Understand NFT (non-homogeneous token) in one article

The full name of NFT is non-homogeneous pass, which is a digital pass on the blockchain. Each pass has a unique subject matter, such as digital artwork, special game items, rare card collections or any other unique digital/physical assets.

NFT is the latest emerging blockchain asset, surpassing the scope of cryptocurrency, stablecoin, governance token and utility token, providing users with brand-new digital assets, and innovating ownership and distribution models. ‍

This article will explore the definition of NFT, the rapid development of the NFT collection economy, and the different NFT types including artwork and games. In addition, the article will explore the importance of verifiable random numbers to create dynamic digital collections and ensure their rarity can be verified.

"Homogeneity" means that each asset is the same, interchangeable and divisible. The homogeneous assets we use in our daily life include US dollars, bitcoins , and credits issued by companies. And "non-homogeneous assets" means that each asset is unique and completely independent of each other. For example, real estate is a non-homogeneous asset. The layout, area, location, land use planning, public facilities and valuation of each real estate are different, so they are unique. ‍

Non-homogeneous tokens (hereinafter referred to as NFT) have further expanded the concept of "non-homogeneous", using blockchain networks such as Ethereum to represent unique physical or digital assets. The ownership of NFT is verified and traced through the public blockchain network, and users can verify the authenticity of each NFT and track the source. Therefore, the true definition of NFT should be: the "certificate of authenticity" issued by the original creator on the blockchain, which uses encryption technology to prove that the holder of the NFT is the real owner of the official underlying asset. ‍

NFT has many values, such as allowing artists to realize their works of art, creating verifiably scarce game items for games, creating a digital collection ecology, and tokenizing assets in the real world to improve liquidity and more.

After the release of CryptoKitties in 2017, NFT entered the public eye for the first time. EtherKitties is a decentralized application released on Ethereum. Users can breed and collect various electronic cats in the game. However, in 2021, NFT became popular again, this time attracting many collectors and artists. ‍

Most homogeneous tokens adopt the ERC20 standard, while NFT usually adopts the ERC721 standard. ERC721 is a templated smart contract that specifies how NFT interacts with other smart contracts and users. The ERC721 standard has accelerated the development and release process of new NFTs, and has spawned various NFT trading markets such as Rarible , OpenSea, and SuperRare. In the NFT market, users can easily hang out and trade NFTs, which greatly promotes the development of the NFT ecosystem. The volume of NFT transactions in these markets continues to rise, accumulating more than 100,000 active users as of this writing, with monthly transaction volume exceeding $1 billion.

OpenSea (NFT trading market) has seen a significant increase in trading volume in recent months, with daily trading volume exceeding $60 million (source)

The recovery of the NFT market is like a "Cambrian explosion of life", giving birth to various unique applications. These applications exploit the innovative potential of NFTs, often with the goal of improving the efficiency of asset ownership transfers, reducing reliance on intermediaries and preserving as much value as possible to authors and markets. However, NFT is still in the early stages of development, so innovative developers, talented artists, and traditional institutions have many opportunities to issue their own NFT assets on the chain.

NFT can provide a flexible framework, use the blockchain network to track the ownership of various digital and physical assets, and enrich the functions of assets through various innovative mechanisms. Use cases for NFT are emerging, and a few common use cases will be shared below.

Digital artwork NFT

The most talked about NFT use case is the ownership of digital artwork tokens. Artists can turn their works into tokens and monetize them, and potential customers in various markets around the world can purchase these works simply by connecting to the Internet. The traditional art market usually lacks transparency and is full of various intermediaries to extract value from it. Not only the purchase threshold is high, but also a large intermediary fee must be paid. In contrast, NFT can be linked to an online trading market that can be accessed from anywhere, and entry does not require permission. Plus, all secondary market revenue goes into the pockets of creators. ‍

The most well-known NFT artwork is "Everydays: The First 5000 Days" (Everydays: The First 5000 Days) by digital artist Beeple. The work is a collection of 5,000 photographs taken by Beeple over the past 13 years. This work was made into an NFT and published on Ethereum, and sold for a high price of more than 69 million US dollars. Beeple adopts the common ERC721 token standard to directly realize the digital artwork, and proves that the NFT is genuine through encryption technology. In addition to this work, thousands of different NFT art collections have been issued and sold around the world.

Game NFT

NFT is the basis of blockchain games, which can pass, track and transfer unique game items without custody. Publishers of traditional online games are usually centralized entities. They completely control the distribution, ownership and attributes of game items. These attributes often determine the value of game characters and game results. If the publisher of the game goes out of business, users lose all of their in-game assets, which they may have spent hours, days, weeks, or even longer to accumulate. ‍

NFT not only guarantees that users have full control over their game items, but also enables a new gaming experience. For example, distribute random NFT rewards in blockchain games, and create interoperable metaverses, in which items from one game can be used and traded in another game. Not only that, NFT also promotes the development of the P2E (play-to-earn) model. Users can harvest rare NFTs in the game and sell them to other players, so as to realize the time and energy they have invested in the game . ‍

Axie Infinity is one such NFT-based blockchain game. The game creates a Pokemon world inhabited by fantasy creatures called "Axie". Each Axie is bound to an NFT, which contains metadata such as character attributes, appearance, and ownership. Chainlink VRF will provide verifiable random numbers for the game, and issue verifiably scarce Axie elves (such as Quad Mystic) in a fair and verifiable way, which can make the game experience in the Axie world richer and more interesting.

NFT collection

NFT is essentially the same as collecting physical cards or stamp collections, and will give birth to a new type of digital collection. Collectors can buy digital items they find valuable, or show support for a company, brand, game or artist. Physical collections are slow to ship and expensive to maintain. In contrast, NFT has no restrictions in these aspects. NFTs are digital collectibles that change hands in seconds and never depreciate. ‍

Currently the hottest NFT series is CryptoPunks , which contains 10,000 unique pixel-style characters. These NFTs are algorithmically generated, so no two NFTs are exactly alike. CryptoPunks are the first batch of NFTs to appear and are distributed to users for free. This project continues to attract a large number of users who want to witness the history of early NFT development. ‍

NFT collections are increasingly being used as account avatars on social media platforms such as Twitter and Discord. Doing so also conveys a strong signal, allowing like-minded people to show their personal style through NFT and find their own group. It is worth mentioning that since NFT is stored on the blockchain, users can use encryption technology to prove to others that they really own the picture in the avatar.

Music album NFT

Blockchain gives musicians the opportunity to turn their creations into NFTs as a way to boost revenue and build their fanbase. Since the outbreak of the epidemic, the music industry's revenue has fallen by 85%, so generating income through NFT can allow artists to make up for the losses caused by the epidemic, and at the same time provide fans with special benefits, such as access to limited edition souvenirs or even one-on-one communication with artists. ‍

Musicians such as 3LAU, Kings of Leon, Shepard Fairey, and Eminem have all released their own NFT albums and earned millions of dollars. Therefore, NFT provides a more innovative and interactive way for artists to give back to fans, and more effectively helps artists expand their fan base.

Real estate NFT

NFTs can also represent ownership of real-world assets such as real estate and inject more liquidity into these fragmented markets. Representing real-world assets with tokens can greatly improve the efficiency of ownership transfer, and provide an authoritative source of facts to verify the authenticity of personal qualifications and assets. In addition, we can also turn other real-world assets into tokens, such as paintings, government documents, warrants, and degree certificates. ‍

While the tokenization of real-world assets is still in its early stages of development, it has enormous application potential. For example, using rent as collateral to issue real estate certificates, and issuing digital certificates without matching any physical documents. In addition, records such as degree certificates and intellectual property contracts can be digitized to increase transparency and create new automation processes.

The significance of verifiable random numbers to NFT

A unique digital artwork NFT can pre-set all attributes before going to the chain, but there are also many NFTs that need to be connected to a random number generator (RNG) to determine their rarity. Examples of the application of random numbers to NFTs include: randomly assigning attributes to NFT artworks, determining the location of NFT treasure boxes in games, and ensuring the fairness of popular limited-edition NFT airdrops. ‍

However, if the source of random numbers is artificially manipulated, malicious actors may exploit loopholes for personal gain. For example, they might mint themselves the rarest NFT, or manipulate the lottery program to win a prize. This can have a serious impact on the value of NFTs, as users cannot verify that the properties and distribution of NFTs are truly random. Since smart contracts cannot generate secure random numbers on their own, sophisticated oracle solutions are required. ‍