What are NFTs? Why are they controversial and how can they be used in Decentralized Finance?

Published by Jonas April 25, 2021

Non-fungible tokens are a revolutionary new token standard that enable each token to be unique, just like how every person is different. This means that for the first time, one token can represent something as unique as a physical asset or digital artwork.

NFT explanation

In this blog post, we’ll discuss what makes these tokens so special and how they are already being used in the decentralized finance space. For the rest of this post, we’ll use the ERC-721 standard as an example. Similar standards exist for non-fungible tokens that are used to represent scarcity in specific games, like Non-Fungible Tokens in Cryptokitties.

ERC-721 is a standard that was created by ethereum smart contract developer Unocto in October 2017. In short, it allows for each token to be unique and can represent anything from a physical asset to digital artwork.

What is an NFT?

The ERC-721 standard allows for each token to be unique. As such, an NFT is a non fungible token that is generated by an Ethereum smart contract and has a unique identity. In most cases, the token will contain information about the asset that it represents (a physical building, or digital artwork), and even metadata (the owner of the building or artwork). This identity allows any dApp (decentralized application) to automatically recognize what each token represents.

Non Fungible Tokens can be created through two ways: minting and cloning. Minting tokens results in a brand new token that has the same identity as another existing non-fungible token.

How do NFTs work?

Once a token has been minted, the owner can change or set metadata to the token (such as name, description, ownership). It’s up to the dApp developer to decide if they will want to allow changing of metadata.

Every token supports basic Ethereum smart contract functions: transfer of ownership, approve for allowance transfer of ownership by an approved third party and burn (destruction) of the tokens. Many advanced features like a registry and voting – where multiple people can vote on what changes are made on a certain NFT – are also possible. For an example of voting with non-fungible tokens, see this blog post from OpenSea about The Abyss voting.

How much are NFTs worth?

NFTs can be bought and sold on a secondary market. Most often, this is done by using an auction process where the price gets set by the market based on what it’s worth to someone willing to pay that price. While this sounds odd, you can see how real estate and stocks work in a similar fashion – people sell properties or shares of stock when someone else is willing to pay more than it’s currently worth. This allows for individual NFTs to be traded at any time between two parties without the need for an intermediary.

A digital artist called Beeple sold one of his NFTs for $69m (£50m).

How can NFTs be used in Decentralized Finance?

OpenSea is a peer-to-peer crypto marketplace where digital goods can be sold, exchanged or bought using Ethereum and ERC-20 tokens. One of the biggest challenges faced by small scale businesses is the fact that selling physical goods online is very expensive. For example, in order to sell a used car online today one must pay for the cost of hosting advertising and for selling services.

NFTs can be used to solve this problem in several ways:

• Incentivized Marketplace Listing with Proof of Stake: In this scenario, a business could mint NFTs with their cryptoasset ID (wallet address) and a unique description. When someone wants to make a purchase, they can deposit the NFT and exchange it for the cryptoasset.
• Auctions: OpenSea offers an auction marketplace where users can sell items and bids are made by depositing tokens. This approach gives the token holders full voting rights on which bid to accept. By making an auction using NFTs, an auction house can provide a much better service to their users.
• Monetizing digital art: NFTs have the potential to allow creatives to monetize digital art without worrying about copycats or digital forgery.

Problems with Existing Systems

The non-fungible token standard helps solve many of the problems that exist with other digital asset standards like Counterparty and ERC20. For example, there is no concept of fungibility in these standards. This means that every asset – whether they be a digital artwork or tokenized stock – can be different from one another. While this may sound like an advantage, it’s actually a significant disadvantage when it comes to trading them on secondary markets.

Morevoer, the standards don’t support metadata and it’s up to the developer to create that functionality (which is typically missing). What this means is that every token has the same interface and there’s no way to differentiate them from one another.

There’s also no way to make specific assets tradable on an exchange. For example, a tokenized artwork would not be able to be listed on a stock exchange like NASDAQ or NYSE. This means that a digital asset like this would have nothing to offer traders and that they wouldn’t even know that one existed. The only way to get around this is by listing their prices through a third party service (such as OpenSea for Non-Fungible Tokens).

The Future of Non-Fungible Tokens in Finance

Non-Fungible Tokens are already being used in the decentralized finance space to represent anything from digital artwork, to buildings, to crops. See for example CryptoPunks, a site for trading CryptoKitties.

There are many exciting new projects on the horizon that will take advantage of these tokens and make life easier for everyone in the decentralized finance space. One such project is called TrustToken and they’re using NFTs to “tokenize everything”.

With TrustToken, any asset can be tokenized into an NFT and then sold on a secondary market.

Is it a good investment?

It’s hard to say. Especially very rich people will see a huge value in them and begin using them as an investment portfolio. However, if you’ve never purchased any digital assets before or only have tiny amounts of funds you don’t want to rely on them entirely for your financial security (like many people do with savings accounts).

Why are NFTs controversial?

The amount of energy NFTs consume is a major concern for many people. From there, it’s easy to see how the whole concept of digital assets can rather controversial. The ‘proof-of-work’ system that’s required to issue an NFT is the same sort of energy-intensive system used to mine Bitcoin and other cryptocurrencies.

The whole idea of necessary ‘waste’ comes from the fact that these tokens are built on the Ethereum blockchain. This means that Ethereum miners are still required to process them on a blockchain where they consume energy. While there’s nothing wrong with this, it does leave a bad taste in many people’s mouths when it comes to new uses for Ethereum.

The decentralized nature of NFTs also brings up a number of ideological differences. Some argue that they are a threat to democracy because they allow the wealthy to dominate inequitable systems and take more power away from the rest of society.

On the subject of security, NFTs are just like any other digital asset so that makes them vulnerable to hacks as well.

This is a subject that has been debated for a long time and there are many opinions on what the future of NFTs will be. To start, there are concerns about whether these tokens can really function as non-fungible digital assets. In many ways, they’re no different than ERC20 or Counterparty tokens – which are all fungible. This means they’re all exactly alike and people who possess any of them can swap them with anybody else that owns one. There is no way for someone to own an individual token – if you own one, then so does everyone else.

How can I create NFTs?

At the moment, it’s difficult for consumers to create their own NFTs. You can only do this on Ethereum but you’re going to have to jump through a number of hoops in order to get all the necessary software and hardware needed.

One has to first register as a user with an Ethereum address by providing personal information about themselves. Then they have to install the Virtual Machine, secure it with a password, and provide some other information. They’ll also be provided with their private key which is used to create digital assets that are just like any other digital token you might already know about.

The best platforms for creating your own NFTs at the moment is on the Ethereum Blockchain or the EOS Blockchain. Both of these networks have their own advantages and disadvantages, it all depends on what you’re looking for and what type of experience you want to have when creating your own NFT.

Here are a few of the platforms that you can currently use to create your own NFTs:

• OpenSea: OpenSea is a platform where users can buy and sell digital assets from each other. They are the most popular place to buy NFTs and you can also list your own creations for sale. OpenSea offers a wide variety of games, collectibles, and tools where you can make money from your creations. If you’re looking to make quick money this is the best place to sell it.
  OpenSea gives users a safe platform for peer-to-peer trading in the Asset Store where they offer their own Ethereum wallet and escrow service with these transactions. This is one of the few options out there right now that you can sell your creations in exchange for ETH or ERC20 tokens like OMG or KIN. It’s really disgusting.”
• Rarible: Rarible is another platform where you can create your own NFTs and sell them on a secondary market. You can also get paid for creating artwork that other people will purchase. The platform will take 15% of your earnings.
• Mintable: Mintable is a platform where you can create your own NFT. It’s easy to use and provides a highly accessible interface that can be used by beginners.

How can I sell NFTs?

There are a few ways to sell your own NFTs over the blockchain. As mentioned above, OpenSea is probably the best option for quickly selling them. However, if you’re looking to do it in an easier manner then you can try your luck with a secondary market where you can auction your creations.

How can I buy NFTs?

There are a number of different sites that allow you to buy NFTs from other people in exchange for ethereum or other digital assets. At the moment, OpenSea and RareBits are two of the most popular places that offer this service.

Which NFT should I invest in?

In recent months, NFTs have been extremely volatile. That makes it really difficult for investors to get into this space because their holdings can change at any time for a large variety of reasons (fair market value, people buying and selling on profile marketplaces).

Conclusion

Non-fungible tokens offer an interesting way of working with digital assets. Many benefits that exist with NFTs also exist with the ERC20 standard and other digital asset standards that are already in existence. The key advantage of NFTs is the ability to create a secondary market where trading can take place between people individually. This is good news for people who need to sell off their assets quickly, whether they’re looking for cash or just trying to find a buyer at a fair price.

The biggest problem with these tokens right now is the fact that it’s extremely difficult for regular consumers to get involved in this space. It’s all up to the developers to have their NFTs listed on exchanges and they typically don’t have enough time, resources, or capital for that. Until more of these types of digital assets are created, we just have to be happy with what’s already available in the market.

References

• – https://ethereum.org/en/nft/
• – https://open-sea.com/
• – https://www.rarebits.com/
• – https://www.mintable.com/home/
• – http://voronoi.io/
• – https://trusttoken.com/
• – https://en.wikipedia.org/wiki/Tron_(film)
• – https://www.ccn.com/?ref=15w6ac1
• – https://www.linkedin.com/pulse/brief-why-should-i-invest-nft
• – https://www.steemit.com/crypto/@avinex/5w6ac1

Disclaimer: These are my personal opinions, therefore they are not financial advice and should not be taken as such.