Non-Fungible Tokens (NFTs) 101

Non-Fungible Tokens (NFTs) have captured the imaginations of collectors, investors, and tech enthusiasts alike, and if your interest in NFTs and blockchain technology is growing, you will want to learn more about NFT standards. However, before you read more, if you aren’t familiar with NFTs and want to learn more about them, we suggest starting with our NFT development article. This piece will give you the background information to understand some of the technicalities we cover in this post.

While investors and collectors are excited about the early popularity of digital collectibles, NFTs represent the future of blockchain technology. They will likely completely change the way digital content is created, distributed, and consumed. In addition, businesses will be able to use NFTs in several ways regarding Digital Rights Management (DRM).

Businesses must take the time to understand NFTs and their underlying standards to position themselves and make competitive business decisions. So let’s take a deeper dive into this exciting topic.

Understanding NFT Standards

The term standards describe the underlying principles that allow a technology to function seamlessly. NFT standards describe how to build Non-Fungible Tokens on a particular blockchain protocol. Ethereum was the first blockchain protocol to create and launch NFTs.

Today, Ethereum is still the most widely used blockchain platform for NFTs. However, Solana, Matic, and Flow are among many other blockchain platforms gaining ground on Ethereum in the NFT space. Experts believe that these blockchain platforms will overtake Ethereum shortly. While Ethereum is arguably the second most popular blockchain after Bitcoin, competitors will likely overtake Ethereum in the NFT market because of associated transaction fees.

Whether trading cryptocurrency or buying NFTs, all blockchain transactions have an associated transaction fee. In most cases, this transaction fee is insignificant. Ethereum transactions are processed in “gas.” “Gas” is linked to the price of Ethereum on the open market. The market price of Ethereum has risen astronomically since its creation. As a result, associated transaction fees on the Ethereum platform are becoming prohibitive for many creators, buyers, and investors.

Still, Ethereum remains the dominant force in NFT creation and sales. So let’s explore the top NFT standards driving the market currently.

Ethereum – ERC-721

ERC-721 is the token standard that started it all, and it remains the most popular, widely used NFT standard to this day. ERC-721 is a free, open token standard that describes how to build NFTs on the Ethereum platform. Every ERC-721 token is unique and can be priced independently of other tokens. For this reason, many digital artists choose to use ERC-721 tokens for their creations. Besides being unique, ERC-721 tokens cannot be destroyed or duplicated.

The ERC-721 token standard was developed to standardize NFTs. As a result, a new dawn of digital content, games, and applications has risen. Without the ERC-721 standard, the world wouldn’t have Decentraland or CryptoKitties.

Ethereum is one of the most popular blockchains globally. Therefore, it is only natural that there will be other NFT standards on the Ethereum blockchain that serve a wide range of purposes. Besides ERC-721, the other standards are used on the Ethereum blockchain. Let's review them.

ERC-20

The ERC-20 introduces a standard for Fungible Tokens, in other words, they have a property that makes each Token be exactly the same (in type and value) as another Token. So why do we discuss them here? Consider a game, where a player can by Healing Potions. These are not unique, as one can buy them as many as one desires. Yet, it still requires some management from the perspective of the game - hence, ERC-20.

ERC-998

ERC-998 tokens are non-fungible, just like ERC-721 tokens. However, ERC-998 tokens are composable as well. ERC-998 tokens can be organized into complex digital assets and valued, traded, or sold as one entity. The ERC-998 token standard can hold various Non-Fungible Tokens, like the ERC-721, and fungible tokens, such as the ERC-20. Think of the ERC-988 token as a unique portfolio of digital assets. People use these NFTs to organize their digital assets in a single place.

ERC-1155

ERC-1155 builds on previous work such as ERC-20 (utility tokens) and ERC-721 (rare one-time collectibles) and allow users to register fungible utility tokens and Non-Fungible Tokens in the same smart contract. So if you have fungible and non-fungible tokens, you can move them at the same time if ERC-1155 is your standard. Fungible tokens, such as in-game currency, are often used to purchase NFTs, such as in-game items and other digital collectibles.

But that's not all. As this token standard was written primarily with gaming in mind, in the NFT world, the ERC-1155 standard allows developers to create and identify different classes of asset. For example all the guns in a mobile game – to facilitate easy large volume trades. It’s becoming increasingly popular within the blockchain games space especially.

ERC-1155 includes optimizations that allow for more efficient and safer transactions. Transactions could be bundled together – thus reducing the cost of transferring tokens. The upside of this is that this will lower the congestion on the blockchain, and in turn gas fees! However, the downside of ERC-1155 is that you can’t have a transaction history.

Other standards

So we checked the main types of NFT standards, but these are not the only ones we have so far. For example, ERC-864 is an experimental standard that allows you to split the NFT ownership into smaller pieces. ERC-777 allows you to send tokens on behalf of other addresses. And if you want to ensure that your NFTs only go to a compatible address, you need the ERC-223 standard.

Final Thoughts

At the moment, Ethereum remains the dominant force in the NFT market. However, that is rapidly changing. Like all standardized ecosystems, the market will continue to evolve and new standards will be created accordingly. This process is absolutely essential for the market to grow in an orderly and efficient manner. What we don’t want to see is a tokenized recreation of analogue ‘format’ wars, such as when Betamax and VHS went head-to-head in the nascent days of home video.

Instead what we have is an established framework for the basic primitives of digital collectibles (ownership, access control). This give developers maximum creative freedom and consumers confidence in the items they buy and trade.

We’re still very early in the adoption curve of non-fungible digital collectibles. There’s no doubt we will see new platforms and NFT standards emerge which iterate from and optimize the existing architecture.

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