands and, in turn, brands have also found a renewed incentive to pursue more creative collaborations using cutting edge technologies. The Future of NFTs holds a promising start and will power digital transformation to the next level, isn’t it?

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Feb 2022. Compilation from various publicly available internet sources, authors views are personal.

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