In the 2017 initial coin investment (ICO) run, ERC-20 was the token standard that facilitated the launch of numerous crypto projects on the Ethereum blockchain. Previously, most blockchain tokens were designed to function as a medium of exchange, store of value, or stock/equity. However, ERC-721 made it possible to issue verifiable, cryptographically unique tokens that could be connected with unique content, from fine art to music to in-game items.
Read on to learn more about what makes an NFT, the ERC-721 protocol, its current uses, and why many people are so optimistic about its potential.
Cryptokitties: One of the first NFTs
Fungible vs. Non-Fungible Tokens: What’s the Difference?
The Merriam-Webster dictionary defines the word ‘fungible’ as:
“being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account”
In simpler terms, a fungible commodity is an interchangeable commodity. An easy example would be fiat money such as the US dollar or even a cryptocurrency such as Bitcoin or Ethereum. If you lent me $20, it doesn’t matter if I repay you with a different $20 note (or two $10 notes) because the US dollar is fungible.
Even in the case of Bitcoin; if I’m repaying you with one BTC, it hardly matters where that BTC came from. There is a slight disclaimer here, however, as when it comes to BTC and other cryptocurrencies, you can track the ‘source’ of each BTC and theoretically BTCs which have been identified as coming from disreputable addresses, such as known hackers’ addresses, may be less accepted. Nevertheless, we can still say that Bitcoin is mostly fungible.
Fungibility is a foundational requirement of a currency. A non-fungible commodity thus cannot be a currency, and NFTs make no attempt at doing so. A better analogy for NFTs would be collectibles. After all, if fungibility means interchangeability, then non-fungibility means uniqueness.
Take for instance the Cryptokitties example (by the way, Cryptokitties was the first successful NFT); each Cryptokitty is unique - they each have their own ‘cattributes’ and differ slightly in their appearances. Hence, although they are all technically ‘Cryptokitties’ they are not perfectly interchangeable with each other.
What is the ERC-721 Protocol?
I am sure you have heard of ERC-20 tokens built on the Ethereum network. However, while they are the most popular token standard, there are others. The ERC721 standard used to create NFTs is another increasingly popular standard. (Note: ERC is an abbreviation for Ethereum Request for Comments).
Each ERC standard merely specifies a way a token is built using said standard. It is a free and open standard, and for those interested in the technical details, you can refer to the GitHub page here. The standard has officially left its beta phase and has been formalized by the Ethereum community.
Projects Using the ERC-721 Standard
As mentioned, the first successful ERC-721 project / NFT was Cryptokitties, created by Axiom Zen in late 2017. Although NFTs are thus relatively new to the cryptocurrency ecosystem, several NFTs have already been created, mostly in the ‘gaming’ arena. They include:
Decentraland: Virtual land on the blockchain
- Decentraland – A decentralized virtual reality platform that allows you to create your own virtual world. The blockchain is used to create an immutable record of your ownership of said virtual property.
- CryptoPunks – Collectible 8-bit characters.
- Gods Unchained - Another popular card game that strives to be a decentralized Magic: the Gathering.
- Axie Infinity: Decentralized RPG that lets you trade Axies and earn tokens.
Cryptopunks: Another popular collectible NFT
Other than these gaming/collectible uses, multiple marketplaces have also added ERC-721 support, allowing users to trade NFTs on their platforms. Some examples of marketplaces where can trade NFTs are:
Top Five NFT Collections by Market Cap
These are the top five NFT collections by market cap.
Top NFT Marketplaces by Market Share
The table below contains the top NFT marketplaces by market share. The percentages are rough estimations.
For more information, kindly check our article on the most popular NFT marketplaces by market share & trading volume.
Beyond Gaming and Collectibles: What is the Potential of NFTs?
You may be reading this article and concluding that NFTs are rather frivolous. NFTs like Cryptokitties and Bored Ape Yacht Club (BAYC) may be funny, and so is trading other types of collectibles. But is that all there is to NFTs?
While it can’t be argued that NFTs have largely been used to create profile picture images and games in their current iteration, their potential applications are quite diverse and far-reaching. This is because many types of unique assets are worth digitizing and storing on the blockchain. Some examples include identity information such as academic and professional certifications, birth certificates, and warranties. NFTs could also function as a bridge that allows even physical assets to be ‘tokenized.’
That being said, the pace of adoption of the ERC721 standard has not taken off as fast as it should. Its most popular projects are still those that could be considered for recreational or leisurely purposes. While the use cases discussed above could be called ‘sexy futuristic applications,’ they still face substantial implementation setbacks, namely the requirement that regulatory bodies and authorities first need to adopt the standard.
You might be interested in this article on Solana NFTs.
Ian Lee is a freelance writer specializing in the areas of finance and all things crypto. He also has over five years of experience in investment banking. Follow him at Ian Lee.