What is an NFT
NFT stands for Non-fungible tokens. They are one of the kinds of cryptographic tokens that can address the responsibility for scant merchandise. Like bits of craftsmanship or collectibles. Non-fungible is certainly not an exceptionally well-known word so how about we understand. In financial matters, fungibility is the attribute of products or commodities. Where each unit is interchangeable and indistinguishable from each others.
Fungibility is best explained with an example:- Fiat money such as the U.S. dollar is a good example of a fungible asset. On the other hand, a limited edition basketball card is a good example of something non-fungible.
Each card is treated as a collectible and has individual properties. The same player doesn’t usually have the same value.
On top of that even when considering two same cards other factors such as the year of production or how the card is preserved can make a difference. An outrageous instance of something non-fungible is a piece of workmanship painting that is made as just a single unique duplicate. Now as we know the meaning of non-fungible.
Let’s understand the properties of NFTs
The first property of nft is that they are unique. Every nft is different and has different properties and that are usually stored in the token form into the token metadata.
NFTs are provably scarce. There are typically a predetermined number of NFTs with an outrageous instance of having just another duplicate. We can verify the number of tokens on the blockchain. Hence its provability is indivisible. Most of the NFTs cannot be split into smaller denominations. So one cannot buy or transfer a fraction of your nft.
To the standard tokens nfts guarantee the ownership of the asset. These are easily transferable and are fraud-proof. These NFTs can be made or implemented on any blockchain that supports smart contract programming. Here are the most noticeable examples ERC 721 and ERC 1155 standards on ethereum.
Before understanding, NFT standards let’s quickly summarize what ERC 20 is.
ERC 20 is a well-known and most popular standard for developing tokens on the ethereum blockchain. It’s some of the examples are:- USDT, DAI, or DEFI coins such as SNR and UNI. ERC 20 allows for creating fungible tokens. So all the above-mentioned tokens are completely indistinguishable. This doesn’t affect the value of each token and it remains the same.
ERC 721 takes into consideration making contracts that can be utilized to make discernable tokens with various properties. The game crypto kitties allow users to collect and breed virtual kittens is a famous example.
ERC 1155 is the next step in creating nonfungible tokens. This standard considers making gets that help both fungible and nonfungible tokens. It was created by engine a project that focuses on blockchain-based gaming. There are many games like world of warcraft where users can hold both fungible like gold and arrows and nonfungible items like swords, shields, armors, etc. In this standard developers can choose both fungible and no fungible tokens and the number of these should exist.
Gods Unchained and Decentraland are a few other popular games that leverage the power of nfts. Players can buy parcels of digital lands in the games like Decentraland. Players can later resell the digital land or even can use it as an advertising space within the game.
Some other examples include marketplaces for digital art such as Rarible, Super rare. Domain names can also be represented as nfts for example ethereum naming services, with dot eth extension. And unstoppable domains with dot crypto extension.
We can see that some of these NFTs are extremely costly. The most expensive crypto kitty dragon was sold for 600 eths I.e 25,93,506.00 dollars.
Scarce domain names such as exchange dot eth can be worth upwards of 500,000 dollars.
We will see that defi NFT will open more potential for decentralized finance.
At this time in defi, the vast majority of def lending protocols are collateralized. We can see that in the future NFTs can be used as collateral. People can soon borrow against NFTs representing a piece of digital art, land, or even tokenized real estate.
Isn’t it sound cool but there is a problem lending and borrowing defi platforms such as compound or aave the value of supplied collateral can be easily measured by integration price oracles. The aggregate prices from multiple liquids sources such as centralized and decentralized exchanges. There are particular NFTs tokens whose markets are often very illiquid. This makes price discovery tricky. This is why we can see that some projects that offer NFT collateralized loans use slightly different models I.e peer-to-peer loans.
This before borrowers can offer application nfts as insurance and banks can pick which nfts, they will acknowledge before introducing an advance. The NFT that is utilized as insurance is kept in an escrow contract. If the borrower defaults on their loan then the NFT is transferred directly to the lender. This space is very new and very few companies that use this model for example NFTFI.
NFT can likewise address more complex financial products.
Besides being used as collateral. It can be used as insurance, bonds, or options. A startup named Yinsure is a good example of nft usage in the insurance sector. Each insurance contract of Yinsure is represented as an nft which can also be traded on the secondary platform such as Rariable. We can recently see that defined native concepts. Such as liquidity mining being used by nft projects. The platform named Rariable started rewarding its users with rari governance tokens for creating buying and selling nfts on their platforms.
NFT space is one of the quickest developing specialties in crypto and has enormous potential.