Editor’s Note: This series of “ELI5” articles is aimed at beginners entering the world of cryptocurrencies, DeFi, NFTs and Web3 with many questions in mind. ELI5 refers to the famous English acronym that means “Explain to me as if I were five years old”. The aim is not to infantilize the reader, but simply to give him keys to understanding, so that the complicated vocabulary of the cryptosphere in the broad sense becomes child’s play as if by magic!
The condition NFT became hugely popular in the year 2021. Anyone familiar with the cryptocurrency universe knows what this refers to. Unfortunately, a beginner can get lost quite quickly and therefore it is necessary to explain it step by step.
So that the name NFT is no longer a mystery to anyone, we will see broadly what this term refers to. Then we analyze the usefulness and all the enthusiasm that this new niche in the universe of cryptocurrencies has generated in 2021.
Definition of a non-functioning token
NFT is actually an abbreviation of the English term Non-Fungible Token. In French, this translates to non-fungible token. There are two types of tokens in the cryptocurrency industry. The non-fungible and the “classic” that refers to a specific digital asset, such as 1 BTC, 1 ETH, or 1 XRP.
The special thing about an NFT is that it only exists in one copy. For example, if you send 10 ETH to someone else, you will have 10 ETH less in your own account, but you won’t know which one you sent.
When you transfer an NFT, you remove a specific cryptocurrency from your storage wallet that relates to a defined asset. This cannot be replaced by another. It’s like sending money to a friend. If you use coins, any coin will do. If, on the other hand, it is a unique collector’s item, only this one can be shipped.
What do these specific tokens guarantee?
The fact that an NFT is unique is very important. This proves that a person is in possession of a particular good. It can be something digital, like for example an art NFT, or the non-replaceable token can refer to something that exists in everyday life.
So if you transfer a digital art board to another person, sending the associated token ensures that the board is now in their possession and that object is no longer yours.
An NFT can therefore guarantee ownership of something to the person who owns it. As long as the non-replaceable token is in his hands, he owns it. If the NFT is transferred to another person, it now belongs to that new person.
Can we use it as irrefutable proof of ownership?
To work, a non-fungible token must use a blockchain. It is the latter who acts as a trusted third party by confirming that a transaction between two individuals has gone well or that a person does indeed have the NFT it claims to have. Currently, the Ethereum network and ERC-721 tokens are the most commonly used for non-functioning tokens.
The fact that a transaction recorded on the blockchain is irreversible serves as proof of ownership. It is not possible to change the information on it and anyone can then prove that they do indeed own the NFT that they claim to have.
While non-fungible tokens are still very new, they will have concrete applications in everyday life. For example, a notary can declare that a person owns a house through an NFT or ownership of a real work of art can be materialized through a non-fungible token.
Are the prices of certain non-fungible tokens justified?
During the year 2021, the price of many NFTs has completely exploded. We ended up with low-quality digital works that sometimes sold for several hundred thousand dollars.
In our view, this was clearly a highly speculative market and completely disconnected from reality. This was also seen at the end of the year and early 2022. Most prices have fallen sharply and the fashion seems to have only been temporary.
However, NFTs backed up by something concrete in real life can have completely legitimate value. So if you own a $10 million house, it’s only natural that the corresponding non-fungible token is worth the same price.
NFTs: What to Remember?
NFTs are a special type of token. Unlike classic tokens which are interchangeable, non-fungible tokens refer to something unique.
The main importance of this technology is to be able to guarantee one’s ownership of a specific asset. For this, the blockchain acts as a trusted third party by guaranteeing that ownership of an asset belongs to the person who owns the associated NFT.
2021 was the year of non-replaceable tokens in the crypto universe. However, this created a huge bubble that eventually burst, causing the last people to enter the industry to lose a lot of money.
Read the other articles in our special beginners series:
Bitcoin (BTC) Explained to a Five-Year-Old Child (ELI5)
Blockchain Explained to a Five-Year-Old (ELI5)
Cryptocurrency Explained to a Five-Year-Old (ELI5)
Explore more crypto vocabulary terms
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