NFTs are a relatively new technology, and in the past year, have received a lot of mainstream attention, from Beeple’s EVERYDAYS: THE FIRST 5000 DAYS being sold at a Christie’s auction for USD 69,346,250 on March 11, 2021, to Saturday Night Live selling a clip from their “What the hell’s an NFT?” skit as an NFT for about USD 365,000. Outside of cryptocurrency enthusiasts, starving artists, and those “in the know”, most people are unsure what to make of this new phenomenon. Today we will be discussing the most commonly searched “how” questions people have on the Google search engine.
How do NFTs work?
“how nfts work/how nfts works/how nfts work reddit”
NFT stands for Nun-Fungible Token and represents a data unit on a blockchain certifying a digital asset to be unique and not interchangeable. Blockchain technology uses a distributed ledger of transactions that is duplicated and distributed across a network of computer systems. In more basic terms, all of the computers, called nodes, share a receipt of transactions, and ownership of an item can be verified by referencing the “block”, or chunk of permanently recorded data, in which it was created or bought.
Most NFTs are currently found on the Ethereum blockchain and adhere to the ERC-721 standard. The ERC part of this stands for “Ethereum Request for Comment”, and you may recognize this prefix from ERC-20, which is the standard used for tradeable tokens such as Chainlink or Uniswap. A request for comment represents the technical standard and list of rules for interacting with a particular technology, in this case, Ethereum.
The numbers in these cases(20 and 721) are just identifiers. In the same way, an Xbox 360 did not imply the existence of 359 others, but rather a different version with attempted improvements. Four of the most popular standards can be found on OpenZeppelin’s GitHub. ERC-777 tokens use authorized operators to address the “approve contract” bottleneck ERC-20s have struggled with. ERC-1155 is used for multi-token purposes and has the potential to drastically decrease transaction costs by bundling transactions. This process claims to remove redundancies, and provide a high level of security for holders. It also allows for the minting of multi-token assets that change when a contract is executed, i.e. a loot box that could have a few different things inside, but will only calculate which when it’s opened.
TLDR: NFTs use blockchain protocols, such as ERC-721 or ERC-1155, to prove uniqueness, authenticity, and exclusive ownership rights. They are digital collector’s items, and the owner or creator can store information inside.
How do NFTs impact the environment?
“how nfts are bad for the environment/how nfts affect the environment/how nfts ruin the environment”
NFTs can be minted and traded on other blockchains, such as Flow or Tezos, but to answer this question, we have to focus on the most popularly used blockchain, Ethereum. The Ethereum network is currently a Proof of Work(PoW) blockchain, that relies on miners using advanced cryptography to verify transactions, in exchange for rewards doled out in its native token, Ethereum(ETH). Ethereum is currently undergoing a gradual transition toward a more energy-efficient Proof of Stake(PoS) algorithm called Casper. It is also commonly referred to as Ethereum 2.0.
In the near term, however, the existing network has a substantial carbon footprint, and while it’s hard to estimate how much of this is due to NFTs themselves, the correlations are hard to ignore.
Energy usage is definitely a prime concern within the Ethereum community, and while it represents a nearly 13 times more efficient network per transaction than Bitcoin, this is one of the reasons that the Casper migration is highly anticipated. For the more environmentally conscious artist, it might be a better decision to postpone blockchain permanence until it’s completed.
How are NFTs minted?
“how nfts are created/how nfts are minted”
Creating, or “minting”, an NFT is done by simply deploying a contract to a blockchain with one of the previously mentioned protocols, or something similar. This process is usually done in one of two ways, depending on coding expertise. More ambitious blockchain developers will want to head into the respective repository, add in the respective files or information, and deploy it to the Ethereum main net using Ethereum from their wallet. From there, exchanges will usually be able to find the NFT when the wallet is connected to their site.
For anyone that finds that checklist intimidating, most exchange sites also offer overlays to mint that can be connected to a digital wallet, like MetaMask. One of the most popular NFT marketplaces, OpenSea, uses a process called “lazy minting”, where an NFT is only minted once it is offered for auction or sold. This helps mitigate the in-between transactions and fees. Currently, after a one-time initialization transaction, fees are only paid when accepting an auction bid or purchasing a fixed-price NFT.
What’s the big deal?
“how nfts will change the world”
Most people do not have a complete, in-depth understanding of the inner workings of the internet or contract law. Yet, they are still able to communicate via email or Facebook. They sign contracts when buying a home. Cryptocurrencies were originally pioneered to prevent the need for intermediaries to verify transactions. NFTs have the potential to provide a similar service for one-of-a-kind assets.
We are still very early in the development stages, and deterrents like sustainability and gas fees are actively being addressed by the Ethereum community. Other blockchains like Cardano have plans to introduce NFTs to their ecosystems as well. NFTs could be used to verify qualifications from educational institutions or prove a claim on a particular plot of land. NFTs are already being used to verify ownership over a “virtual world” in games like Decentraland. The implications of this type of commerce could easily extend to the outside world if more institutions continue to accept cryptocurrencies as payment.
Thank You
for reading my first Medium post. Hopefully, this article helped expand your understanding of NFTs and the NFT ecosystem. I plan to revisit even more NFT questions in the second installment so feel free to reach out if you have any you would like answered. I can be reached at CyderNFT on Twitter, or via email at cydernft@gmail.com.
