Non-Fungible Tokens and Their Types

The first NFTs or non-fungible tokens were minted in 2014, but the real breakthrough of NFTs happened in 2021, culminating in record-breaking artwork sales by digital artists Beeple (highest sale of $69,346,250) and PAK (highest sale of $91,800,000).

Why are people willing to pay such crazy amounts of money for some digital images? Let’s figure it out!

What Is a Non-Fungible Token?

Non-fungible means that it cannot be replaced with another token, it is unique. Anything (both digital and physical items) can be digitized and turned into a non-fungible token:

Pictures
Drawings
Music
Whatever else, even real estate.

Unique Features of Non-Fungible Tokens

Indivisibility

Historically NFTs are indivisible. For example, you cannot use a train ticket to some extent only. Now, however, with the DeFi development, we are talking about fractional ownership of NFT which demonstrates clearly that the indivisibility aspect doesn’t work as it used to do.

Scarcity

Scarcity is one of the main factors driving the token’s value. Of course, the token creator can create as many similar tokens as they want but if the number of tokens is limited, their value is more likely to be growing.

Uniqueness

There are no two identical tokens, all of them have specific features that distinguish one token from others.

Ownership

An NFT exists on a distributed ledger within a specific account – the account of the token’s creator, and only the token’s creator can transfer the token to a different account.

Interoperability

NFTs can be bought, sold, or exchanged across different distributed ledgers. It can be done on NFT marketplaces, via a custodial service, or by using a decentralized bridge.

NFT Standards

Ethereum is the first blockchain that enabled the creation of NFTs. The majority of tokens are created on the Ethereum blockchain. There are the following NFT standards.

ERC-721

This token standard was proposed in 2017 and is the first token standard ever. It is written in Solidity on the Ethereum blockchain. This standard allows anybody to create NFTs for digital collectibles. The ERC-271 token standard enables mapping unique identifiers to addresses that in turn enable to identify the address owner.

ERC-998

ERC-998 tokens are similar to ERC-721 - they both are non-fungible. But the ERC-998 standard has one significant improvement - these tokens are composable. “Composable” means that they can be organized in complex groups. Each group can be bought, sold, or exchanged as a single position, and thus, the transaction fee is charged for a single transfer.

ERC-1155

The ERC-1155 standard was developed with games in mind. ERC-1155 tokens can also be assembled in groups and thus traded or exchanged as a group, just like ERC-998 tokens. But they allow users to register both NFTs and fungible tokens using the same address and smart contract. So, fungible tokens can represent a currency in a game, while NFTs can represent game collectibles or exchangeable assets.

Non-Ethereum Standards

While Ethereum is still the hub for NFT creators, high gas fees and network congestions have pushed many developers to other platforms.

Tezos

The Tezos blockchain has three token standards, and one of them, the FA2 standard, is non-fungible.

The FA2, or TZIP-12 standard is a unified token contract interface. It supports an impressive variety of token types:

Fungible
Non-fungible
Non-transferable
Multi-asset contracts.

Developers can define and invent new types of tokens, including NFTs that contain gaming elements with unique features.

NFT and DeFi

DeFi and NFTs work together to provide their users with more interesting opportunities such as:

Staking
Liquidity provision
Lending & Borrowing

There are DeFi platforms that offer lending and borrowing services to their users. In crypto-lending, users leave their crypto as collateral to get a loan in, say stablecoins. When a user repays the loan body and the interests, their crypto is returned to the user. If the user fails to make a repayment, the crypto collateral is sent to the lender.

As collateral, the most popular coins are normally used such as Ethereum, Bitcoin, Litecoin, etc. But it might happen that the user doesn’t have the required coins. Instead, they have NFTs, CryptoKitties, for example. Such a user can give CryptoKitties as collateral to get the required loan.

Some DeFi platforms went further and offered their own non-fungible tokens. They are purchased by the user and kept as collateral. Such tokens are fractionalized (they can be divided into pieces, fractions). The main difference between these tokens from those mentioned previously is that they are financial tokens, financial derivatives. They are not art, not collectibles but financial instruments that enable users to benefit from a DeFi platform functionality.

Fractional NFTs

Not only financial NFTs can be fractionalized. Token creators might enable fractioning in any NFT and make it possible for a user to buy a token fraction, a part instead of purchasing the entire token. The part price is determined proportionally to the part size (the bigger the fraction is the higher is its price). It opens more opportunities to the NFT collectors and fans.

You can trade fractionalized NFTs on decentralized exchanges and the majority of NFT marketplaces.

NFT Use Cases

NFTs can be used to tokenize anything: a digital entity, asset, etc. let’s have a look at the most popular application cases of NFTs.

Collectibles

NFTs are used to tokenize collectibles - both physical and digital. Traditional collectors can also tokenize their collections - those of stamps, coins, etc.

Gaming

Blockchain-based games use NFTs widely. In-game collectibles form the primary use for non-fungible tokens. Such native tokens are used in the game to obtain benefits or upgrades, and further, they can be sold on NFT marketplaces.

Digital and Physical Art

Any valuable item can be digitized as an NFT. Most of such tokens are fractionated - divided into pieces. Fractionalization has made such tokens available to the majority of users.

This is a category of tokens that are used by communities and individual users. These tokens represent ownership in building an entity or the success of an individual. Social tokens are fans tokens, community tokens, creator tokens, personal tokens, among others.

Calaxy could serve as an excellent example of a social token. Calaxy is a DLT-based application that enables influencers and creators to sell their tokens. It also allows users to apply their tokens for interactions, for example, to produce dividends.

Decentralized Domains

Blockchain domain names including their licensing and distribution are one more emerging NFT use case. NFTs could be a good option to replace long digital wallet addresses. Anybody who has a website would be able to buy a blockchain domain to enable crypto payments.

Identification

NFTs have unique information about an asset. This information is programmed in NFTs. This feature makes NFTs perfect for issuing licenses, certificates, identities, and similar. An NFT can be traced back to its source to ensure the NFT’s authenticity.

The Future of NFT

The NFT market is still in its infancy stage, and the possibilities of NFT application are being explored. While for now there are many technical aspects to consider and issues to eliminate, NFT might change the way many industries function. Along with the newer developments such as metaverse, DeFi, even cryptocurrency, NFTs can be applied in traditional financial systems for lending and borrowing, and of course, many more new fields of NFT application are to be discovered.

Stay tuned for further updates, crypto guides, and market insights from LetsExchange. You can also follow us on Twitter, Facebook, Reddit, Instagram, LinkedIn, Medium, Quora, Telegram, Steemit, and Bitcointalk for first-hand information from our team.