An Introduction to NFTs

Region: Europe
Apr 8, 2021, 1:00:00 PM Published By Yves Renno
It seems like everyone has been talking about NFTs lately, but what are they and what do you need to know? Wirex's Head of Trading, Yves Renno explores the recent increase in popularity of NFTs as well as breaking down the information on how they work. 

What is an NFT?

An NFT is a unique token governed by smart contracts that lives on the blockchain. Smart contracts are built to automatically execute transactions if certain conditions are met, and will define what an NFT can do. Like any other token, an NFT is transferrable and tradable, but not interchangeable, and has a unique signature that is embedded in its metadata. This signature can be quite sophisticated, describing an asset or just pointing to an asset (e.g. an image URL). Keeping the metadata low makes the NFT cheaper to produce or transfer.

A Recent Growth in NFTs

Although the technology is still in its infancy, it’s growing fast. Many improvements have been considered and developed by several projects since the Cryptokitties craze at the end of 2017, including techniques to compress data and improve transfer fees such as Efficient Balance Packing.

While some argue it’s still not accessible to the mass market given the high transaction fees  and the need to own a crypto wallet, surprisingly, creating an NFT does not require knowledge of cryptocurrencies since, in theory it’s available to anyone with an internet connection. In fact, it would only take takes a few minutes to create a ‘collection’ on Opensea and upload your work.

What’s more, creators retain the copyright of their work, meaning the buyer doesn’t buy the right to duplicate the asset. Regardless of the number of subsequent transfers of the NFT that follow, ownership can always be traced, which makes the technology a deterrent against copyright infringement. If the owner himself stole the work, then he could be more easily identifiable, and potentially liable, as ownership is much easier to trace.

NFT Issuance

Ethereum is the most popular blockchain for NFT issuance, but all major blockchains that support the design and deployment of decentralized applications (DApps) can be NFT issuers. Anyone can make an NFT on these apps, provided they implement a specific piece of code that looks like the ERC-721 or the ERC-1155 standards. Of course, you don’t need to know anything about these standards to use the technology, but it’s still interesting to go over a few simple properties they hold to measure the technology’s real potential:

Transfer: a function that lets the smart contract reassign the ownership of the NFT after its creation

Approve: a function that can only be called by the NFT owner to approve the transfer of the NFT by another party

TransferBatch: a function of the ERC-1155 standard that lets the owner transfer multiple NFTs

NFTs Interfaces

The interface looks simple for a developer, but it is always more difficult to write simple code as there’s no hacks or patches that can be performed. However, code simplicity makes NFTs reliable and means they can appeal to the mass market.

As one of the top one hundred cryptocurrencies and tokens by market capitalization, TRON (TRX) announced its support for NFTs in December last year with the launch of its TRC-721 interface. The EOS blockchain has also been a potential issuer since mid-2019 with the dGoods standard. The dGoods standard, like Ethereum’s ERC-1155 interface, lets a creator design an NFT smart contract that can govern one or many NFT smart contracts.

A classic analogy that is typically emphasized by the crypto community helped me understand the practical fallout of this last sentence. An ERC-1155 could represent a theatre or a theatre’s brand, and the governed NFT smart contracts would be the theatre’s seats.

Game projects use Enjin’s ERC-1155 technology to create and manage their virtual assets. Weapons, armour, vehicles, land... hundreds of thousands of identifiable assets can be tokenized and their market can be managed by ERC-1155 contracts: the game ‘Age of Rust’ have even created a new in-game marketplace where players can rent out their in-game assets.

With ERC-1155, relationships between identifiable unique assets can be structured on several layers. And the structure’s complexity is only limited by the efficiency of the blockchain, and its capacity to store and transfer data at a reasonable cost, and in a timely manner. In the real world, ERC-1155 could be used for the management of theatre tickets but also to protect a brand from forgery

NFT and Decentralisation

The ERC-721 and ERC-1155 standards have “decentralised” the ownership concept. Decentralisation is not only a technological revolution; the “all-decentralised” way of thinking is a social movement that disrupts the established order. This could be a big step forward for community self-governance and it’s a step that is only conceivable today by virtue of the blockchain technology.