Analyzing NFTs: In-depth understanding of the concepts and principles of non-fungible tokens

Learn what NFT is in one article

1. What is NFT

NFT is the abbreviation of Non-Fungible Token. It is a digital asset based on blockchain technology. Each NFT has unique characteristics and identity. Unlike traditional cryptocurrencies, NFTs represent unique digital assets, such as artwork, music, game props, etc. By using smart contracts, NFT can ensure the authenticity, uniqueness and ownership of each asset. NFT has risen rapidly in recent years and has become a hot topic in the digital economy. In this article, we will discuss the definition, characteristics and applications of NFT, and give you a comprehensive understanding of what NFT is.

NFT stands for non-fungible token. Non-fungible is an economic term used to describe things that are not interchangeable, such as furniture, song files, or computers. These items have unique properties and therefore cannot be interchanged with other items.

Fungible items, on the other hand, can be exchanged because their value determines them, not their unique properties. For example, ETH or USD are fungible because they can be exchanged at the same rate.

2. How NFT works

NFT is different from ERC-20 tokens (such as DAI or LINK) because each NFT is unique and indivisible. NFTs give the ability to take ownership of specific digital data and track it through the Ethereum blockchain as a public ledger. NFTs can be viewed as representations of digital or non-digital assets, minted on digital objects.

Ownership of an NFT is managed through a unique ID and metadata that cannot be replicated with other tokens. The minting of NFTs occurs through smart contracts, which are responsible for assigning ownership and managing the transferability of the NFT. When someone creates or mints an NFT, they execute code stored in a smart contract that adheres to different standards. This information is added to the blockchain that governs the NFT. The minting process can be summarized into the following steps:

Create a new block Verify the information Record the information into the blockchain

NFT has some special properties:

Each minted Tokens all have a unique identifier that is directly linked to an Ethereum address. Unlike other tokens, they are not directly interchangeable 1:1. For example, 1 ETH is exactly the same as another ETH. However, this is not the case with NFTs. Every token has an owner, and this information is easily verified. They exist on Ethereum and can be bought and sold on any Ethereum-based NFT market.

3. Scarcity

The creator of NFT can decide the scarcity of its assets.

For example, consider tickets to a sporting event. Just as the organizer of an event can choose how many tickets to sell, the creator of an NFT can decide how many copies exist. Sometimes these are exact replicas, such as 5,000 general admission tickets. Sometimes several are minted that are very similar, but each one is slightly different, such as a ticket with an assigned seat. In another case, the creator may want to create an NFT where only one is minted as a special rare collectible.

In these cases, each NFT will still have a unique identifier (like the barcode on a traditional "ticket") and only one owner. The expected scarcity of an NFT is important and depends on the creator. The creator may intend for each NFT to be completely unique to create scarcity, or have a reason to produce thousands of copies. Remember, this information is public.

4. Minting NFT

When you mint an NFT, a few things must happen:

It needs to be confirmed as an asset on the blockchain. The owner's account balance must be updated to include the asset. This makes it possible for it to be traded or verifiably "owned". Transactions confirming the above need to be added to a block and "immortalized" on the chain. The block needs to be confirmed as "correct" by everyone in the network. This consensus eliminates the need for an intermediary because the network agrees that your NFT exists and belongs to you. It's on chain so anyone can check it. This is one of the ways Ethereum helps NFT creators maximize their returns.

All these tasks are completed by block producers and validators. Block proposers add your NFT transaction to a block and broadcast it to the rest of the network. Validators check that the transaction is valid and then add it to their database. There are many cryptoeconomic incentives to ensure that validators act honestly. Otherwise, anyone can claim they own the NFT you just minted and fraudulently transfer ownership.

5. NFT Security

The security of Ethereum comes from the proof of equity. The system is designed to economically inhibit malicious behavior and make Ethereum tamper-proof. This is what makes NFTs possible. Once the block containing your NFT transaction is finalized, an attacker will spend millions of ETH to change it. Dishonest tampering with an NFT can be immediately detected by anyone running Ethereum software, and perpetrators will be subject to financial penalties and deportation.

Security issues related to NFTs are often related to phishing scams, smart contract vulnerabilities, or user errors (such as inadvertently exposing private keys), so good wallet security is crucial for NFT owners.

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