Lesson 5: All About NFTs

Welcome to lesson number five in Kriptomat’s Introduction to Cryptocurrencies. This lesson is titled “All About NFTs.”

As you may have noticed, NFTs have taken the crypto world by storm:

• Before the 2021 boom in NFTs, most people thought cryptocurrencies were all like Bitcoin – virtual assets intended to serve as a replacement for government-issued currency.
  
• Now people understand that there is a second kind of crypto, one that’s associated with celebrities, sports teams, games, digital art, and the metaverse.
  
• While the benefits of conventional cryptocurrencies can seem abstract, idealistic, and theoretical to outsiders, NFTs are central to topics that are trending right now.

What does “fungible” mean, anyway?

• “Fungible” is a jargon word from the insurance industry, where it is applied to items that can easily be replaced with identical items. If your toaster is destroyed in a fire, your insurance company will reimburse you the value of a used toaster.

• Non-fungible items are unique. For example, your grandmother’s wedding ring is a one-of-a-kind piece of jewelry. A jeweler could weigh the gold and assess the quality of the gemstones, but the appraisal would not account for the special value that comes from the ring’s history.

• Fungible items can have a standard value, but non-fungible items are individually priced based on unique characteristics.

NFTs have been around longer than you think

• In 2012, Yoni Hesse, the CEO of eToro, advanced the idea of a Bitcoin “colored coin” on his personal blog. Hesse envisioned “color” as a property that would allow individual Bitcoins to be associated with tokenized off-chain objects, including stocks, real estate, and fiat currency.

• By 2014, a practical version of colored coins had been created on Bitcoin. But the implementation was complex, the coins slowed Bitcoin block processing, and the system wasn’t fully secure.
  
• Creating a workable alternative to colored coins was one of the goals outlined in the 2014 white paper that would become Vitalik Buterin’s blueprint for creating Ethereum.

But it was a few years before Ethereum supported NFTs

• In 2017, four members of the Ethereum community conceived a method for implementing non-fungible tokens on the Ethereum blockchain. Their ideas were summarized in Ethereum Improvement Proposal 721, which they submitted to ethereum.org. 

• The proposal was approved as a proposed standard, Ethereum Request for Comment 721, and after a period of comments and suggestions, the proposal was adopted as the ERC-721 standard in January 2018.
  
• Today, most NFTs conform to ERC-721 or to a compatible standard, ERC-1155, that offers a few advanced features. And NFTs have become a multi-billion euro industry.

NFTs provide a bridge between blockchains and the real world

• Ownership information and transactions involving NFTs can be posted to the Ethereum blockchain just like transactions involving conventional cryptocurrency.

• The Ethereum blockchain – the open ledger – provides a secure public record of ownership of the property associated with the NFT.

• To begin tracking an item, simply mint an NFT that represents it. From then on, the blockchain address of the owner will be a matter of public record, no matter how many times the item changes hands. Your ownership is recorded, much like the ownership of a house or other real estate.
  
• The terms of your ownership might not include physical possession. Consider the mineral rights to a piece of property. The owners of the mineral rights don’t own or occupy the property. Their ownership is visible only on a piece of paper filed in a government office somewhere. But this ownership is a real thing. If oil, natural gas, or precious metals are found on the property, those belong not to the property’s owner, but to the owner of the mineral rights.

NFTs have found use in many markets

• NFTs have brought new capabilities to video gaming, fine-art sales, digital rights management, collecting, sports, supply-chain tracking, healthcare, and digital identity management.
  
• In gaming, for example, NFTs can represent avatar modifications, weapons, rewards, land, structures, abilities, and other items. Players can earn NFTs by completing tasks and spending NFTs on enhancements within the game. 

• NFTs are also expected to play a major role in the Metaverse, a proposed version of the internet that you navigate like moving through a video game.

Most NFTs are bought and sold at special online markets

• NFT marketplaces attract buyers, making them an attractive place for NFT owners who wish to sell. A lively market of rising and falling prices adds an element of investing to the NFT market.
  
• Top NFT marketplaces include OpenSea, Rarible, and SuperRare.

So – what have we learned?

• An NFT can’t be replaced by an identical token. It is unique in some way.
• In video games and early versions of the metaverse, NFTs represent personal belongings and other objects.
• An NFT is like a deed that lets you own 10% of a masterwork of art that hangs in the Louvre, for example.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

Which of these is non-fungible?

A 500 gram bar of gold.

Tickets to Disneyland.

A baseball card signed by Babe Ruth.

A video game.

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Why are most NFTs hosted on Ethereum?

Ethereum has the worldwide accessibility, security, and low transaction costs necessary to support the worldwide NFT market.

Ethereum supports non-fungible tokens with published standards.

Unlike Bitcoin, Ethereum supports tax-free transactions on NFTs.

Ethereum’s ability to support smart contracts makes it easy to buy and sell NFTs.

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What do NFT marketplaces do?

They provide a centralized market where NFT owners and buyers can meet and conduct transactions.

They allow NFT owners to arrange NFTs in a virtual playing field and charge other users to play marketplace-hosted NFT games.

Give holders of multiple NFTs voting rights on prices and fees.

Allow sellers to hide the price and transaction history for their NFT offerings.

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Which of these is NOT a role played by NFTs in gaming.

Serve as a reward in play-to-earn games.

Allow you to customize your avatar.

Allow you to purchase armaments and powers for battling in-game enemies.

Allow you to become an authorized reseller of the game.

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Which of these is NOT an NFT marketplace?

Opensea

Sotheby’s

Rarible

SuperRare

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