Introduction To NFTs And How They Work On Ethereum Token Standards

Calibraint

Author

August 18, 2023

Last updated: September 4, 2023

Beyond Cryptocurrency: Exploring NFTs on the Ethereum Blockchain

Hey there, eager learners! Have you ever heard of NFTs? So, what exactly are NFTs? How can a digital item be ‘one-of-a-kind’? How does Ethereum, a popular cryptocurrency, come into play? Why is Twitter’s co-founder Jack Dorsey jumping onto the NFT bandwagon? And why are people shelling out mind-boggling amounts of money for an NFT art that can be easily screenshotted? 

If these questions have sparked your curiosity, you’re in for a treat. In this blog post, we’ll take you on a journey to explore the magic of NFTs on the Ethereum network. From the basics to the complexities, we’ll explore how these digital tokens are changing the way we perceive ownership and authenticity in the digital age. 

What Is A Non-Fungible Token?

Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership of a specific object or piece of content. Unlike fungible tokens, such as cryptocurrencies, NFTs are not interchangeable, meaning that each token is one-of-a-kind and cannot be exchanged for another token on a one-to-one basis. 

NFTs are generally created using the same type of programming used for cryptocurrencies. NFTs are stored on a blockchain, which is a decentralized and distributed ledger that records transactions across a network of computers. The blockchain provides a permanent and immutable record of ownership, making it almost impossible to alter or destroy an NFT once it is created and stored on the blockchain.

What Makes NFTs So Special?

When you buy an NFT, for example, a Bored Ape, each piece stands apart from the rest in the collection. This distinctiveness arises from the presence of unique attributes or traits that play a role in defining their rarity. These specific characteristics are securely recorded on the blockchain, alongside ownership details. Thus the simplicity with which authenticity and individuality can be verified is a pivotal factor in attributing value to an NFT.

How Do NFTs Work?

A question that often arises is: How exactly do NFTs work? NFTs function within the framework of a blockchain, which serves as a transparent public ledger. However, in contrast to cryptocurrency tokens, NFTs cannot be divided into smaller units; rather, each NFT represents an individual, complete entity corresponding to a digital or tangible asset. Among the various blockchains, Ethereum stands out as the predominant platform for NFTs. While Ethereum employs the ERC-20 standard for cryptocurrency coins, NFTs make use of the distinctive ERC-721 and ERC-1155 standards.

However, the control over NFT ownership revolves around a dual mechanism: distinctive identification (ID) and metadata. These traits are immune to replication by any other token within the blockchain ecosystem. The initiation of a fresh NFT involves the execution of a smart contract. This contractual arrangement empowers the emerging NFT to integrate seamlessly into the network, endowing it with its unique attributes and transferability. 

How Are Non-Fungible Tokens Used?

Currently, the prevailing domain where Non-Fungible Tokens (NFTs) shine is in the world of collectibles. To illustrate, digital artists now have the option to transform their artwork into NFTs, thereby safeguarding it from potential theft or misuse across the vast expanse of the internet. This trend has carved out a significant path for emerging artists, offering them a novel platform through which they can reap rewards from their creative endeavors.

Yet, NFTs’ utility extends beyond this use case. These tokens have found a foothold as in-game collectibles. But that’s not it! NFT use cases are spread across a plethora of diverse applications that transcend the confines of gaming. 

How Is An NFT Different From Cryptocurrency?

A Non-Fungible Token (NFT) and a cryptocurrency are distinct types of digital assets, each serving different purposes and exhibiting unique characteristics:

Nature of Value and Representation:

NFT (Non-Fungible Token): NFTs represent ownership or proof of authenticity of a specific, unique item, digital content, or asset. Each NFT is distinct and cannot be replicated or replaced on a one-to-one basis. NFTs are often used for art, collectibles, virtual real estate, and other unique digital creations.

Cryptocurrency: Cryptocurrencies, like Bitcoin and Ethereum, are fungible digital assets that serve as a medium of exchange or store of value. They are interchangeable on a one-to-one basis, meaning one unit of a cryptocurrency is equivalent to another unit of the same cryptocurrency.

Interchangeability:

NFT: NFTs are non-interchangeable, meaning each NFT has its own unique value and cannot be traded or exchanged on a like-for-like basis with another NFT.

Cryptocurrency: Cryptocurrencies are interchangeable and can be traded or used for transactions with other units of the same cryptocurrency.

Use Cases:

NFT: NFTs are primarily used to represent ownership or authenticity of digital or physical assets in a secure and transparent manner. They find applications in digital art, virtual goods, music, collectibles, and more.

Cryptocurrency: Cryptocurrencies are designed for financial transactions, investments, remittances, and other use cases where a medium of exchange or store of value is required.

Unit of Value:

NFT: The value of an NFT is often subjective and tied to the uniqueness, scarcity, or popularity of the underlying asset it represents.

Cryptocurrency: The value of a cryptocurrency is typically driven by factors such as market demand, supply dynamics, utility, and adoption.

Divisibility:

NFT: NFTs are typically indivisible, meaning they cannot be divided into smaller units.

Cryptocurrency: Cryptocurrencies are divisible, and most are divisible into smaller fractions (Ex: Bitcoin can be divided into satoshis). 

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Prominent ERC NFT Standards: A Closer Look

Ethereum stands out as a prominent blockchain globally and serves as an excellent entry point for those intrigued by non-fungible tokens (NFTs). Holding the second position in market capitalization among all cryptocurrencies, Ethereum’s popularity has consistently surged since its establishment in 2013. 

Despite the emergence of various blockchains facilitating NFTs, Ethereum continues to dominate the NFT trade volume, maintaining its stronghold as the preferred choice for NFT transactions. 

Having said that, the two most popular ERC NFT standards are ERC721 NFTs & ERC1155 NFTs. Although there are many other Ethereum token standards, these 2 NFT standards stand out from the crowd in the decentralized world of blockchain. 

ERC721 NFTs

The ERC721 standard, utilized on the Ethereum blockchain, defines a framework for crafting non-fungible tokens (NFTs). Each ERC721 token represents a unique asset or object, and the ownership of that asset is tracked on the blockchain.

The ERC721 standard includes a set of functions that allow developers to create, transfer, and manage ownership of their NFTs. These functions include the ability to create new tokens, transfer ownership of tokens, and query the ownership of a specific token.

ERC721 tokens also have a number of properties that make them unique. They have a unique identifier, which is a combination of the token’s contract address and a unique token ID. They are also non-interchangeable, meaning that each token has its own specific value that cannot be exchanged for another token on a one-to-one basis. Additionally, ERC721 tokens are indivisible, meaning that they cannot be divided into smaller units.

ERC1155 NFTs

ERC1155 is a newer standard for creating both fungible and non-fungible tokens on the Ethereum blockchain. This standard allows for the creation of multiple tokens within a single contract, which can be either fungible or non-fungible.

ERC1155 tokens have a number of advantages over ERC721 tokens. 

• Firstly, they are more flexible, allowing developers to create both fungible and non-fungible tokens within a single contract. This makes it easier to manage large numbers of tokens and reduces the complexity of the smart contract code. 
• Secondly, ERC1155 tokens can be batch transferred, meaning that multiple tokens can be transferred in a single transaction. This can reduce gas costs and make the transfer of tokens more efficient.

Final Thoughts

NFTs represent a revolutionary form of digital asset, granting unparalleled ownership and genuineness to digital items. These tokens come to life through the application of blockchain technology, delivering an enduring and unalterable ledger of possession. 

At the forefront of NFT creation are the widely adopted NFT standards: ERC721 and ERC1155. These standards furnish developers with the tools to generate, convey, and oversee ownership of NFTs. In an era marked by escalating digitization, NFTs are positioned to wield significant influence in shaping the forthcoming landscape of ownership and intrinsic worth.

Frequently Asked Questions On NFTs

Is An NFT A Bitcoin?

No, an NFT (Non-Fungible Token) is not a Bitcoin. While both are blockchain-based, Bitcoin is a cryptocurrency used as a digital form of money, while an NFT represents ownership of a unique digital asset, such as artwork, music, or collectibles. 

Does Ethereum Use NFT?

Yes, Ethereum is a blockchain platform that popularized the use of NFTs (Non-Fungible Tokens), allowing for the creation and trading of unique digital assets like art, collectibles, and virtual real estate through its smart contract capabilities.

Is Ethereum An NFT Or Crypto?

Ethereum is a cryptocurrency and a blockchain platform that supports the creation and trading of NFTs (Non-Fungible Tokens), which are unique digital assets representing ownership of items like art, music, and collectibles on the blockchain.

Calibraint

Author

August 18, 2023

Last updated: September 4, 2023