Non-fungible tokens (NFTs) are digital assets representing ownership of unique real-world and virtual items on the blockchain, such as physical art, digital art, in-game objects, sports collectibles, and virtual land. They are non-fungible because you can’t exchange one NFT for another.
Kevin McCoy invented the first NFT, Quantum, on May 3, 2014. However, it was not until 2020/2021 that the popularity of NFTs soared, raking in millions of dollars for artists and investors. According to a report by NonFungible, NFT sales hit a record $17.7 billion in 2021, a substantial increase from $82.5 million in 2020.
Sure, these numbers are attractive, but it’s important that you first understand the NFT tech before immersing yourself in the space. Keep reading to discover the technical aspects of NFTs.
NFT Tech Explained
Blockchain technology and smart contracts are the technologies that power NFTs. This guide will explore the two and other significant features.
What is Blockchain Technology?
Blockchain technology is a distributed, decentralized, immutable, and secure digital ledger that facilitates the tracking of assets and processing of transactions. A blockchain network includes connected nodes (computers) that confirm transactions and contribute to the chain’s security. The blockchain is the underlying technology powering NFTs. Therefore, you cannot create an NFT without a blockchain. Satoshi Nakamoto introduced the first working blockchain that powers the top cryptocurrency by market cap, bitcoin. He aimed to create a peer-to-peer system that would eliminate intermediaries like banks during transactions. Today, Nakamoto’s goal is a reality. Since the launch of bitcoin in 2009, blockchain use cases have evolved beyond cryptocurrencies.
What is a Smart Contract?
Just like traditional contracts, smart contracts define the terms of an agreement. Instead of writing the agreement on paper, a smart contract is written in code. It also automatically executes the predefined conditions of a deal. That means that two parties can get into a contract without a third party. Smart contracts are a crucial part of NFT tech.
What is the Difference Between the Blockchain and Smart Contracts?
Blockchain technology is a decentralized digital database, while a smart contract is a piece of code. Developers store smart contracts on blockchains. Also, smart contracts execute the predefined conditions on a blockchain.
What is a Blockchain Address?
A blockchain address is a form of identification comprising a string of alphanumeric characters. Every user has a specific blockchain address that’s different and unique. They use these addresses to send and receive crypto, NFTs, and other forms of tokens via wallets.
What is NFT Encoding?
Encoding means converting data into a coded form. For instance, Ethereum uses hex values to encode the different parts of a transaction namely: function name, values, and parameters. Ownership in a set of hex values can prove you own an NFT.
Crypto Tokens Vs. Non-Fungible Tokens
Cryptocurrencies and NFTs are similar because they’re created on blockchains. However, they’re also different. Crypto tokens are fungible, meaning that one crypto is equal to the next. To illustrate, you can swap bitcoin like-for-like (1 BTC = 1 BTC). On the contrary, you can’t exchange one NFT for another because each NFT represents a unique item.
How NFTs Work
There can only be one NFT owner at a time. The metadata and uniqueID ensure that no other token can duplicate this data. The uniqueID is linked to the creator’s blockchain address.
When you’re minting an NFT, you execute a smart contract by the blockchain’s standard. Minting means that you’re uploading a digital file to the blockchain where it converts to a digital asset.
During the minting process, a block is created. Next, the nodes validate the data in the block and then add it to the blockchain. Once the nodes have added data to the blockchain, no one can obliterate it. That’s because every block contains the hash of the block before it, creating an unbreakable chain. Keep in mind that this whole process costs money. Consequently, you’ll have to pay blockchain network fees to mint an NFT.
The creator’s public key is a certificate of authenticity and is a permanent part of the NFT’s history. As a result, anyone can see who created the NFT, giving it value. When you receive an NFT, the token proves that you hold a copy of the original file. On the other hand, your private key acts as proof of ownership of the original. The public key is the address you share with the sender during the transaction. The private key is the secret and random passphrase that your wallet generates. You cannot access your tokens without this passphrase.
More NFT Tech Insights: NFT Standards and Blockchains
You can mint an NFT on a variety of blockchains. The most popular NFT blockchain is Ethereum. The other blockchains that support NFT minting are Solana, Flow, Binance Smart Chain, Polygon, Cardano, EOS, NEO, Tron, Immutable X, Tezos, and Wakatta.
Each blockchain offers different NFT standards. A standard is a set of rules that governs a token. NFT standards comprise the technical foundation of non-fungible tokens. Here’s a description of some of the popular NFT standards:
ERC-721 is an Ethereum NFT standard released in 2018. It was the first NFT standard in existence.
ERC-721 enables each NFT to be unique and to have a price. Additionally, each ERC-721 smart contract has a tokenID. This is a special uint256 variable used in identifying NFTs. As a result, you cannot alter the token during the contract’s lifetime.
The ERC-721 smart contract has two main functions: ownerOf and transferFrom. The former authorizes users to check ownership details, while the latter permits the transfer of assets from one wallet to another.
ERC-1155 is a multi-token Ethereum standard for both fungible and non-fungible tokens. This token performs the same functions as ERC-20 and ERC-721 tokens, or both at the same time. ERC-20 is a standard for fungible tokens.
ERC-1155 is more efficient because a single smart contract interface can represent and control multiple fungible and non-fungible tokens. The ERC-1155 functions are transferFrom and balanceOf. The functions use uint256 variable _id to reference token categories.
BEP-721 is a Binance Smart Chain (BSC) NFT standard. It is an extension of ERC-721, meaning that they work similarly.
BEP-721 helps creators to tokenize data ownership and give it a unique identifier. This makes every NFT special. Examples of BEP-721 functions are balanceOf and totalSupply.
Flow NFT Standard
Dapper Labs, the company behind CryptoKitties, created the Flow NFT standard to solve the flaws of ERC-721. The standard differs from ERC-721 because it uses Cadence, a different programming language. Also, it allows developers to upgrade smart contracts even after deployment. NBA Top Shot also uses this standard.
How to Store Metadata
Metadata refers to the variables that describe your NFT. Case in point, a digital art’s metadata can include name, artist, size, colors, and date created. Here’s an example of a metadata file:
“date”: “2 May 2022”,
When you use the ownerOf function to verify NFT ownership, it references a metadata file similar to the one above. JSON is the most common metadata storage format.
There are two ways to store metadata, on-chain and off-chain. Below is a description of both.
On-chain storage means storing the data on the blockchain. That means that the blockchain’s logic governs the metadata. Also, the metadata will live on the chain as long as that blockchain exists. The author or anyone else cannot remove it once it’s stored on the blockchain.
Off-chain storage entails storing the metadata outside the blockchain through companies providing server solutions. This option is ideal for NFT creators that want to avoid the disadvantages of on-chain storage. Fortunately, several blockchains make it possible to include an identifier that can retrieve off-chain metadata.
You can store metadata off-chain on centralized or decentralized servers. Centralized servers offer cloud storage services, allowing you to store your NFT’s metadata. You’ll only keep on-chain the link to the metadata location. The drawback with this option is that the server can alter the link making the metadata inaccessible. Moreover, the developer can amend the metadata. On the other hand, a decentralized server is a peer-to-peer system like IPFS. This server stores metadata on multiple servers located in different areas. As a result, it’s difficult for anyone to modify the data.
The NFT space is still in the nascent phase. For that reason, experts expect NFT tech to evolve in the future as developers strive for efficiency and seamlessness. For example, it’s impossible to transfer NFTs from some marketplaces to others. Creating a seamless solution that allows the transfer of NFTs to any marketplace could be a huge game-changer.
Furthermore, the NFT market is rapidly growing, with popular NFTs like CryptoPunks, Bored Apes, and Art Blocks trading hands for millions of dollars. Scenting a shift in the assets market, venerable auction houses such as Christie’s and Sotheby’s have embraced NFTs, hosting sales, and (in the latter’s case) launching an NFT platform.