What Is an NFT (Non-Fungible Token)?

Non-Fungible Definition

Assets with fungibility mean that each unit is identical, interchangeable, and divisible. Fungible assets are used everyday like the US dollar, Bitcoin, and even company reward points. In contrast, non-fungible assets mean that each unit is entirely unique from one to another. For example, real estate is non-fungible because each property is different from one to another due to varying features like layout, size, location, zoning, utilities, and valuation.

Non-Fungible tokens, or NFTs, expand upon the concept of non-fungibility by leveraging blockchain networks like Ethereum to represent unique physical and/or digital assets. NFT ownership is validated and tracked from inception using a public blockchain, allowing users to verify the provenance of any NFT all the way back to its origin. Thus, NFTs are best described as a “certificate of authenticity” issued by the original creator on the blockchain, which provides cryptographic proof that the holder of an NFT is the rightful owner of the official asset it is tied to.

Historical Growth of the NFT Economy

NFTs were first popularized in 2017 with the launch of CryptoKitties, a decentralized application (dApp) on Ethereum where users breed and collect digital cats. However, in 2021, NFTs saw a significant resurgence in interest from collectors and artists alike.

Similar to the ERC20 standard used by most fungible tokens, NFTs were commonly built upon the ERC721 token standard—a templated smart contract that outlines how an NFT functions with other smart contracts and users. The ERC721 standard accelerated both the development and launch of new NFTs, as well as the creation of various marketplaces like Rarible, OpenSea, and SuperRare. NFT marketplaces allow users to seamlessly list, buy, and sell NFTs, supporting the growth of the NFT ecosystem.

This renewed interest in NFTs led to a Cambrian explosion of unique applications that leverage the property of non-fungibility in innovative ways, often with the goal of increasing efficiency in the transfer of asset ownership and reducing the need for intermediaries who siphon value away from creators and marketplaces. However, NFTs are still largely in their infancy, meaning there is a vast amount of opportunity for growth from innovative developers, creative artists, and traditional institutions wanting to bring distinct assets on-chain.

The Value in NFT Technology

A hallmark feature of any NFT is that it is a unique, 1-of-1 identifier that can help prove ownership, authenticity, and provenance. These distinctive features have opened a host of possibilities: Artists can monetize their digital masterpieces, games can sell provably rare in-game items, and creators can build digital collectible ecosystems and communities.

NFTs serve as a foundational building block for developers—there is no “form” that an NFT must take. It can be used to wrap music, immortalize art, tokenize real-world assets, and much more. One NFT use case that took the Web3 industry by storm is the emergence of collectible profile picture (PFP) collections like Bored Ape Yacht Club (BAYC) and Azuki. These collections present a harmonious design narrative, with each NFT boasting unique trait combinations. The individual value of any PFP NFT often hinges on trait rarity, leading to a general pricing strategy based on the “floor price”—the price of the least expensive NFT in the collection.

However, one size doesn't fit all. While the floor price model might suit PFP collections, it isn't applicable to a standalone piece of digital art minted as an NFT, for example. This can be a challenge for NFT finance (NFTFi) protocols, which seek to unlock liquidity for NFT owners by providing financial rails such as NFT lending protocols.

Exploring the Different Types of NFTs

NFTs offer a flexible framework for tracking ownership of a wide array of digital and physical assets using a blockchain network, as well as adding utility (such as NFTFi) to these assets in any number of interesting ways. The variety of use cases for NFTs is expanding, but below are a few common applications that have emerged.

Digital Art NFTs

One of the most recognized NFT use cases is tokenized ownership of digital artwork. By tokenizing their work, artists are able to monetize their craft and then tap into a global market of potential customers that only need an Internet connection to purchase it. Compared to traditional art marketplaces, which are often opaque, value-extracting, limited in discoverability, and require significant listing fees, NFTs can be listed on global, permissionless online marketplaces and can even provide creators revenue from all secondary sales.

An example of NFT art that made headlines is the famous digital artist Beeple. His piece “Everydays: The First 5000 Days,” a collage of 5,000 images that took 13 years to create, was tokenized as an NFT on Ethereum and sold for over $69M. Using the popular ERC721 token standard, Beeple was able to monetize his digital artwork and establish cryptographic proof that the specific NFT was the official copy. Beeple’s artwork is only one of thousands of different collections of digital art released and sold worldwide as NFTs.

Gaming NFTs

NFTs are a foundational component of blockchain-based video games because they allow unique in-game items to be tokenized, tracked, and transferred in a non-custodial manner. With traditional online video games, centralized publishers have complete control over the distribution, ownership, and attributes of in-game items that often determine the value of certain characters and game outcomes. If the publisher shuts down, users lose access to all of the game items they potentially spent hours, days, weeks, or even longer acquiring.

NFTs not only ensure users have complete control over their game items, but they enable entirely new gaming possibilities. This includes the creation of an interoperable metaverse—where the items from one game can be used and traded in another, and even marketplaces for lending and renting various game NFTs. 

The implementation of gaming NFTs varies across games, from tokenizing cosmetic skins in MOBA and FPS games and characters in MMORPGs to creating general community membership NFTs that provide holders with early access to new game features, governance power to help shape a game’s direction, and more.

NFT Collectibles

Similar to collecting physical trading cards or mail stamps, NFTs empower a new type of digital collectible. Collectors can buy digital objects they deem valuable or signal their support for a specific company, brand, game, or artist. Unlike physical collectibles that can be slow to transport and expensive to maintain, NFTs have no such restraints as they are entirely digital, transferrable in seconds, and never degrade in quality.

Some of the most recognized NFT collectibles are CryptoPunks, a collection of 10,000 unique 8bit-style characters algorithmically generated so no two characters are exactly alike. CryptoPunks were some of the first NFTs ever created and were given away for free. They continue to attract users who want to own an original piece of NFT history.

Collectible NFTs are increasingly being used as profile pictures on social media platforms like Twitter and Discord. Doing so provides a powerful signaling mechanism, where like-minded individuals can display their interest in an NFT collection and join a community of like-minded individuals.

Music Album NFTs

Blockchains have given music artists the ability to tokenize their work through music NFTs as a way to increase their revenue and foster fanbase engagement. With the Covid-19 pandemic contributing to an 85% reduction in music industry revenue, supplemental income from NFTs has helped artists offset these losses while at the same time providing fans a way to earn special perks like limited-edition memorabilia and even direct access to the artist’s time.

A wide range of music artists such as 3LAU, Kings of Leon, Shepard Fairey, and Eminem have tokenized their work, generating millions of dollars in the process. As a result, NFTs have served as a new, more engaging, and creative medium for creating fan reward programs and galvanizing community support for artists.

Real Estate NFTs

NFTs can also represent ownership of real-world assets like real estate to introduce additional liquidity into traditionally fragmented markets. The tokenization of real estate significantly increases the efficiency of transferring ownership and provides a single source of truth around the authenticity and provenance of a specific property. The concept of tokenizing real-world assets can be expanded to include many asset types such as physical paintings, government documents, certifications, and diplomas.

While still in the early stages, real-world assets tokenized as NFTs enable a number of new possibilities, from revenue-generating real-estate tokens backed by rental income to issuing digital credentials without the need for a physical document counterpart. They can also digitize existing records like educational diplomas and intellectual property contracts, leading to more transparency of credentials and opening up new forms of automation.

Start Building Your Own NFT Project

Every use case stated above is still in its nascent stages. From pioneering successful monetization models to the establishment of universal technical standards, NFTs have a long way to go before they’re used and adopted at scale. Building a breakthrough NFT project, collection, or application is difficult—but that difficulty also means there are unparalleled opportunities for a savvy entrepreneur willing to dive deep into the tech. 

That’s where Chainlink steps in, with a wealth of tools and educational materials on offer to streamline the Web3 development journey and unlock innovative use cases. The very first step for any NFT developer is to understand how to create and mint an NFT. The next natural step is to build a dynamic NFT (dNFT), or an NFT that evolves based on preconditioned triggers,

This is as far as many NFT collections have gone so far, but to build something that truly stands out, developers need better tools.

As the industry-leading Web3 services platform, Chainlink provides developers with simple but powerful services that extend the features of any NFT or smart contract. For example:

• Verifiable Randomness: Chainlink VRF has helped power a generation of NFT collections with provably fair NFT minting processes. NFT users want to know that their NFTs’ traits were distributed in a fair manner—and in a truly Web3 fashion, VRF provides cryptographic proof of randomness. 
• API Connection: Whether it’s upgrading dNFTs from an off-chain game server or changing a dNFT based on the weather outside, Chainlink Functions seamlessly connects all the world’s data to NFT smart contracts. The possibilities are endless.
• Cross-Chain Connectivity: Today’s blockchains are isolated from each other, making it difficult for users to access an NFT on one blockchain when they’ve already onboarded to another blockchain. Chainlink’s Cross-Chain Interoperability Protocol (CCIP) unlocks true cross-chain NFTs, expanding the potential user base for any NFT application. ‍
• Smart Contract Automation: As NFT use cases get more advanced, developers will run into an important challenge—reliably automating their smart contract functions. Chainlink Automation is the leading solution, unlocking set-and-forget implementations that save countless development hours.

Developers who are serious about building a breakthrough NFT application or project need Chainlink services to stand out from the crowd. In the current paradigm of isolated, one-off, static NFT implementations, innovation is just one Chainlink service away.