Non-Fungible Tokens: What Is It and What's Been Happening in 2019
Non-fungible tokens (NFTs) achieved mainstream attention in 2017 following the popularity of the crypto collectibles game CryptoKitties. The NFT market has evolved since then.
In this article, we will delve into non-fungible tokens to understand what they are and what they can do. We will also explore what has been happening in the NFT market throughout 2019.
Fungibility is defined as the quality of a good or commodity that makes its individual units interchangeable with another unit of the same commodity with the same value. It is considered an essential feature of any viable currency or item utilized as a store and transfer of value.
Fiat currency presents an excellent example of fungibility. The currency in your wallet is acceptable everywhere. Fiat currency, say 100 dollars, in a large denomination is exchangeable for five 20 dollar notes. Likewise you can choose to pay for a good or service with your 100 dollar bill or in smaller denominations. This is fungibility.
Fungibility is considered one of the most important characteristics of a currency. Digital currencies are a mixed bag with regard to this feature. Some cryptocurrency networks, like Bitcoin, started as fungible but the open nature of its ledger combined with leaps in blockchain analytics technology have made fungibility a distant memory. However, some digital currencies, those with significant privacy considerations such as Monero, leverage technology that imparts their tokens with fungibility. Fungibility is important for currencies because it allows it to meet the society's needs effectively.
While fungible items serve a purpose in society, the same is true of their opposites too. Non-fungible items are those which cannot be interchanged with any other good. Non-fungible assets are typically items of high value that are rare. Examples of such items are paintings or other valued art, precious stones, and other collectables, like baseball cards.
Non-fungible items operate on the scarcity principle. In social psychology, this principle explores and explains how the availability of an item affects its valuation by members of the public. The rarer an item is, the more money people are willing to part with to acquire it. Human beings have been attaching meaning to items that do not possess any inherent worth since time immemorial. Other reasons, such as religion and sentimentality, can also have an effect on the valuation of an item. A good example is the Gutenberg Bible, which is worth upwards of USD 4 million because of its historical and artistic value.
In the context of digital assets, non-fungible tokens are made possible by blockchain networks that support the creation of decentralized apps (dapps) through the deployment of smart contracts.
NFTs are unique one-of-a-kind tokens, sometimes representing another real-world item, which are deployed on a blockchain network. It is important to note that most NFTs do not have to represent items in the real world. In fact, the majority of the NFTs in existence represent assets that only exist in their crypto-ecosystem.
NFTs possess characteristics that distinguish them from the rest of the cryptocurrency sector. These tokens are unique as a function of their rarity. Additionally, they are a scarce asset class. The maximum supply of any type of NFTs is usually predetermined and capped at a certain quantity.
Additionally, because they are typically deployed on blockchains, NFTs are readily accessible to anyone with an internet connection. The use of blockchain technology ensures that the tokens will exist after the life of their creators. Moreover, it is possible to design and launch entire ecosystems around NFTs, which can interact with each other in many novel ways, thanks to the blockchain.
The Ethereum-based dapp, CryptoKitties, which brought NFTs to the forefront of the crypto community in 2017, capitalized on digital scarcity. In the cryptocurrency world, just as it is in the real world, people want to own things that only they or very few others have. The virtual kittens deployed on the Ethereum blockchain gained popularity in a short time leading to much slower speeds for the network, significantly affecting the Ethereum network negatively.
Following the CryptoKitties craze of 2017, NFT projects mushroomed in number. Most projects employ the ERC-721 standard designed by Dieter Shirley to deploy their NFTs, making Ethereum home to most NFT projects. However, other smart contract platforms such as EOS are also increasingly being leveraged to launch NFTs.
NFTs in 2019
"We believe there is strong growth potential in NFT, and that the NFT space in 2019 is like the crypto space in 2014," Bobby Ong, Co-founder of major crypto market data provider CoinGecko, told Cryptonews.com earlier this year.
While Ethereum has dominated the NFT standard for the last couple of years, developers at EOS recently released two new standards for non-fungible assets on their blockchain. The standards were published by two different projects namely, Simple Assets by CryptoLions and dGoods by Mythical Games. The deployment of these standards is an attempt by EOS to dethrone Ethereum as the king of the NFT market.
According to StateoftheDapps, there are 26 NFTs in existence in the market. While DappRadar lists 68 crypto collectibles.
Also, while many NFTs are deployed in the context of gaming, there are some NFT projects which are marketplaces or for use on social networks. On the other hand, Ethereum continued to expand its NFT dominance. The Ethereum Name Service is a recently launched innovative project. It is designed to provide users with human-readable domain names deployed on the Ethereum blockchain. To make this possible, developers are leveraging using NFTs to represent the unique domain names generated by users.
Moreover, a number of NFT marketplaces have sprung up over the past two years. The largest of these is OpenSea. It was launched early 2018 and typically trades about 50-150 ETH in NFTs daily. Auctionity and Rare Bits are other NFT marketplaces.
Lastly, NonFungible.com published a report analyzing some of the biggest names in the market. The report found that while extensibility, the ability to interact with other ecosystems in a gaming environment and one of NFTs biggest unique characteristics, is not being utilized as much as was previously thought.
Through analyzing on-chain gaming transactions over the course of the year, Nonfungible.com found that 91% of wallets have only interacted with one game since January 2019. This may represent a bit of a challenge to the billion-dollar gaming industry, which is quite enamoured with NFTs due to the possibility of extensibility.