Recently, there has been a significant increase in interest in NFTs worldwide. There are constant reports in the news about how people get thousands of dollars from selling or investing in tokens. Let’s figure out what NFT is and how do NFTs work technically due to NFT licensing, what token standards exist, and how to increase your capital with their help.
In simple terms, an NFT token is a certificate created on the blockchain that confirms the ownership of a digital asset.
NFT tokens are non-fungible (unique), and their number is always limited. They differ from identical cryptocurrency tokens, which can have unlimited emission and participate in the exchange. The blockchain must record information about the author, the time of the creation of the NFT, and data on each operation performed with it.
To better understand the principle of operation of NFT tokens (what they are and how does nft work technically arranged), you should find out the meaning of the concepts associated with them.
A blockchain is a database that is a continuous chain of blocks arranged chronologically. The key features of the blockchain are transparency and security. No one can correct, copy or delete data from the blockchain.
A token is a digital asset without a blockchain and allows you to use certain goods or services on the network.
One of the main functions of a token is identification. A company or individual can prove their involvement in a particular project through this asset.
Creating an NFT requires an underlying distributed ledger for records and transactions. The nfts work technically system includes two nodes that perform the roles of owner and buyer. The following algorithm can describe the process of creating an NFT:
- Data digitization. The owner checks that the file, title, and description match. It then converts the raw data into the proper format.
- Storage. The owner stores the data on an external database outside the blockchain. He also has access to blockchain storage, but gas is usually charged for this, so only some people use this opportunity.
- Data signature. The owner signs the transaction, including the hash. After that, the transaction is sent to the smart contract.
- Coinage and NFT trading. After the smart contract receives the transaction, the NFT is minted and traded.
- NFT confirmation.
Every time an NFT is minted or traded, a new transaction must be sent to invoke the smart contract. Once the NFT transaction is confirmed, the metadata and owner details are added to the new block, thereby ensuring that the history of the NFT remains intact and ownership is preserved.
Having defined what an NFT token and tokenization are, let’s look at the areas in which these types of assets are most often used:
- Games. NFTs are often used to create unique characters and acquire or collect in-game items: weapons, building materials, products, etc. The most striking examples: CrytoKitties, and My Crypto Heroes.
- Metaverse. In this area, tokens are used to digitalize real products. Dolce & Gabbana and Gucci are already selling virtual versions of their products, which are even more expensive than their physical counterparts.
- Art. Artists, musicians, and music video makers turn their creations into NFTs and sell them at auctions. Canadian singer Grimes made $6 million in 20 minutes by selling tokenized digital art and a video. In addition, with the help of NFT art, authorship can be easily verified. Digital Art creators can transfer the right to use and get paid for their work.
- Sport. There are already examples of using tokens to sell tickets for sports matches. In October 2022, the Binance platform with FC Shakhtar raffled off tokenized tickets for the match against Real Madrid. Along with a place in the stadium, buyers of tokens received T-shirts and balls with the players' signatures, for which they exchanged their NFTs.
- Logistics. With the help of tokens, you can check the product's originality and track its path from the manufacturer to the consumer. Nike is already practicing a similar solution.
How do nfts work technically, and what do they mean when creating digital assets? What are ERC-721 NFTs, and do they have anything in common with ERC-1155?
NFT token standards differ depending on the blockchain on which they were created and the features and functions embedded in them.
In Ethereum, the most commonly used standards are ERC-721 and ERC-1155. The former can be used exclusively for NFTs and requires developers to create a separate smart contract for each token. ERC-1155 is an improved version of the previous standard considered more efficient and functional. It involves the creation of a single, smart contract for several tokens. The standard can be used for fungible and non-fungible tokens.
When creating a token on the Tezos blockchain, the TZIP-16 standard is most commonly used. It provides access to contract metadata in JSON format and simplifies the integration of Tezos smart contracts for applications and crypto wallets.
