On average, NFTs are a single entirely digital asset; but real-world versions can also be created. Since NFTs are not interchangeable with each other, they could function as proof of authenticity, ownership and non-fungibility.
Fungibility means that the individual units of an asset are interchangeable and essentially indistinguishable from each other. For example, fiat currencies are fungible, as each unit is interchangeable with any other equivalent individual unit. A ten dollar bill is interchangeable with any other genuine ten dollar bill. This is imperative for an asset that aims to serve as a medium of exchange.
Fungibility is a desirable property for a currency, as it allows for free trade and, theoretically, there is no way to know the history of each individual unit. However, this is not a useful feature for collectibles.
What if instead we could create digital assets similar to Bitcoin, with the difference of a unique identifier for each unit? This would make each of them different from all other units (i.e. non-fungible). Essentially, this is an NFT.
How do they work?
There are various frameworks for creating and issuing NFTs. The best known of these is ERC-721, a standard for issuing and trading non-fungible assets on the Ethereum blockchain.
A newer and improved standard is the ERC-1155. It allows a single contract to contain both fungible and non-fungible tokens, opening up a whole new range of possibilities. The standardization of NFT issuance enables a higher degree of interoperability, which ultimately benefits users. Basically it means that unique assets can be transferred between different applications with relative ease.
If you want to keep and contemplate your awesome NFTs, you can do it with Trust Wallet. Just like other blockchain tokens, your NFT exists on one address. It is important to note that NFTs cannot be replicated or transferred without the owner's permission, even from the issuer of the NFT.
NFTs can be traded on open markets, such as OpenSea.io. These markets connect buyers with sellers, and the value of each token is unique. Of course, NFTs are subject to price changes in response to market supply and demand.
But how can these things have any value? Just like any other precious object, the value is not inherent in the object itself but is instead assigned by people who believe it to be precious. In essence, value is a shared belief. It doesn't matter whether it's fiat money, precious metals or a vehicle - these things have value because people believe they have it. This is how every precious object acquires value, so why not digital collectibles?
What can they be used for?
NFTs can be used by decentralized applications (dApps) to issue unique digital items and crypto collections. These tokens can be a collector's item, an investment product, or something else.
The economics of video games are nothing new. And considering that many online games already have their own economy, using blockchain to tokenize gaming assets is a simple step forward. In fact, the use of NFT could potentially solve or mitigate the inflation problem common to many video games.
While virtual worlds are already thriving, another interesting use of NFTs is the tokenization of assets in the real world. These NFTs can represent fractions of physical assets that can be stored and exchanged as tokens on a blockchain. This could introduce new and necessary liquidity into many markets that would otherwise not have much, such as works of art, real estate, rare collectibles and more.
Digital Identity is also a sector that can benefit from the properties of NFTs. Storing identification and ownership data on the blockchain would increase privacy and data integrity for many people around the world. At the same time, easy and trustless transfers of these assets could reduce friction in the global economy.
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