NFTs can represent anything from digital assets like cryptocurrency to physical items like special-edition soda cans, antiques, and real estate. If you have heard of non-fungible tokens (NFTs), you may have considered investing in them through http://nft-profit.me. For example, in the 2022 virtual world, Decentraland, players could buy and sell land, represented by non-tangible land tokens.
When a player bought land, they were not buying the token but instead simply buying the right to use that token in that virtual world. It resulted in land tokens becoming intangible and able to be traded freely within the game.
Interestingly, NFTs are not ‘new’; they are the evolution of many different ideas that have been maturing over time. Therefore, it is best to consider NFTs as a hybrid between nontransferable tokens and transferable digital assets to avoid getting too complex.
NFTs represent unique digital assets that can be created and stored on the blockchain with smart contracts. For example, using a DAO token on Ethereum, one can create a “stock” that represents ownership of shares in a company set up as a contract from the outset. First, let’s have a brief overview of the universe of NFTs:
Two critical components of the NFT universe:
The two essential components of the non-fungible token universe are blockchain and smart contracts.
- Blockchain:
A blockchain is a decentralized database that stores all records of digital transactions that are cryptographically secured from being manipulated or edited. A blockchain is appended only system and, as such, does not require any central authority to approve or validate transactions. It means that the only way for database changes would be if the auditors added a new block to the chain.
The distributed ledger that forms a blockchain contains every transaction ever processed, making it highly resistant to modifications. This decentralized methodology of record-keeping ensures that the network remains secure even if portions of it fail or if some participants act maliciously. It means that records cannot disappear, be changed, or be tampered with unless many people take action at once.
Smart contracts:
A smart contract is a set of contractual conditions and outcomes digitally encoded as software. In other words, an intelligent contract automatically ensures that parties fulfill their obligations per the agreement’s terms.
In simpler words, a smart contract is like a software program that acts as a legal document. It describes the rules that define an agreement between parties. It contains conditional logic, which enables it to automatically perform actions when specific conditions are met or when the terms of an agreement have been fulfilled.
Why does an NFT have value?
A token is valuable because it is scarce, durable, and transferable. It can also easily be distributed, managed, and transferred.
Scarcity:
Scarcity refers to the number of tokens that people will generate. In theory, every time a new token is added to the ecosystem, it pushes up the price of that asset by reducing its availability – making them more desirable than others. This scarcity makes NFTs perfect for scarce assets, as anything created or stored on the blockchain cannot be changed by anyone once it has been entered or stored into a smart contract.
Durability:
The durability of a token refers to its ability to withstand attacks from hackers and other malicious parties. In other words, tokens need to have robust cryptographic construction. For example, the blockchain has repeatedly proven itself as one of the most secure storage systems ever invented because it can verify each transaction within the chain directly and perform computations on the result. This verifiability makes it hard for any party, including hackers, to alter records or shortchange users by creating new tokens representing the same value as real ones.
Transferability:
The transferability of a token refers to its ability as an asset that can have traded freely between different parties in different locations. For example, bitcoin is a transferable digital asset because it can be stored and moved between various wallets and exchanged for any other currency.
NFTs are transferable both in the real world and virtual worlds, as they can be stored on any device with an internet connection. Note that NFTs are transferable but not interchangeable; simply, you cannot exchange an NFT with another NFT. Instead, you can merely transfer the ownership of these assets.
How do NFTs work?
As opposed to regular fungible assets – a token is limited in supply and can be transferred, moved or traded only by the owner. The NFT is a digital asset much like a cryptogram (a sequence of characters representing an immutable form of data). They are created by tokenizing unique assets such as rare coins, paintings or land parcels in virtual worlds. These assets are stored using decentralized public ledgers on the blockchain.
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