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What is an NFT

Contributed by Ismael Stephanus.

NFTs are digital assets that live on a blockchain. They are non-interchangeable with other items because they have unique properties and no two NFTs are the same. NFTs are used to represent ownership of unique items and allow for tokenizing of things like art collectibles, they are mainly secured by the Ethereum blockchain (Shebaro, 2022).

According to Spano, Massaro, Ferri, Dumay, and Schmitz (2022), NFTs came to prominence in 2017 with a game called CryptoKitties, which enables players to buy and “breed” limited-edition virtual cats. From there, game developers adopted NFTs in a big way to allow gamers to win in-game items such as digital shields, swords or similar prizes, and other game collectibles. Tokenization of game assets is a real game-changer since it enables transferring tokens between different games or to another player via NFT-specialized blockchain marketplaces.

Table of Contents

Background

Nonfungible tokens, or NFTs, were created by Anil Dash and artist Kevin McCoy whereby artists are using them to block NFT spammers from hijacking their works and monetizing them as NFTs without permission (Oyelude, 2022).

The two primary components of NFTs are the ownership data and the media data. The ownership data determines the ownership of the token, and its data is encrypted in the smart contract, while the media data is the NFT file itself, which can be a JPEG, PNG, MP3, MP$, or any other supported format. The ownership data of NFTs and crypto technologies sit on the blockchain, which is the very essence of the web3 philosophy (United Ceres College, 2022). NFTs can be either on-chain or off-chain in Nature. In an on-chain NFT, both the ownership and media data sit on the blockchain, so every time a transaction (a purchase, transfer, or token deletion) is initiated, the media data is called up. Off-chain NFTs on the other hand, only have the ownership data on the blockchain, while the media data is stored off the blockchain and when a transaction is initiated, only the smart contract is called because it is on the blockchain.

How cryptography is applied to NFTs

NFT blockchain technology makes use of cryptography to bring about records of transactions that cannot be altered and remains that way for as long as possible. NFTs are symbolized by using unique illustrations called cryptographic tokens. A cryptographic token brings about an added layer of security in a way that a particular asset can be tracked and identified (Shah, 2022).

The fact that NFTs are secured by the Ethereum blockchain means, no one can modify the record of ownership or copy or paste a new NFT into existence. Ownership is managed through the unique ID and metadata that no other token can replicate. NFTs are minted through smart contracts that assign ownership and manage the transferability of the NFT

According to Manan Shah (2022), Blockchain technology has introduced a new chapter to the world of identity management and cybersecurity through a decentralized system of data protection. The intention is to keep the sensitive information of individuals and organizations safe from malicious attacks by a third party or hacker. It can also be used to track the identities of individuals and items. Its security innovations revolve around: decentralized technology, security through blocks, private and public blockchains, and smart contracts.

Decentralized Technology, In the blockchain network, users can store data in a decentralized system where it is further used for more sophisticated data encryption. The decentralized system is set up in such a way that an individual entity does not have control over another user’s identity or sensitive data. This setup makes it seemingly impossible for hackers to hack the network because it would require them to attack over 51% of the system concurrently.

Security Through Blocks, as a distributed ledger, the blockchain maintains ever-growing data record lists in blocks. An individual block entails a cryptographic hash of transaction data and a timestamp. Its in-duplicity remains an outstanding feature, and by it, users can be confirmed when their identities are compromised.

Smart Contracts, this form of security innovation in blockchain technology is self-executing and enforces the terms of deals without requiring human or machine assistance. It has boosted confidence in businesses as data can’t be tempered and transparent. Business owners, organizations, government agencies, defense systems, and investors can use these provisions to manage identities.

Private And Public Blockchains, in a private blockchain database, enterprises can communicate without a third party or the need for a central authority. But in a public blockchain, data is accessible to everyone who wishes to use or just have a look at them. Whether private or public, they are proof against any alteration because they are transparent and safe.

Validation And Smart Encryption, one of the ways in which NFTs secure digital assets is by using validation and smart encryption. The system is designed in a way that gives just about anyone on the internet the ability to trade and acquire assets smoothly. In private and public blockchains, validation and smart encryption in NFTs are mostly used to enhance data security and identification.

Advantages of NFTs

NFTs thrive on scarcity, this is because NFTs are rarely mass-produced, they make sensible investments (Avatao.com, 2022).

NFTs power the metaverse, companies that are hoping to operate in the virtual worlds like Decentraland will need to invest in virtual assets like NFTs that can be used there.

Boost brand recognition and consumer loyalty – Brands are investing in limited-edition NFTs available to select customers.

Create Limited-Edition Merchandise, NFTs can be used to reward loyal customers and achieve higher recognition with limited-edition merch. For example, Coca-Cola launched a digital “loot box” with NFT products, including a redesigned Coca-Cola logo and virtual jacket

To reduce the Counterfeiting of Products, NFTs operate on the open, permissionless, and trustless blockchain, making verifying ownership and validity easy. An NFT tied to a physical product can help limit counterfeiting cases. Customers can scan an NFT barcode on an item to confirm its originality. As an example, the specialty winemaker Ackerwines is selling wines with accompanying NFTs to authenticate their merchandise.

Raise Funds for Social Causes, several companies provide free NFTs as incentives to get others to donate to charity.

Improve Supply Chain Management, implementing NFT tags on physical goods can help businesses can track inventory across the supply chain. Each NFT is updated with relevant information, like the origin of raw materials and techniques used in production at different points of the throughput process. Defective products can easily be identified and subsequent processes causing defects can be quickly improved. For example, Taco Bell and Coca-Cola are using NFTs to raise money for social causes by selling company memorabilia NFTs and sending proceeds to charity.

Disadvantages of NFTs

In January 2022, it was reported that some NFTs were being exploited by sellers to unknowingly gather users’ IP addresses. The “exploit” works via the off-chain nature of NFT, as the user’s computer automatically follows a web address in the NFT to display the content. The server at the address can then log the IP address and, in some cases, dynamically alter the returned content to show the result. OpenSea has a particular vulnerability to this loophole because it allows HTML files to be linked

There is a concern that NFTs are not eco-friendly, there reason is that NFTs are built on the same blockchain technology used by some energy-hungry cryptocurrencies.

The NFT market is witnessing explosive growth, therefore reaching a point of saturation with countless NFT projects with limited utility, which are largely driven by the whims of only a few platforms such as OpenSea and Rarible plagued with high transaction fees (Zenon, 2022).

In money laundering, NFTs, as with other blockchain securities and with traditional art sales, can potentially be used for money laundering (Owen & Chase, 2022). Gou Wenjun, the director of the Anti-Money Laundering Monitoring and Analysis Centre for the People’s Bank of China, expressed that NFTs could “easily become money-laundering tools.” Gou elaborated that there is increasing unlawful exploitation of various new cryptographic technologies and that illicit actors often self-identify as innovators of the financial technology sector (Coco,2022).

Other issues and criticisms about NFTs are:

  • Unenforceability of copyright
  • Storage off-chain
  • Environmental concerns
  • Artist and buyer fees
  • Plagiarism and fraud
  • Pyramid/Ponzi scheme claims

FAQs about NFTs

What is the difference between fungible and nonfungible tokens?

Fungible tokens are identical in value, and they are interchangeable. Nonfungible tokens (NFTs) represent something unique, can differ in value, and are noninterchangeable due to their individual distinct attributes.

Do I need a specific wallet to use NFTs?

One does not need a specific NFT wallet. Since NFTs use the Ethereum blockchain, most Ethereum wallets will work. However, the recommended wallets are MetaMask, Math Wallet, AlphaWallet Coinbase Wallet, or Trust Wallet. These two crypto wallets support a wide variety of blockchains.

Should I invest in NFTs?

NFTs are “only as valuable as someone else is willing to pay for it” and this makes it inherently risky to invest a large portion of one’s portfolio. If you want to invest in NFTs, there are a lot of factors to take into consideration. Primary factors are (a) How much money are you willing to risk, (b) How long can you wait without profit, and (c) the purchase fee which can be very high. It is recommended to do it in a risk-free way by putting in only what you are willing to lose.

What can an NFT be or represent?

NFT can represent a piece of digital art, a song, a 3d Model of something, a poem, or a baseball card.

What Is Minting an NFT?

Minting an NFT is the act of publishing your token on the blockchain to make it purchasable. Minting can either refer to the creation process of an NFT or the purchase of an NFT o its release date. In both cases, minting is always a recorded transaction on the blockchain.

What blockchain should I use?

There are quite a few blockchains to choose from when minting an NFT. The Ethereum network was the first major blockchain to offer non-fungible tokens as we know them today. The list of NFT-compatible blockchains now includes BNB Chain, Polkadot, Tron, Tezos, and many more.

What Are Some Examples of Non-Fungible Tokens?

Non-fungible tokens can digitally represent any asset, including online-only assets like digital artwork and real assets such as real estate. Other examples of the assets that NFTs can represent include in-game items like avatars, digital and non-digital collectibles, domain names, and event tickets.

How do you pronounce NFT?

Almost everyone spells it out, saying “en eff tee.” The brave call them “nefts.” The enlightened have never had the word cross their lips.

How Can I Buy NFTs?

Many NFTs can only be purchased with Ether, so owning some of this cryptocurrency—and storing it in a digital wallet—is usually the first step. You can then purchase NFTs via any of the online NFT marketplaces, including OpenSea, Rarible, and SuperRare.

Are NFTs Safe?

Non-fungible tokens, which use blockchain technology just like cryptocurrency, are generally secure. The distributed nature of blockchains makes NFTs difficult (although not impossible) to hack. One security risk for NFTs is that you could lose access to your non-fungible token if the platform hosting the NFT goes out of business.

What Does Non-Fungible Mean?

Fungibility is an economic term that describes the interchangeability of certain goods. For example, a barrel of oil is fungible (interchangeable/indistinguishable) from any other barrel of oil. A dollar bill, likewise, is equal to any other dollar bill (or 4 quarters, etc.). Non-fungible is to render such items unique or distinguishable. For instance, if you were to take a dollar bill and have it drawn on and signed by a famous artist, it become unique – unlike all other dollar bills, and perhaps worth more than its face value.

How do I see if an NFT is Off-Chain?

To check if an NFT is on-chain or off-chain, you’ll need access to MetaMask, OpenSea, and Etherscan. For MetaMask, open your wallet and click on “NFTs”. If you don’t see this option, check out how to toggle NFT visibility on MetaMask. Select the NFT you want to review and click the link opposite “Asset Contract.” You’ll automatically be taken to Etherscan.

For OpenSea, open the webpage for the NFT you want to review and click on the “Details” section. This will take you to Etherscan. Once you’ve opened Etherscan, head to the “Contract” tab below the “Contract Overview” box. Click “Read Contract” from here and scroll to “tokenURI.” This will create a dropdown box where you can enter the token ID. This can be found in the name of your NFT. If a link appears, the artwork is stored off-chain.

References

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  2. Baker, H. K., Nikbakht, E., & Smith, S. S. (Eds.). (2021). The Emerald Handbook of Blockchain for Business. Emerald Publishing Limited.
  3. Boscovic, D. (2021). How nonfungible tokens work and where they get their value–a cryptocurrency expert explains NFTs. The Conversation. https://theconversation. com/how-nonfungible-tokens-work-and-where-they-get-their-value-a-cryptocurrency-expert-explains-nfts-157489.
  4. Shebaro, B. (2022). Teaching blockchain in security. Journal of Computing Sciences in Colleges, 37(7), 48-54.
  5. Oyelude, A. A. (2022). Trending issues in advancing blockchain technology in libraries, archives, and museums. Library Hi Tech News.
  6. Shah, M. Blockchains And NFTs In Identification And Security Protocols, https://www.forbes.com/sites/forbestechcouncil/2022/02/23/blockchains-and-nfts-in-identification-and-security-protocols/?sh=3ed093c414fc, Feb 23, 2022,08:30am EST
  7. Zafar, T.  Blockchain, NFTs and the New Standard for Identity and Security – Role of Blockchain and NFT in security and identity. https://www.entrepreneur.com/money-finance/blockchain-nfts-and-the-new-standard-for-identity-and/403417. January 4, 2022
  8. Zenon. The New NFT Standard: when cryptography meets steganography. https://medium.com/@zenon.network/the-new-nft-standard-when-cryptography-meets-steganography-9e356007dcaa. May 7, 2022
  9. Avatao.com. NFT: Setting new security standards in blockchains. https://avatao.com/blog-nft-security/. June 8, 2022
  10. Binance Academy. How to Make Your Own NFTs. https://academy.binance.com/en/articles/how-to-make-your-own-nfts?utm_campaign=googleadsxacademy&utm_source=googleadwords_int&utm_medium=cpc&ref=HDYAHEES&gclid=Cj0KCQjw4omaBhDqARIsADXULuWasb1h-W8i_FlfuCaXnOwW1Za-bNjdRK9scbGJ58Wu39DCRltlnmcaAjDYEALw_wcB. Published Apr 27, 2021. Updated Sep 23, 2022
  11. Sharma, R. Non-Fungible Token (NFT): What It Means and How It Works. https://www.investopedia.com/non-fungible-tokens-nft-5115211. June 22, 2022
  12. The Verge Mitchell Clark. NFTs, explained. https://www.theverge. com/22310188/nft-explainer-what-is-blockchain-crypto-artfaq.
  13. CLARK, M. NFTs, explained. https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq. Jun 6, 2022.
  14. Owen, Allison; Chase, Isabella (December 2, 2021). “NFTs: A New Frontier for Money Laundering?”. Royal United Services Institute. Retrieved January 16, 2022.
  15. Coco, Feng (December 2, 2021). “China’s market for NFTs, metaverse may drive money laundering”. South China Morning Post. Retrieved January 16, 2022.
  16. United Ceres College. (2022, August 30). On-chain and off-chain NFTs: How does that work? https://unitedceres.edu.sg/on-chain-and-off-chain-nfts-how-does-that-work/#:~:text=In%20order%20to%20save%20on,would%20incur%20less%20gas%20fees.
  17. Pastel (2022, September 15). On-Chain Vs. Off-Chain NFTs Explained. https://pastel.network/on-chain-vs-off-chain-nfts-explained/
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  2. Gailey, A. (2022, February 14). 3 Experts Explain Why NFTs Are So Popular, and What They Mean for Crypto Investors. NextAdvisor. https://time.com/nextadvisor/investing/cryptocurrency/are-nfts-good-investment/
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