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What Is an NFT (Non-Fungible Token)?

DEFINITION

Non-Fungible Tokens, or NFTs, are digital tokens on a blockchain that each represent something unique, such as a digital piece of art, a special in-game item, rare trading card collectibles, or any other distinct digital/physical asset.

NFTs signal the latest evolution in blockchain-based assets, moving beyond cryptocurrencies, stablecoins, governance tokens, and utility tokens to provide users a new kind of digital asset with innovative models of ownership and distribution.

In this article, we cover what NFTs are, the rapid growth of the NFT collectibles economy, and the different types of NFTs in industries ranging from art to gaming. We also discuss the importance of verifiable randomness for creating provably rare and dynamic digital collectibles.

Non-Fungible Definition

Assets with fungibility mean that each unit is identical, interchangeable, and divisible. Fungible assets are used everyday like the US dollar, Bitcoin, and even company reward points. In contrast, non-fungible assets mean that each unit is entirely unique from one to another. For example, real estate is non-fungible because each property is different from one to another due to varying features like layout, size, location, zoning, utilities, and valuation. 

Non-Fungible Tokens, or simply referred to as NFTs, expand upon the concept of non-fungibility by leveraging blockchain networks like Ethereum to represent unique physical and/or digital assets. NFT ownership is validated and tracked from inception using a public blockchain, allowing users to verify the provenance of any NFT all the way back to its origin. Thus, NFTs are best described as a “certificate of authenticity” issued by the original creator on the blockchain, which provides cryptographic proof that the holder of an NFT is the rightful owner of the official asset it is tied to.

NFTs provide a wide range of benefits, such as allowing artists to monetize their digital artwork, enabling games to create provably rare in-game items, fostering new ecosystems of digital collectibles, tokenizing real-world assets for increased liquidity, and much more.

Historical Growth of the NFT Economy

NFTs were first popularized in 2017 with the launch of CryptoKitties, a decentralized application (dApp) on Ethereum where users breed and collect digital cats. However, in 2021, NFTs have seen a significant resurgence in interest from collectors and artists alike. 

Similar to the ERC20 standard used by most fungible tokens, NFTs are commonly built upon the ERC721 token standard—a templated smart contract that outlines how an NFT functions with other smart contracts and users. The ERC721 standard accelerated both the development and launch of new NFTs, as well as the creation of various marketplaces like Rarible, OpenSea, and SuperRare. NFT marketplaces allow users to seamlessly list, buy, and sell NFTs, supporting the growth of the NFT ecosystem. The volume of NFTs traded on these marketplaces continues to increase, with 100k+ active users doing over $1B a month in volume at the time of writing.

The renewed interest in NFTs has led to a Cambrian explosion of unique applications that leverage the property of non-fungibility in innovative ways, often with the goal of increasing efficiency in the transfer of asset ownership and reducing the need for intermediaries who siphon value away from creators and marketplaces. However, NFTs are still largely in their infancy, meaning there is a vast amount of opportunity for growth from innovative developers, creative artists, and traditional institutions wanting to bring distinct assets on-chain.

Exploring the Different Types of NFTs

NFTs offer a flexible framework for tracking ownership of a wide array of digital and physical assets using a blockchain network, as well as adding utility to these assets in any number of interesting ways. The variety of use cases for NFTs is expanding, but below are a few common applications that have emerged.

Digital Art NFTs

One of the most recognized NFT use cases is tokenized ownership of digital artwork. By tokenizing their work, artists are able to monetize their craft and then tap into a global market of potential customers that only need an Internet connection to purchase it. Compared to traditional art marketplaces, which are often opaque, value-extracting, limited in discoverability, and require significant listing fees, NFTs can be listed on global, permissionless online marketplaces and can even provide creators revenue from all secondary sales.

An example of NFT art that made headlines is the famous digital artist Beeple. His piece “Everydays: The First 5000 Days,” a collage of 5,000 images that took 13 years to create, was tokenized as an NFT on Ethereum and sold for over $69M. Using the popular ERC721 token standard, Beeple was able to monetize his digital artwork and establish cryptographic proof that the specific NFT was the official copy. Beeple’s artwork is only one of thousands of different collections of digital art released and sold worldwide as NFTs.

Gaming NFTs

NFTs are a foundational component of blockchain-based video games because they allow unique in-game items to be tokenized, tracked, and transferred in a non-custodial manner. With traditional online video games, centralized publishers have complete control over the distribution, ownership, and attributes of in-game items that often determine the value of certain characters and game outcomes. If the publisher shuts down, users lose access to all of the game items they potentially spent hours, days, weeks, or even longer acquiring.

NFTs not only ensure users have complete control over their game items, but they enable entirely new gaming possibilities. This includes the distribution of randomized NFT rewards in blockchain-based games and the creation of an interoperable metaverse—where the items from one game can be used and traded in another. NFTs have also furthered the growth of the play-to-earn model where users can monetize their time and effort from gaming by acquiring rare NFTs and selling them to others.

One popular blockchain-based video game leveraging NFTs is Axie Infinity, a Pokemon-inspired universe with unique fantasy creatures called “Axies.” Each in-game Axie is programmatically tied to an NFT that contains metadata regarding the creature’s attributes, appearance, and ownership. Through verifiable randomness provided by Chainlink VRF, certain Axies such as a Quad Mystic can be made provably rare through a fair and verifiable distribution process, ultimately becoming more attractive to other players in the Axie universe.

NFT Collectibles

Similar to collecting physical trading cards or mail stamps, NFTs empower a new type of digital collectibles. Collectors can buy digital objects they deem valuable or signal their support for a specific company, brand, game, or artist. Unlike physical collectibles that can be slow to transport and expensive to maintain, NFTs have no such restraints as they are entirely digital, transferrable in seconds, and never degrade in quality.

Some of the most recognized NFT collectibles are CryptoPunks, a collection of 10,000 unique 8bit-style characters algorithmically generated so no two characters are exactly alike. CryptoPunks were some of the first NFTs ever created and were given away for free. They continue to attract users who want to own an original piece of NFT history.

Collectible NFTs are increasingly being used as profile pictures on social media platforms like Twitter and Discord. Doing so provides a powerful signaling mechanism, where like-minded individuals can display their interest in an NFT collection and join a community of like-minded individuals. Importantly, because NFTs are stored on the blockchain, users can cryptographically prove to others that they own the image being used in their profile picture.

Music Album NFTs

Blockchains have given music artists the ability to tokenize their work through NFTs as a way to increase their revenue and foster fanbase engagement. With the Covid-19 pandemic contributing to a 85% reduction in music industry revenue, supplemental income from NFTs has helped artists offset these losses while at the same time providing fans a way to earn special perks like limited-edition memorabilia and even direct access to the artist’s time.

A wide range of music artists such as 3LAU, Kings of Leon, Shepard Fairey, and Eminem have tokenized their work, generating millions of dollars in the process. As a result, NFTs have served as a new, more engaging and creative medium for creating fan reward programs and galvanizing community support for artists.

Real Estate NFTs

NFTs can also represent ownership of real-world assets like real estate to introduce additional liquidity into traditionally fragmented markets. The tokenization of real estate significantly increases the efficiency of transferring ownership and provides a single source of truth around the authenticity and provenance of a specific property. The concept of tokenizing real-world assets can be expanded to include many asset types such as physical paintings, government documents, certifications, and diplomas. 

While still in the early stages, real-world assets tokenized as NFTs enable a number of new possibilities, from revenue-generating real-estate tokens backed by rental income to issuing digital credentials without the need of a physical document counterpart. They can also digitize existing records like educational diplomas and intellectual property contracts, leading to more transparency of credentials and opening up new forms of automation.

The Importance of Verifiable Randomness for NFTs

While NFTs such as 1-of-1 digital artworks can have all of their properties predetermined before deployment on-chain, there are a number of NFT designs that require a random number generator (RNG) to introduce additional rarity. Some examples of how randomness is applied to NFTs include assigning random attributes to NFT artwork, determining the in-game locations of loot boxes dispensing NFTs, or ensuring a fair distribution for a high-demand, limited edition NFT drop.

However, if the source of randomness can be manipulated, then malicious actors can exploit the RNG mechanism to their advantage. For example, they could mint themselves NFTs with the rarest traits or direct lottery rewards to an address under their control. This has a significant implication on the value of the NFT if users cannot verify that its attributes or distribution are truly random. Since smart contracts cannot generate their own secure form of randomness, a proven oracle solution is required.

Chainlink VRF is a Verifiable Random Function that provides smart contracts and NFTs with a secure source of randomness backed by a cryptographic proof. The cryptographic proof serves as an audit trail proving the RNG operated in a tamper-proof manner. The cryptographic proof is then validated on-chain before delivering the random number to the consuming NFT contract, helping guarantee only truly random values are consumed. The strong security properties of Chainlink VRF help ensure neither the oracle, users, or developers can manipulate or predict the random number generated, resulting in NFTs that are assigned provably rare attributes and NFT collections distributed in a verifiably fair and unbiased manner.

Chainlink VRF is already being used in-production to power a wide array of NFT applications across a number of different blockchain networks. Aavegotchi, a blockchain-based crypto collectible game, has called Chainlink VRF over 10,000 times on the Polygon Network to mint Aavegotchis with randomized traits. EtherCards, a framework for minting NFTs, uses Chainlink VRF to secure both the attribute assignment and distribution of artist-created NFTs to users. Trey Mancini, a Major League Baseball star, used Chainlink VRF to mint NFTs with randomly assigned utility, with proceeds going to cancer research.

In addition to accessing verifiable randomness, developers can leverage Chainlink oracles to create dynamic NFTs that evolve in appearance, value, or utility based on real-world events like the weather or a sports match outcome. If you’re a developer and want to build a dynamic NFT using Chainlink oracles, explore our Introduction to Chainlink VRF. To discuss an integration, reach out to an expert

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