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CoinEx Research: Do You Really Know What an NFT Is and How It Works?

2021-08-16 09:17:25

The NFT has exploded in popularity since early 2021. The hot word even set the trend for the entire blockchain industry. At the end of last month, Alibaba and Dunhuang Fine Arts Research Institute jointly launched an NFT skin. All copies of the skin were sold out upon release. As it is known to more people, the NFT starts to attract increasing attention.

What is an NFT?

Before we get to know the NFT, we need to understand what an FT is. The FT stands for the “fungible token”. A fungible token is a token replaceable with another one identical to it, which resembles the real-world legal currency and is easy to transfer and circulate. Therefore, the FT is also called the “on-chain currency”. It could be the native token of a blockchain, such as BTC and ETH. It may also serve as the contract token on a public chain, like ERC20 tokens on Ethereum. An FT is characterized by fungibility and divisibility. Fungibility means that, for example, 100 BTC in your hand can be replaced by 100 BTC from any other person. Divisibility means that 5 BTC can be split into 10 units of 0.5 BTC.

The NFT stands for “non-fungible token”, which is unique and indivisible with exclusive ownership. It can be used to represent the ownership of a physical item of actual value in the real world. Specifically, the NFT supports the on-chain ownership recognition, circulation, and transaction of many things: housing ownership certificates, artworks (like albums and paintings), game props, concert tickets, insurance policies, contracts, domain names, credentials of various sorts, to name only a few. The NFT is designed to convert real-world assets into on-chain assets. There are two purposes for doing so. One is to recognize the ownership of assets using blockchain technology. The other is decentralization, which will let both buyers and sellers keep the maximum profits from asset transactions.

Why do NFTs exist?

Here are examples from three industries.In the game industry, the equipment and props of traditional games are owned by game companies. In other words, players have only the right to use rather than ownership. In the world of blockchain games, game props are made into NFTs, which can be owned by players. Even if blockchain game servers stop working in the future, players will still be able to own and trade their NFT game assets.

In the field of art collectibles, converting artworks into NFTs allows artists to own the copyrights of such works without having to rely on third parties. The absence of intermediaries helps artists make more profits. Buyers can ensure that the artworks they purchase are authentic rather than pirated or counterfeit. By empowering the art industry, NFTs make it easier for artists to create and trade artworks and earn royalties from NFT sales. In the field of art collectibles, converting artworks into NFTs allows artists to own the copyrights of such works without having to rely on third parties. The absence of intermediaries helps artists make more profits. Buyers can ensure that the artworks they purchase are authentic rather than pirated or counterfeit. By empowering the art industry, NFTs make it easier for artists to create and trade artworks and earn royalties from NFT sales.

Explore the origin of NFTs

The growth of NFTs can be divided into four stages, that is, the embryonic stage, budding stage, growth stage, and the ongoing stage of explosive expansion.

2012: Embryonic stage

The first NFT-like token “Colored Coin” was born in 2012. Colored Coin is composed of small units of Bitcoins, with the smallest unit being one Satoshi (the smallest unit of Bitcoin). It can represent multiple assets and have multiple uses, including property, coupons, and issuance of company shares. The appearance of Colored Coin demonstrates the feasibility and potential of the operation—putting real-world assets on the blockchain, which has laid the foundation for the subsequent development of NFTs.

2014-2016: budding stage

This stage witnessed the emergency of some projects such as Counterparty, Spells of Genesis, Force of Will, and Counterparty Rare Pepes. These projects are basically attempting to put game assets such as game cards and meme tokens on blockchains. Meme represents a trendy culture that can be widely spread among people. Two examples of the culture are the Dogecoin logo and the quotes of Wang Sicong that have recently gone viral. During this stage, NFTs started to grow at an accelerated pace.

2017: growth stage

CryptoPunks and CryptoKitties made their debuts in the 2017 bull market, making the NFT a household name overnight.

CryptoKitties is the earliest blockchain cat-raising game.

CryptoPunks is inspired by the London punk movement in the 1970s. It embodies a rebellious and uninhibited spirit, something like the non-mainstream culture that spread extensively in China for a period of time.

CryptoPunks has a total of 10,000 unique NFT collectible characters. Originally, they could be claimed for free by anyone with an Ethereum wallet, so all 10,000 were quickly claimed. People later began to trade these NFT characters, creating a thriving secondary market for CryptoPunks.

A Crptokitty named Dragon was sold for a whopping 600 ETH or about $270,000 at that time.

Since 2018: stage of explosive expansion

Various projects have sprung up across different niche markets. Meanwhile, infrastructure and trading platforms are also striving to grow larger and stronger. (See the figure below)

What can we do with NFTs?

NFT + blind box

What is the correct way to open an NFT blind box? Just not to open it! Why is that? If buying an NFT blind box brings you a piece of happiness, then it is equivalent to getting a second piece of happiness after opening it to find a big prize there. However, the second piece of happiness is not something everyone can get equally. Instead, it happens by chance. In this sense, NFT blind boxes are like a game. CROSS pioneered an option of “re-auction”, where buyers could choose not to open their blind boxes and to re-auction them. The mystique of these boxes will further push up the sale prices of NFTs and allow buyers to obtain higher profits. By analogy, any auctioned NFTs can be circulated in this way and see their prices skyrocketing. The NFT economy will, therefore, enter a virtuous circle internally, which helps NFT products gain continuing popularity.

Here are three examples of how to combine NFTs with Defi.

NFT + staking: MEME tokens. With NFTs and staking combined together, users who buy MEME coins from Uniswap and pledge them on the NFT Farm can harvest pineapple points every day. When pineapple points are accumulated to a certain amount, they can be used to exchange for NFT collection cards, which users may either collect or sell on the NFT trading platform.

NFT + yield mining: CryptoWine. By combining NFTs with yield mining, projects like CryptoWine allow users to obtain NFTs by participating in yield mining activities that are embedded with the governance tokens of the project (GRAP) and then sell them on the NFT trading platform in exchange for yields.

NFT + lending: NFTfi project. Borrowers can put any ERC-721 token (NFT asset) for collateralization, and other users can provide loans on demand. If a borrower accepts a loan, the wETH and DAI get paid out from the lender’s account to the borrower’s, and the NFT asset of the borrower is locked in the NFTfi smart contract until the borrower pays off the loan. If the borrower fails to pay off the loan before the due date, the NFT asset will be transferred to the lender.

Other things we can do with NFTs

NFTs can be airdropped. Take the aforementioned CryptoPunks for example. The issuer sent out all the NFTs in the form of airdrop as a move to give back to the community.Users can buy NFTs of a project to become eligible to participate in an initial dex offering (IDO) of the project. For instance, ChainGuardians, a project that has recently wrapped up its IDO requires users to buy the NFTs issued by themselves if they want to get the eligibility for participating in IDO of its governance tokens named “CGG”.NFTs can also be tokenized. The NFTX project is a case in point. Users who stake various NFTs to create corresponding ERC20 tokens can create trading pairs on decentralized exchanges (DEX) such as Uniswap where their ERC20 tokens are traded. Similarly, ERC20 tokens can be used to redeem their staked NFTs.Things we can do with NFTs are by no means limited to these listed above. It is believed that there are more possibilities around the corner. 

Tips on NFT trading

NFT trading platforms are now growing in number, with each having its respective merits. For ordinary players, the largest marketplace for NFTs OpenSea can basically meet all sorts of needs. As an established artist, you may want to create artworks at Makersplace and SuperRare. If you are an amateur artist, Rarible proves to be one of the best marketplaces where you can create and sell your NFT products.

Here are a few tips for everyone interested in NFTs. 

  1. First, you need to keep abreast of the basics of NFTs, such as NFT issuance plans and design mechanisms, the quantity of NFTs a project intends to issue and the initial price of such NFTs, the aesthetic value of NFT designs, and whether NFTs can be upgraded or destroyed or not, if they are game equipment.
  2. Second, you will assess whether the project and its team are reliable. Specifically, by visiting the official website of the project, viewing the team introduction, and browsing their accounts on such platforms as Twitter and Discord, you may collect the basic information about the project and its team, and find out whether they have the required experience and quality partners.
  3. Third, you are advised to observe the activity of the project’s community. By joining its official group in Telegram anonymously, you will learn about not only the number of fans but also how often they chat. NFTs are heavily dependent on market activity.
  4. Finally, you should keep an eye on the amounts of NFTs traded and their transaction fees. Assuming an NFT is initially priced at 0.05 ETH and the transaction fee for one transfer is 0.05 ETH, you cannot break even unless the NFT is sold at twice the initial price or higher. In this case, it can be said that buying means losing money. Additionally, if you are technologically savvy, test the smart contract address issued by the NFT project and use some trading data to judge whether transactions of the project are in strong demand.

Be cautious when trading NFTs

“In the face of new things, the best policy is to ensure neither directly denying them nor making an all-or-nothing bet.”

NFTs are now all the rage. For ordinary users, investing in NFTs requires high professionalism and extreme market sensitivity. Since the NFT itself is an emerging technology in the blockchain industry, its value gets affected by many factors so easily that it is difficult to be defined. Besides, NFT trading marketplaces are also facing a series of challenges, such as poor liquidity, difficulty in finding valuable NFTs, and the existence of contra trade (an act where two persons intending to intervene in the stock market plot together and disguise themselves as the seller and buyer to conclude a transaction by sending trading instructions to one securities broker or two different ones with the type, price, and quantity of traded securities agreed upon in advance). The value of NFTs still needs to be tested by the market, so investors should avoid blindly following the recent positive market momentum.

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