NFT Research Report
NFT stands for non-fungible token, which is the digital asset that cannot be replaced by each other. On the contrary, FT (Fungible Token) tokens are mutually replaceable tokens. The well-known Ethereum ERC-20 tokens belong to the fungible tokens, while ERC-721 and ERC-1155 were born for NFT.
The difference between NFT and FT is whether they can replace each other and whether they can be split. If you compare with physical assets, NFT is a cultural relic, while FT is like a currency such as the USD.
1、History of NFT
Before 2017, the development of NFT was at a relatively primitive stage, and the industry mainly explored the issuance of unique digital assets on chain. In 2017, the first Ethereum-based NFT project CryptoPunks was born. In the same year, the explosion of the CryptoKitties game introduced NFT into the market. In this game, each cat is unique, and users can collect, trade, and breed crypto kits. The most popular crypto cat ever sold for a high price of US$100,000, causing attention in the market. At the same time, the smart contract standards ERC-721 and ERC-1155 for NFTs were launched, enabling assets to be traded across the ecosystem. Since 2018, art collection has occupied increasingly in the NFT ecosystem.
NFT is naturally digital and unique, combined with the non-fungible and traceable characteristics of the blockchain, it is very suitable for digital art. NFT lowers the threshold for participation in digital art. For example, users can make and sell their own NFT works on Rarible. It is easy to confirm the rights of digital art works on NFT. In the traditional art market, collectors often make a lot of money in the secondary market, but creators are still impoverished. Platforms such as SuperRare, Async Art, and RareArt all enable creators to get part of the sales proceeds from the secondary market, which can guarantee the creator’s income.
2、NFT issurance standard
(1) ERC721
Four developers William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs proposed the Ethereum improvement proposal EIP721 in January 2018, which defined the ERC721 standard.
This is how ERC721 is defined in EIP721. The ERC721 standard implements a standard API for NFT in smart contracts. The API defines a series of methods and events. For specific methods and events, please refer to the link:
https://docs. openzeppelin.com/contracts/3.x/api/token/erc721
ERC721 provides basic functions for tracking and transferring NFTs, including transferring tokens from one account to another, obtaining the current token balance of the account, obtaining the owner of a specific token, and the total supply of tokens available on the network. There are also some other functions, such as approving a third-party account to transfer the number of tokens in the account.
Each NFT token is marked with a unique token ID in the ERC721 contract, and it cannot be changed during the entire contract life cycle. Through the contract address and token ID, it can be ensured that each NFT is uniquely marked on the entire Ethereum blockchain.
(2) ERC1155
Another widely used NFT standard is ERC115.
ERC1155, pioneered by the Enjin team, brings the concept of semi-fungibility to the NFT world. In ERC1155, token ID does not represent a single asset, but an asset class. For example, a token ID represents “sword”, and a wallet address may have 1000 (1000 Copies) of such swords.
The difference between ERC721 and ERC1155 can be illustrated with the sword above. If the user wants to transfer 1000 swords, using ERC721, you need to call transferFrom 1000 times, while using ERC1155, you only need to call transferFrom 1000 times.
In one sentence: ERC20 maps the number of tokens to the owner, ERC721 maps the unique token ID to the owner, and ERC1155 is a nested mapping from token ID to owner and amount.
So what can NFT be used for? From the perspective of usage scenarios, NFT can be subdivided into many categories, such as tickets, certificate, identity, pet collection, card, game, artwork, virtual real estate, and many more.
3、Typical NFT projects
(1) Decentralized domain name:
It makes sense to own a domain name as an NFT. Recently, a domain name was sold at Unstoppable Domains for a high price of 230 ETH.
ENS is the most famous decentralized domain name service platform. ENS maps human-readable names to blockchain and non-blockchain resources, such as Ethereum addresses, IPFS hashes, or website URLs. ENS domain names can be bought and sold on the secondary market. Unstoppable Domains allows users to replace crypto-currency addresses with readable addresses and is resistant to censorship.
(2) NFT trading market
The nature of NFT allows you to bring them to any secondary market to trade. OpenSea is currently the world’s largest NFT trading platform. OpenSea was established in January 2018. Users can directly create NFT tokens in Opensea or put NFT tokens issued elsewhere on OpenSea.
Rarible is another popular NFT trading platform, which was established in 2020, but its innovation is that it released the governance token RARI on July 15, allowing the most active creators and collectors on Rarible to vote for any platform upgrade , And participate in management and review. In addition, in order to attract users, Rarible has also introduced a “market liquidity mining”, where 60% of the total 25 million tokens are distributed to users based on weekly purchases and sales.
(3) Game
CryptoKitties is the first blockchain game that adopts the ERC721 standard. It is a digital cat collection and breeding game based on blockchain technology. Players can buy, sell, and trade. Unlike traditional collectibles, players can also pass two Only CryptoKitties mate and reproduce, and a brand new CryptoKitty with a unique gene is born.
(4) Virtual world
Decentraland is a decentralized virtual reality platform based on Ethereum. It is issued with token MANA, which is fungible token. In Decentraland, users use the Decentraland token MANA to purchase LAND. LAND is identified by Cartesian coordinates (x, y). On LAND, users can create their own content, environment or applications. LAND on Decentraland is the NFT token, and of course it can also be traded.
(5) Collectibles
CryptoPunks are the first batch of NFTs issued on Ethereum. They are a set of 10,000-pixel cartoon collections.
Unisocks is a token issued by Uniswap for Uniswap in 2019, with an initial issuance of 500. When Uniswap issued coins, 1,000 UNI tokens were airdropped to each Unisock holder.
(6) DeFi+NFT
This is new and very interesting. Users can pledge tokens to earn NFT rewards, similar to “collecting”, but with assets of different value and rarity, which brings a brand new gameplay to traditional DeFi.
MEME is the first NFT to be introduced into DeFi liquidity mining. The source was originally a fictitious project by ConsenSys developer Jordan Lyal mocking DeFi liquidity mining. A few hours later, MEME tokens were created and airdropped for free. The gameplay is to pledge MEME to get pineapple points, which can be exchanged for a limited number of NFT collection cards, all drawn by famous crypto artists.
4、Closing remakrs
Since the NFT market has always been considered to be relatively niche and has the shortcomings of liquidity, since 2019, attempts to improve the liquidity of NFTs have begun to appear in the industry. By locking the NFT into the smart contract, the ERC20 token is generated, so that the NFT can be circulated in the market in the form of a fraction (Fraction) and at a cheaper price.
At the same time, the market has also begun to explore NFT lending. Different from DeFi’s popular lending method, the characteristics of NFT make its lending method mainly based on the negotiation of the borrowing contract terms between the borrower and the lender. For physical assets with insufficient liquidity, different NFTs can be converted into ERC-20 tokens, and the NFT’s lending function can be realized in the form of divisible ERC-20 tokens.
The main obstacle to the future development of NFT lies in its low liquidity. Although there are attempts to increase the liquidity of NFTs in the market, the overall market for NFTs is too small and has restrictive effects on its future development. At the same time, NFTs do not have spot prices and are priced. The lack of agility and convenience of the mechanism is also an obstacle to its future development.
However, NFT also has more potentials. The strong applicability of NFT in many fields makes it easy to spread out to non-blockchain space. In addition, the overall development of digital assets has built a good foundation for the industry and supported the development of NFT.
