Everything About Non-Fungible Tokens (NFTs)

Understanding the Core of NFTs

The Nature of Digital Assets and Uniqueness

In today's digital era, one of the most fundamental characteristics of digital content is its ease of replication. Anyone familiar with computers knows that copying digital content is as simple as selecting text and pressing 'Ctrl C + Ctrl V' on the keyboard. This applies not only to text but also to images, audio, and video files - essentially all digital formats can be duplicated effortlessly.

This ease of replication leads to a significant consequence: digital content becomes abundant and loses its uniqueness. When something can be copied infinitely, it becomes difficult to maintain its value or establish scarcity. This fundamental property of digital content has long posed challenges for creators and collectors who seek to establish ownership and value in the digital realm.

Why NFTs Have Gained Attention

You may have encountered news stories about digital artworks selling for millions of dollars as NFTs. These pieces are often simple digital images that can be easily copied and pasted. So why would anyone pay such substantial amounts for them?

Consider the example of Beeple's "EVERYDAYS: THE FIRST 5000 DAYS," which sold for $69 million. The key to understanding this lies in recognizing what an NFT actually represents. An NFT is not the digital image itself, but rather a digital certificate of authenticity and ownership. It's comparable to a property deed in real estate - you're not buying the physical building, but the legal right to claim ownership of that specific property.

When someone purchases an NFT, they are acquiring the rights to the original creation, not just a copy of the image. This concept of "original traceability" is crucial. Even before the advent of NFTs, art collectors were essentially purchasing the provenance and authenticity of artworks rather than just the physical objects themselves.

Take the Mona Lisa as an example. While numerous copies and forgeries exist, the authentic painting in the Louvre Museum is invaluable. What makes it genuine is not just its appearance, but its documented history - the traceable path from Leonardo da Vinci's hands through various owners to its current location. This historical record, or provenance, is what establishes its authenticity and value.

How NFTs Prove Original Traceability

The most widely used NFT standard is the ERC-721 format on the Ethereum blockchain. This technology allows creators to mint digital media (images, text, audio, video) as NFTs and store them on the blockchain. The blockchain records crucial information: when the NFT was created, who created it, and every subsequent transfer of ownership. This immutable record provides the proof of original traceability, making NFTs a revolutionary solution for establishing digital ownership and authenticity.

The blockchain acts as a permanent, transparent ledger that anyone can verify, eliminating the need for centralized authorities or intermediaries to authenticate digital assets. This decentralized verification system is what gives NFTs their power and has driven their adoption across various industries.

How NFTs Work and Where They Are Stored

As explained earlier, an NFT is essentially a digital certificate of ownership rather than the media file itself. The certificate is recorded on the blockchain, but this raises an important question: where is the actual media file stored?

While it's technically possible to store media files directly on the blockchain, this approach is often impractical due to the high costs associated with blockchain storage. Gas fees are calculated based on the amount of data stored, and large media files would incur substantial expenses. To address this challenge, most NFT projects utilize alternative storage solutions.

The most common approach involves storing the actual media files on IPFS (InterPlanetary File System), a peer-to-peer distributed storage network. The NFT on the blockchain then contains a reference or link to the IPFS location where the file is stored. This hybrid approach combines the security and immutability of blockchain technology with the cost-effectiveness and efficiency of distributed storage systems.

It's important to note that IPFS is not a blockchain itself, but rather a decentralized file storage system designed to prevent data loss and hacking through its distributed architecture. However, this setup introduces a potential vulnerability: if the IPFS network storing your NFT's media file experiences issues or is compromised, you might lose access to the actual content, even though your ownership record on the blockchain remains intact. This is why choosing reputable NFT platforms and storage solutions is crucial for collectors and creators.

Characteristics of NFT Trading

Since the early 2020s, numerous NFT marketplaces have emerged to facilitate the buying and selling of non-fungible tokens. Some of the most prominent platforms include Blur, OpenSea, Rarible, CryptoSlam, AtomicAssets, and SuperRare. These platforms provide venues for collectors and creators to engage in NFT transactions through various mechanisms.

The trading process on these marketplaces closely resembles traditional art auctions. NFT holders can list their tokens on the platform, and interested buyers can place bids. The highest bidder or the first person to meet the seller's asking price (in the case of fixed-price listings) acquires the NFT. This auction-style mechanism helps establish market value through supply and demand dynamics.

However, this trading model presents certain limitations. Like physical art markets, NFT markets can suffer from low liquidity. Not every NFT finds a buyer easily, and sellers may need to wait considerable time to find interested parties willing to pay their desired price. This illiquidity is a natural consequence of the unique, non-fungible nature of these assets - each NFT is distinct, making it harder to establish standardized pricing or facilitate rapid trading.

Can NFTs Be Traded Like Regular Tokens? The ERC-404 Innovation

The unique nature of NFTs, while providing authenticity and scarcity, also creates challenges in terms of market liquidity. In traditional markets, unique items like art pieces are difficult to buy and sell quickly because they require specific buyers who appreciate their particular value. In cryptocurrency terms, these are "low liquidity assets."

Recently, an innovative concept has emerged to address this limitation: the ERC-404 standard. This experimental token standard attempts to combine the characteristics of fungible tokens (like regular cryptocurrencies) with non-fungible tokens, creating a hybrid that could potentially increase market liquidity while maintaining uniqueness.

To understand this concept, consider the real estate market analogy. Typically, buying an apartment requires physically visiting and inspecting the property. However, for high-end, standardized apartment buildings with consistent quality and specifications, buyers sometimes make purchases based solely on the brand name and location without physical inspection. This is common among international real estate investors who buy properties in foreign markets.

While the NFT market hasn't yet developed such standardized, high-value brands that enable blind trading, the potential exists. As Web3 technologies become more prevalent and the metaverse expands, we may see the emergence of NFT collections or digital assets that provide consistent utility and value, making them more fungible and tradeable. The ERC-404 standard represents an early attempt to enable this kind of enhanced liquidity while preserving the unique characteristics that make NFTs valuable.

Understanding the fundamental principles of NFTs - their purpose, mechanics, and limitations - is essential for recognizing future innovations and investment opportunities in this evolving space. As the technology matures and new use cases emerge, the core concepts of digital ownership, provenance, and scarcity will remain central to the value proposition of non-fungible tokens.

FAQ

What is NFT (Non-Fungible Token)? How does it differ from Bitcoin and Ethereum?

NFT is a unique blockchain-based digital asset where each token is non-interchangeable with distinct identifiers. Unlike Bitcoin and Ethereum which are fungible and used as currency, NFTs represent ownership of specific digital items and cannot be divided or replaced one-for-one.

What are the practical applications of NFTs? Why should digital art, game assets, and virtual collectibles use NFTs?

NFTs provide verifiable ownership records on blockchain. Digital art gains authenticity and ownership proof. Game assets become tradable player property. Virtual collectibles achieve scarcity and uniqueness, ensuring transparent, immutable ownership that traditional digital methods cannot provide.

How to buy and trade NFTs? What are the main NFT trading platforms?

To buy and trade NFTs, connect your wallet to platforms like OpenSea, Magic Eden, Rarible, and Blur. Browse collections, place bids or buy directly, then complete transactions. Each platform offers different features and blockchain support for diverse trading needs.

What are the risks of buying NFTs? How to identify scams and counterfeit NFT projects?

NFT risks include phishing attacks, fake marketplaces, and rug pulls. Identify scams by verifying platform legitimacy, checking project transparency, reviewing team credentials, and avoiding suspicious links or unrealistic promises.

How is the value of NFTs determined? Why can some NFTs sell for astronomical prices?

NFT value is determined by market demand, artist reputation, scarcity, and uniqueness. High-profile NFTs command premium prices due to limited supply, celebrity ownership, cultural significance, and strong community support driving competitive bidding.

NFT未来的发展前景如何？它会成为主流资产吗？

NFT前景广阔。随着实物上链、品牌赋能等发展趋势，NFT正与实体经济结合，逐步成为主流资产。下一轮牛市中，具有实际应用价值的NFT项目将获得更大增长。