Non-Fungible Tokens (NFTs) for Dummies

If you’re a regular reader of our blog, you’ll often see us referring to NFTs, saying things like “NFTs are redefining online gaming…” or “NFTs have revolutionized digital art”. While we firmly believe these statements to be true, we sometimes get so swept up in our excitement that we forget NFTs can be confusing and complex to figure out for new readers.

So, we would like to take a step back and elaborate on what NFTs are in a way that anyone can understand.

Hopefully after reading this, you’ll be as thrilled about NFTs as we are!

Where it all started

One of the very first use cases for blockchain technology that gained the attention of mainstream users was Bitcoin, a digital currency that eliminated any need for a middleman (i.e. banks).

Bitcoin

Bitcoin was exciting because it demonstrated that decentralized, digital currencies could actually work, and it solved a number of problems. Bitcoin allowed anyone to make secure, transparent, and verifiable transactions thanks to its public, distributed ledger (the blockchain).

Blockchain and Crypto currency

Blockchains are essentially distributed databases, allowing us to store information in a way that is secure and publicly accessible. Because they are distributed, there is no need for a middleman, making cryptocurrencies like Bitcoin possible. Blockchains also provide economic incentives to avoid conning, thereby allowing real economic scarcity (we’ll return to this concept later).

Blockchains also provide interesting solutions regarding the issue of digital identity: every transaction that you make on a blockchain is associated with a public address — an anonymous and secure identifier that you can use over and over again.

While blockchains are really powerful, Bitcoin, the first widely used cryptocurrency is useful only as a currency. It’s nothing more than a representation, record, or placeholder of value. While Bitcoin used blockchain to store a record of transactions, some people saw an even bigger potential.

Ethereum

Vitalik Buterin, created Ethereum – which uses blockchains to decentralize much more sophisticated information. People began using Ethereum to create new cryptocurrencies (often referred to as tokens) and decentralized applications (or dApps) like our LAND Marketplace.

This ability to encode more complex data structures led to a need for standards…

ERC: building a community and ecosystem

You’ll often see the acronym ERC thrown around in crypto circles (usually followed by an identifying number like 20 or 721). ERC stands for “Ethereum Request for Comments” which results in a set of standards for building software using Ethereum. These standards are written and agreed upon by the Ethereum developer community.

ERC 721 ERC 20 ERC Standards Non-Fungible Tokens NFTs Ethereum

Why do we need ERC standards?

Standards allow developers to build software that’s compatible with other software. Without these standards, you wouldn’t be able to buy LAND with your MANA or MANA with ETH. By ensuring different tokens and applications share similar components, developers can then interchange those components to build new experiences.

Think of these standards like Lego: since all of the different parts fit together in the same way, anyone can use them to build all types of cool things.

ERC20 is the standard by which most fungible tokens are built (like Ethereum and Decentraland’s MANA).

Wait, what does “fungible” mean?!

If an item is fungible , then it can be swapped or traded for a similar item. Fiat currencies, like the US dollar, contain fungible units. One dollar bill can be exchanged for any other dollar bill. Cryptocurrency tokens like Bitcoin, Ethereum, and MANA are all fungible because one token can be traded for any other token. The only thing that changes is a log on the blockchain registering the transaction.

It must follow that two non -fungible tokens are not interchangeable. So what is it about non-fungible tokens (NFTs) that gives them this quality?

The answer lies in the data or information stored within NFTs! We’ve already seen that Ethereum allowed developers to start decentralizing more complex data, so why shouldn’t a token contain more variables than a simple unit value and owner?

Let’s compare two real-world examples of fungible and non-fungible items that most people are familiar with: dollars and movie tickets.

Dollars

If I have a dollar and you have a dollar, we can trade the two and neither of us will be any richer or poorer than we were before.So, they are obviously fungible.

Movie tickets

Now, let’s say I have a ticket to go see the new Avengers movie and you have a ticket for Star Wars. Both of us have movie tickets, so if we trade we won’t be any better or worse off, right?

No! It’s more complex than that, and not just because Star Wars is clearly the better movie. While each of our tickets contains the same kind of information (showtime, seat number, film title) the information on each ticket can be different.

Avengers might be showing at the 3:30 PM matinee which only cost me $10 while StarWars is at the more expensive, evening showtime. Or maybe I have a ticket for the 3D showing of Avengers whereas your ticket is for the cheaper 2D version of Star Wars.

Finally, we can infer that the two tickets can be exchanged at the theater for two objectively different experiences.

NFTs are the digital expression of items like movie tickets , in that they can contain information in addition to just the owner, lending them all types of uses and unforeseen value.

However, just like with fungible tokens, the Ethereum developer community realized that to build a strong ecosystem of tokens and dApps, they would need to standardize NFTs…

ERC721: The birth of the contemporary NFT ecosystem

ERC 721 ERC 20 ERC Standards Non-Fungible Tokens NFTs Ethereum
ERC 721

Just like ERC20 standardized fungible tokens, ERC721 was created to standardize non-fungible tokens. By standardizing NFTs, the developer community ushered in a new ecosystem of digital content, games, and applications that use NFTs. Owing to ERC721, we have things like Decentraland, CryptoBeasties, Etheremon, and CryptoKitties.

What does it mean to have an ecosystem of apps that use NFTs?

It can be useful to consider NFTs as a new technology on top of which we can build the same kinds of products and experiences that we already love, with the additional benefits of decentralization and sound, economically scarce, digital assets.

Let’s look at two of the most popular examples: games and rare art.

Games

At Decentraland, we’re especially thrilled about blockchain games. If you want to read in (much) more detail about how we think NFTs and blockchain tech are advancing gaming, check out:

For now, let’s look at the three biggest impacts we see NFTs having on games.

  • NFTs allow for in-game items that can be transferred from game to game. The use of NFTs to represent in-game items means that you could receive a new skin for your avatar in one game, then transfer that to a different avatar in a totally different game (it could even be developed by another company).
  • Blockchains and NFTs allow for public player records. Much like the in-game items that can move from game to game, player records can also be transferred between games. Your history as a player, scoreboards, achievements, experience points, and more can all be stored on a blockchain and referred to by other developers, enriching your experience as a gamer.
  • Blockchains and NFTs allow creation of a single, unified identity maintained across multiple games and platforms. Remember that single public key we talked about earlier? This could replace the various avatars that you have to create for every new game you want to play. This brings the additional benefit of a persistent identity simplifying your login info and allowing other players to recognize you as the same person between different games.

Rare Art

NFTs have given artists more control over their creations, making it far easier for them to monetize their work. Because of the legitimate scarcity made possible by blockchains, buyers can rest assured that the art they purchase is, in fact, rare. This gives digital art real value that’s never been seen before.

NFTs and cryptocurrencies also enable artists to make money off of subsequent sales of the work. Owing to a public, immutable record of transactions, digital art stores or trading platforms could be created giving artists a percentage from every sale.

While we are yet to see this applied to the music industry in a robust way, this aspect of NFTs could radically transform the way we look at rights protection for things like digital music.

Challenges facing NFTs

NFTs are still extremely new. As an industry, we have a lot to do to improve the technology. The two biggest issues being the experience of buying and selling NFTs, and building applications that can support larger numbers of transactions.

We know that NFTs are still relatively inaccessible to mainstream users. Currently, only early adopters and speculators are using blockchain-based platforms. We want to lower the entry barrier to NFTs and blockchain-based experiences by demystifying the technology (through posts like this! ).

Centralized applications (think Netflix) scale much more easily than decentralized ones, giving us another hurdle to overcome, but this is a problem we’re actively solving.

Remember, the impact of NFTs isn’t limited to the material ownership of digital items. It extends to the emotional experience of interacting with technology — it changes the way we view our relationship with the products that we use and the content that we consume.

NFTs and Ownership

We often hear “NFTs allow users to truly own their digital items”. This is true, but it falls short. While NFTs do allow us to really own digital goods, they ultimately give artists more control over their creations, companies less control over their users, and users more control over their identity. These are far-reaching impacts that extend beyond simple ownership.

Let’s take a look at one last example that reshaped an industry, and subsequently peoples’ experience with technology. The phonograph allowed us to record and replay music way back in the early 20th century, but the next advancement came in the form of digital recording. Digital audio allowed us to continue recording music, but with a huge new range of possibilities. The control that digital audio gave musicians helped to create entirely new genres and subcultures.

Much like the shift from analogue music to digital music, NFTs are redefining our experience with online content and applications. Like any radically new and innovative technology, we can only speculate as to how NFTs will be used, but we think it’s safe to say that we’ll see some incredible things, very soon.

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