Non-Fungible Tokens: An Intro To NFTs & NFT Use Cases

Delton RhodesMarch 11, 2020

Non-fungible tokens (NFTs) are a specific type of digital asset, where each token is individualized. In other words, each NFT has a unique identifier that makes it distinct from all other NFTs.

These characteristics mean that non-fungible tokens can be used to represent ownership rights for everything from digital collectibles to real-world property. And, as more and more businesses become interested in adopting blockchain technology, the number of use cases for non-fungible tokens is steadily expanding. 

In this article, we’ll define what exactly non-fungible tokens are and how they have evolved since the launch of the first NFT-like token in 2012. We’ll also look at a range of emerging use cases for non-fungible tokens in gaming, real estate, and event ticketing, as well as other industries.

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What Are Non-Fungible Tokens?

To understand what non-fungible tokens are, it’s crucial to understand how they are different than both coins and fungible tokens. This requires a basic grasp of how digital currencies derive their value.

Coins vs. Tokens

Before looking at what a non-fungible token is, it’s important to understand the difference between coins and tokens. 

The primary difference is that coins are cryptocurrencies built on their own blockchain-- BTC on the Bitcoin blockchain and ETH on the Ethereum blockchain are two good examples of coins. Coins can always be earned through cryptocurrency mining, if it’s a Proof of Work blockchain, or through staking, if it’s a Proof of Stake blockchain. These blockchains’ peer-to-peer networks are public-- that is, open to anyone and everyone-- and secured through mining or staking, depending on the blockchain consensus mechanism in use.

Tokens, on the other hand, are cryptocurrencies built on top of an existing third-party blockchain. DAI tokens built on the Ethereum blockchain are one such example. DAI tokens do not have a sovereign blockchain, so users still need to pay gas fees in ETH to send DAI to another person. It’s also important to note that most tokens cannot be generated through mining or staking. Instead, they typically have a fixed supply and the tokens must be acquired through cryptocurrency trading.

Coins are always fungible, meaning that one specific coin can be interchanged with any other coin of the same blockchain at the same price. 1 BTC is always equal to 1 BTC. In contrast, tokens can be either fungible or non-fungible. ERC-20 tokens are perhaps the most common example of fungible tokens. ERC-721 tokens are the most common example of non-fungible tokens.

Let’s further clarify this concept in the following section.

Fungible vs. Non-Fungible

If a currency or resource is “fungible,” it means that every single unit is identical and exactly equal to every other unit. For instance, traditional fiat currency is fungible. If Alice has a $20 bill and Bob also has a $20 bill, they can trade the bills and they will both be in the exact same position that they started in. To take another example, gold is fungible. If Alice has an ounce of pure 24 karat gold and Bob also has an ounce of pure 24 karat gold, they can swap their gold without any consequence.

Non-fungible tokens are not fungible, meaning that each one is unique. One NFT is not equal to any other NFT, either in value or in the properties of the token itself. Each token is assigned a digital hash that distinguishes it from every other NFT of its kind.

An easy-to-understand example of a non-fungible resource is a car. Suppose that both Bob and Alice have cars of the same make, model, and year. Let's image that they both own a black 2016 Toyota Corolla. In all likelihood, Bob and Alice would not be willing to exchange vehicles, even if they were in the same condition. Why not? Because cars aren't fungible. Unlike a $20 bill, one car isn't exactly equal to every other, even when the year, make, and model are all the same.

There may be circumstances where two NFTs are equal in market value. Perhaps you have an NFT that proves ownership of a $30,000 car, and I have an NFT that proves ownership of a $30,000 work of art. We could potentially make an even swap because the value of the tokens is equal, but the NFTs themselves are not equal to one another. They represent ownership of different assets and the tokens themselves possess distinct unique identifiers. 

A Brief History of Non-Fungible Tokens

The concept behind early non-fungible tokens (or NFT-like tokens) was not much different than today, yet obvious limitations limited their adoption until the technology advanced.

Colored Coins

As Andrew Steinwold outlines in an October 2019 blog post on the history of non-fungible tokens, use cases have been emerging since around 2012 and 2013. The first iteration of NFT-like tokens were “Colored Coins,” first mentioned in Yoni Assia’s March 2012 blog post titled, “bitcoin 2.X (aka Colored Bitcoin) — initial specs”. The introduction of Colored Coins created the ability to represent property, coupons, company shares, subscriptions, digital collectibles, and more, on a public blockchain.

However, the technology worked better in permissioned environments, meaning that it was better suited for traditional databases than public blockchains. In short, this was the case because the Bitcoin Script programming language wasn’t designed to support non-fungible tokens. 

In order for Colored Coins to function as designed on the Bitcoin blockchain, all users had to agree upon a commonly-accepted value for each unit. If one user disputed an item’s equivalent value in Colored Coins, the entire system wouldn’t work for that specific item. These flaws influenced developers to explore new solutions to improve upon the existing functionality of Bitcoin’s blockchain. 

Non-Fungible Token Technology Improves

In 2014, Counterparty developed a peer-to-peer financial platform and distributed, open-source Internet protocol on top of the Bitcoin network. The platform included a trading card game and meme trading. Counterparty enabled the launch of Spells of Genesis (April 2015), Force of Will (August 2016), and Rare Pepes (October 2016). 

In 2017, more projects started looking at other networks beyond Bitcoin. Ethereum was a popular choice since it had already gained popularity for its support of fungible tokens, with ERC-20 tokens being the most common. For instance, Cryptopunks launched as an ERC-20 and ERC-721 hybrid token in June 2017. Later, in November 2017, the infamous CryptoKitties project launched as a full ERC-721 token.

Popular NFT Standards: ERC-721 and ERC-1155

Developers began working on the creation of the ERC-721 standard for Ethereum smart contracts in 2017. ERC-721 was officially created in January 2018 with the purpose of providing a simplified and standardized set of rules regarding how non-fungible tokens functioned on the Ethereum blockchain. Combined with the earlier adoption of the aforementioned CryptoKitties and Cryptopunks, ERC-721 made Ethereum the go-to blockchain network for non-fungible token development. 

Learn more about the ERC-721 Token Standard here.

Since that time, developers have launched additional token standards for non-fungible tokens. In January 2018, the first version of the ERC-1155 Multi Token Standard was published on Ethereum’s GitHub repository

As stated in the ERC-1155 abstract, “The ERC-721 standard's token ID is a single non-fungible index and the group of these non-fungibles is deployed as a single contract with settings for the entire collection. In contrast, the ERC-1155 Multi Token Standard allows for each token ID to represent a new configurable token type, which may have its own metadata, supply and other attributes.” 

Although still not as popular as ERC-721, ERC-1155 has gained adoption. This is because it gives developers the ability to create fungible, non-fungible, and semi-fungible tokens with just one token standard. Previously, developers had to choose between either ERC-20 (fungible) or ERC-721 (non-fungible), or use both contracts to create two different types of tokens.

Non-Fungible Tokens: Collectibles, Marketplaces, And Blockchains

As non-fungible tokens have gained recognition, additional infrastructure has been built to support them. Here is an overview of the current landscape.

Digital Collectibles

In 2020, digital collectibles are by far the most established use case for non-fungible tokens. They can be worth large sums of money in some cases. One person paid the equivalent of $215,000 in ETH for a Decentraland parcel in 2018. That same year another paid the equivalent of $170,000 in ETH for one collectible cat on CryptoKitties.

CryptoKitties (CK)

CryptoKitties is a game in which users can purchase, collect, breed, and sell virtual cats. Each cat on CryptoKitties is unique and represented through an ERC-721 token. The project launched on November 28, 2017. By December 3, 2017, around $1.3 million in CK tokens had been transacted. CK tokens are currently held in 82,000+ unique Ethereum addresses. There have been more than 4.8 million CK transfers in total since the project launched.

Gods Unchained Cards (CARD)

Gods Unchained is a trading card game that is mechanically similar to Hearthstone. The CARD token first launched on November 16, 2019. 6 million CARD were transferred in three days, easily surpassing the previous 3-day record for non-fungible tokens— 4.7 million CK transfers. CARD tokens are currently held in 10,300+ unique Ethereum addresses. There have been more than 7.3 million CARD transfers in total since the project launched.

MLB Champions (MLBCB)

MLB Champions is a trading card game for Major League Baseball. Every game of MLB Champions is tied to a live MLB game in real time. The better your team performs in a live MLB game, the more rewards you earn. MLBCB tokens are currently held in 1,496 unique Ethereum addresses. There have been more than 470,000 MLBCB transfers in total since the project launched.

Marketplaces

Marketplaces play an important role in the no-fungible token ecosystem. They are quite different than cryptocurrency exchanges, which are used for fungible coins and tokens. NFT marketplaces function similar to popular e-commerce platforms (e.g. Etsy). As mentioned earlier, digital collectibles are currently the most prominent use case of NFTs to date. Most NFT marketplaces also focus on this use case.

OpenSea

OpenSea supports trading for ERC-721 and ERC-1155 tokens, which have been used to create 4 million+ digital items. Gods Unchained Cards, ENS names, CryptoKitties, and Decentraland land are just a few examples of supported non-fungible tokens. Since launching in June 2018, OpenSea traders have made 210,000+ transactions.

KnownOrigin

KnownOrigin is a marketplace for digital artwork. Users can verify each piece on the platform is authentic and truly unique via the platform’s native ERC-721 token, KnownOriginDigitalAsset (KODA). Since launching in February 2018, KnownOrigin has supported 7,500+ purchases and close to 200 artists. KnownOrigin currently has 19,300+ artwork pieces available and 2,300+ editions.

Pixura

Although Pixura itself is not a marketplace, it offers marketplace templates that allow anyone to launch a non-fungible token marketplace on Ethereum with zero coding required. The platform also supports the development of custom crypto collectible games, apps, and giveaways. Pixura smart contracts use OpenZeppelin’s ERC-721 standard Solidity contracts.

Other Blockchains Supporting NFTs

Ethereum is definitively the most-used blockchain for non-fungible tokens, yet several other blockchains also support NFTs. Examples include EOS, Waves, VeChain, TRON, Loom Network, and Komodo. As developers on-board to these blockchains, it’s likely that even more use cases around non-fungible tokens will emerge.

Additional Use Cases For Non-Fungible Tokens

Whether talking about digital collectibles or other use cases, the infrastructure required for large-scale non-fungible token adoption is still in development. Here are a few examples of other promising use cases that have begun to emerge.

Real Estate Ownership

In 2018, OpenLaw announced an initiative with ConsenSys that proposed using ERC-721 tokens to carry out transfers of houses, land and other ‘tokenized’ properties. Smart contracts are accessible to all parties involved in a given purchase, including the seller, the buyer, real estate agent, the authorities, and the legal representatives. 

Depending on regulations in specific jurisdictions, historical property transactions may also be stored on the blockchain. OpenLaw began the deployment of its protocol in Australia, developing a blockchain-based property system that simultaneously creates a property title and registration. 

Event Ticketing

AlphaWallet created a smart contract using the ERC-875 standard (also designed for non-fungible tokens) and sold 2018 World Cup tickets by working directly with FIFA. OpenSea used ERC-721 tokens for issuing tickets to the 2018 and 2019 NFT.NYC conferences. Each ticket is a unique ERC-721 item, which OpenSea calls a CryptoTicket. They are instantly re-sellable, transferable, bundle-able, and bid-able.

Supply Chain

Some developers have proposed the creation of non-fungible tokens as a means of tracking items to facilitate blockchain supply chain management. One limitation is the current lack of standardized metadata options (i.e. production, date, etc.) available for this specific use case. This might require a new smart contract standard on Ethereum or another blockchain platform.

There are also concerns over the amount of metadata that can be stored on-chain vs. how much needs to be stored off-chain. This can add up when considering the number of possible data entry points required on a typical supply chain. Additional scalability solutions would likely be required for supply chain NFTs to realize their full potential.

Credential Verification

Digital identification is another example use case for NFTs. Instead of using paper documents (i.e. passports or driver’s licenses) to prove an individual’s identity, a non-fungible token can be used to represent and verify a particular person. This could potentially speed up Know Your Customer (KYC) checks.

0xcert demonstrated the potential of this use case in 2018 when it became the first project to use ERC-721 KYC tokens to provide an additional security layer. A similar non-fungible token system could be used in other industries that require KYC checks (e.g. banking, real estate, gaming).

Developing Non-Fungible Tokens On Komodo 

Komodo's technology supports the creation of non-fungible tokens. Every project that launches in independent Smart Chain with Komodo can also create non-fungible tokens on top of their own chain. Following this tutorial, developers have the ability to create non-fungible tokens in a matter of minutes.

Check out our developer documentation for more information and in-depth guides about developing on Komodo.

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