NFT

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An NFT is a non-fungible token, a type of digital asset where each token is identifiably unique and cannot be substituted for an equivalent token. The application was revolutionized with the introduction of CryptoKitties, the 2017 online blockchain based game that was one of the first instances of using blockchain technology for entertainment or recreation. In the game, users purchase digital cats by spending Ether. They can then breed, trade or sell their purchases for Ether. Each cat constituted an NFT.

When created NFTs are entered onto a blockchain usually as a smart contract that validates ownership of the token and authenticates the basis of the token which, by the early 2020s, can range from video sports highlights to in-game video rewards to digital art and to recorded music clips.

Technical background

The tokens are artifacts of the blockchain on which they are registered and to the extent that that blockchain is immutable, the data in the registration is immutable. NFTs are useful for certifying ownership of something and can be used to establish the chain of ownership over time.

At the time of this post (April 2021), the great majority of NFTs are built on the Ethereum blockchain using the ERC721 standard. The ERC721 standard was designed to assure the singularity of each token that is minted, while most other Ethereum standards create fungible tokens. ERC1155 can also be used for Ethereum-based NFTs as can TRC721 on the TRON blockchain.[1] ERC20, the principal standard for Ethereum tokens, yields only fungible tokens, tokens that can be freely interchanged with other ones.

The ERC721 standard allows unique tokens by defining a minimum interface to allow tokens to be managed and traded. There is no standard for metadata or restriction on adding supplemental features. It was originally designed as part of the CryptoKitties project.[2] CryptoKitties is a video game which in which players can buy, collect and trade unique CryptoKitties. This game was briefly successful, but, more importantly, led to sales of millions of U.S. dollars worth of pictures of cats, the ownership of which was individually and permanently recorded using ERC-721.[3]

The ERC-721 standard resulted from the 721st ethereum improvement proposal (EIP) and was accepted as final in June 2018. (Most such EIPs are not accepted, by the way.)[4]

Using Ethereum for NFTs is more than a matter of convenience because using one of the largest, best known blockchains for an NFT better assures the authenticity of the token or at least its immutability. A joke tweet from Lech Rzedzicki, a staff engineer at Marklogic, about another tweet highlights the importance of the accessibility, popularity and reputation of the underlying blockchain when looking at NFTs: "I hereby have bought this tweet for 0.1 MyCoinz. This is not reversible because it is on MY blockchain. (but you can buy 50% or more of MyCoinz)."[5]

Earliest NFTs

Possibly the earliest sighting of an NFT occurred in 2013 when a loosely organized group called BitcoinX developed a concept called "colored coins" which were what would later be called a "layer 2" innovation in that its innovations sat on an operating level above the bitcoin blockchain. The coins, which could be as small as a single satoshi - one one-hundred millionth of a bitcoin - could be "colored" with certain defined attributes that would turn them into bonds or shares or IOUs.[6] The first publication on the idea was bitcoin 2.X (aka Colored Bitcoin) - initial specs, written by Yoni Assia, who founded eToro, a securities and cryptocurrency brokerage firm.[7] Colored Coins were limited because the coloring of the coins worked best in a limited, "permissioned" environment.[8]

CryptoKitties crash Ethereum

NFTs' early dependence on the Ethereum blockchain did bring its own problems, however. When CryptoKitties launched in October 2017 on the Ethereum blockchain, as the Ethereum developer house ConsenSys put it, "the disarmingly simple CryptoKitties game captured imaginations with the emergent blockchain community and beyond." [9] One of the CryptoKitties developers, Arthur Camara, wrote in an early January 2018 article in CoinDesk that although the team was surprised when the new game went viral, "We put a lot of attention into user experience, gameplay, and design, and the reason for that is simple: our goal is to bring blockchain — often mistaken for an exclusively financial instrument — closer to the masses."[10]

The CryptoKitties sensation clogged the blockchain with numbers of transactions six times previously normal levels. According to ConsenSys, it took an ad hoc group of Ethereum developers from MetaMask, Infura and Grid+ to work with CryptoKitties to slim down the amount of code that needed to reside on the blockchain. One of the solutions to the congestion turned out to be providing users with the ability to raise the amount of "gas" they were willing to spend to complete their in-game transactions. Alex Miller from Grid+ introduced the idea of using sidechains to help the game scale better. Grid+'s "Trusted Relayers" offered the ability to move across Ethereum sidechains efficiently because only transaction headers would be relayed between them, not the state messages. Much of the problem had been resolved by mid December 2017.[11]

Development of Flow

In response to the network congestion that CryptoKitties caused in the Ethereum blockchain, Dapper Labs was established in early 2018 to carry on the project. Dapper Labs' new approach uses a "proof of stake" model that relies on splitting transaction validations between four different types of nodes for each transaction processed: consensus, verification, execution, and collection. Each transaction requires all four nodes.[12]

Despite its success with NBA Top Shot, it wasn't until April 2021 when Dapper Labs said it was ready to move almost 100,000 CryptoKitty investors away from Ethereum to the Flow blockchain.[13][14]

Before that, Dapper labs introduced Flow as the technology behind NBA Top Shot which is a joint venture between Dapper Labs and the National Basketball Association. Securing agreement from the National Basketball Players Association, the NBA and Dapper Labs reinvented the sports trading card and put it on the Flow blockchain. NBA Top Shot launched in May 2020 in an invitation only debut among enthusiasts. By the time it launched publicly on October 1, 2020, Top Shot had already invited 17,000 users on board to test out the Flow platform.[15]

On February 25, 2020 Dapper Labs announced in a blog post that it would use Flow to host a moments market for the Ultimate Fighting Championship league.[16]

What do you get with an NFT?

For the most part, the person who has bought an NFT owns data recorded on the (usually) Ethereum blockchain, that authenticates a digital file (usually a photo, video or audio file) and validates the owner of that digital file. The NFT includes the name as well as a longer plain language description of the thing represented in the file. The NFT also includes a uniform resource identifier (a URI; URLs are a familiar form of URI) that links to the digital file containing the item underlying the NFT.

Tracy Alloway, the tech-savvy executive editor for Bloomberg, once tweeted, "People keep describing NFTs as digital collectibles but they're really digital bragging rights."[17]

Sports "moments"

In the tie-up between the National Basketball Association and Dapper Labs that yielded the successful NBA Top Shot business, buyers of one of their NFTs receive one of a limited number of copies of a game highlight, a brief video of game play. This is termed a "moment." The platform displays the moment in a frame that mimics a physical trading card or the owner can "showcase" it along with others in their collection in a display on the website. The moments are sold in blind packs, as sports cards have traditionally been sold.

According to the NBA website, "the NBA cuts the highlights and then Dapper Labs decides how many of each highlight they are going to sell and number them. They place each highlight into digital packs, just like regular trading cards, and sell the packs on the official NBA Top Shot website for prices ranging from $9 to $230. The pack prices depend on the quality of highlight, the stardom level of the player and the exclusiveness of the card. Once you purchase a pack, those highlights go into your encrypted, secure highlight wallet to be "showcased" or re-sold on the NBA Top Shot Marketplace."[18]

The purchase of a pack of moments conveys no ownership rights in the actual highlight video clips, which remain freely viewable by the public either on YouTube or on the NBA Top Shot platform itself if one of the owners of the rights to the moment happens to showcase it. NBA continues to own the clip.[19]

Art

There are a few different approaches to visual art NFTs.

Blockchain native

The most readily understood ones have the same structure as the 10,000 "Cryptopunks," which are individually unique graphic designs native to the Ethereum blockchain. By documenting ownership and transfers on the blockchain, their coding foreshadows CryptoKitties and the development of the ERC-721 standard. Limited to exactly 10,000 unique images, they were generated by John Watkinson and Matt Hall, founders of Larva Lab, who allowed anyone who had an Ethereum wallet to claim one for free in June 2017. They then were tradable on secondary markets.[20]

Larva Labs maintains a public page for each Cryptopunk, containing a freely downloadable image, a plain English description of the image and its ownership history.[21]

Since they were designed with a specific London punk aesthetic to evoke a certain anarchic cool factor, they might be considered the first NFT art. They have proven to be highly popular, so much so that Christie's auction house is conducting its first auction of nine Cryptopunks in mid May 2021. Christie's describes them as "24x24, 8-bit-style pixel art images of misfits and eccentrics."[22]

Digital art

Christie's hosted the most successful NFT auction to date when it offered Beeple's Everydays: The First 5,000 Days online from February 25 to March 11, 2021. The NFT sold for $69,346,250.[23]

The NFT includes 5,000 original images created and downloaded by Beeple, one each day starting on May 1, 2007 and continuing for the next 5,000 days. It is visually represented by a collage but the buyer of the NFT instead received a digital file containing the digital representations of each of the 5,000 images along with verification of ownership. Yet, according to Verge, an online technology magazine NFTs, "Buyers typically get limited rights to display the digital artwork they represent, but in many ways, they’re just buying bragging rights and an asset they may be able to resell later." Beeple is reportedly willing to work with the buyer to develop a way for the buyer to display the work.[24]

Starting on January 28, 2021, Shortly before Christie's auction of Everydays: The First 5,000 Days was announced, digital art in the form of 16,000 NFTs from a Swiss-based art collective called Suum Cuique Labs began to be sold in batches over a few days for about $9 million. Representing cultural and historic figures from William Shakespeare’s Hamlet to a Star Wars's C3PO, they are digitally executed portraits titled "Hashmasks." Assuming that unique art works fetch the best prices over time, the art works seem to have been strategically designed to attract collectors because the smart contracts for provide that some of works can be "customized" later.[25] Suum Cuique Labs is a largely anonymous collective of 70 artists.[26]

Collectibles

As early as 2016 people were issuing "rare pepes" on a platform called Counterparty that was built on top of the bitcoin blockchain. Rare pepes are NFTs that feature different versions of the otherwise popular "pepe" internet meme that features a green frog. Rare pepe NFTs are tradable on the "Rare Pepe Meme Directory."[27]

By early 2021, NFTs had proven their popularity with CryptoKitties, Beeple, and NBA Hot Shot, and in March the NFT issuance platform and marketplace Foundation created and sold an NFT from a popular real life photograph of a cat, Grumpy Cat. The Grumpy Cat meme became popular in 2012 after the photo was published in Reddit. The metadata for the NFT, which is a single version issue, includes the following discussion: {"name":"Grumpy Cat","description":"We present this original remastered Grumpy Cat photographic image. This singular keepsake is available as a 1/1 authenticated edition NFT.\n\nArguably the planet’s most famous feline, Grumpy Cat is a New York Times best selling author, the star of her own Lifetime Christmas movie, and the first cat in history to be honored with a Madame Tussaud’s wax figure. Grumpy became a pop cultural icon on September 23, 2012, after her frowning photo was posted to Reddit.

This jpg, nominated as a "Worst NFT Ever," sold on Foundation on March 12, 2021, having been minted as just two days earlier, for 44.20 Ether, around $77,000 at the time. The new owner of the NFT does not have exclusive viewing rights to the photo, which can be seen here.[28]

Video gaming

Legal aspects of NFTs

As with many things in the cryptocurrency and digital asset space, NFTs are too young for there to be much settled law around them.

Quoted in TechCrunch, an online technology business magazine, Chicago attorney Nelson Rosario pointed out, "An NFT is not that different from any other crypto purchase in that you are buying control over information in an entry in a ledger." That article by TechCrunch's Leigh Cuen also says that buying an NFT does not necessarily mean that you now own any of the media files - jpegs, GIFs or MP3s - that might be associated with it.

According to attorney Moish E. Peltz, "In theory, NFTs can represent almost any real or intangible property, including artwork, music, videos, collectibles, trading cards, video game virtual items, or even real estate. In sum, an NFT is the digital version of a certificate of authenticity, embodied in the blockchain."[29]

Copyright

Adult content

Music

Miscellaneous

Marketplaces

Nifty Gateway, OpenSeas, Rarible, Mintable, Foundation

References

  1. Ledger Academy > What are non-fungible tokens(NFT)?. Ledger.
  2. ERC-721. ERC-721.org.
  3. Nontechnical: What is ERC-721?. Blogspot.com.
  4. 721, the first graduate from the Last Call process #1170. Github.
  5. @xchaotic. Twitter.
  6. Colored coins paint sophisticated future for Bitcoin. CoinDesk.
  7. bitcoin 2.X (aka Colored Bitcoin) – initial specs. Yoni Assia.
  8. The History of Non-Fungible Tokens (NFTs). Medium.
  9. The Inside Story of the CryptoKitties Congestion Crisis. ConsenSys.
  10. Cats Went Crypto First, Now It’s Time for Consumers. CoinDesk.
  11. The Inside Story of the CryptoKitties Congestion Crisis. ConsenSys.
  12. What is Flow? The Blockchain Built for NFTs. Decrypt.
  13. CryptoKitties: Getting in the Flow. CryptoKitties.
  14. Animoca Brands brings “MotoGP™ Ignition” to Flow blockchain, announces first collectibles NFT sale. Cointelegraph.
  15. Dapper’s NBA Top Shot Launches Out of Beta With Samsung Galaxy Store Deal. CoinDesk.
  16. Enter the Octagon: UFC on Flow brings MMA to crypto. Medium.
  17. @tracyalloway. Twitter.
  18. What is NBA Top Shot? Explaining the Blockchain NBA highlight collectables. National Basketball Association.
  19. What Is NBA Top Shot? Blockchain NBA Highlight Market Explodes With 5-Figure Sales. Action Network.
  20. The History of Non-Fungible Tokens (NFTs). Medium.
  21. Cryptopunks. Larva Labs.
  22. 10 things to know about CryptoPunks, the original NFTs. Christies.
  23. Beeple’s opus. Christie's.
  24. Beeple sold an NFT for $69 million. The Verge.
  25. Latest Ethereum Craze Hashmasks Sells 16,000 NFTs for $9 Million. The Verge.
  26. How Hashmasks Are Setting the Standard for Digital Art. CoinDesk.
  27. The History of Non-Fungible Tokens (NFTs). Medium.
  28. So you spent millions on an NFT. Here's what you actually bought.. Mashable.
  29. Thinking of Buying or Minting an NFT? Here’s What You Need to Know. Los Angeles Magazine.
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