Home Entertainment & Arts Volker Hartzsch: What Are Non-Fungible Tokens and How Do They Work?

Volker Hartzsch: What Are Non-Fungible Tokens and How Do They Work?

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Volker Hartzsch is the director and co-founder of Block Prime, the organisation behind the Sixth Society non-fungible token (NFT) project. This article will look at non-fungible tokens in more detail, exploring how and why they are used today.

NFTs are digital representations of assets that can also represent real-world items such as art and real estate. Some users believe that tokenising real-world tangle assets in this way makes buying, selling and trading them more efficient and secure, reducing the risk of fraud. NFTs hold a value that is set by the market according to supply and demand. They can be bought and sold in the same way as physical assets.

A non-fungible token is an asset that has been tokenised via a blockchain. NFTs are unique identification codes created from metadata through encryption. These tokens are stored on the blockchain, with the assets themselves stored in other places. What makes NFTs unique is the connection between the token and the asset.

NFTs can be exchanged and traded for cryptocurrencies, money or other NFTs depending on the value of the market and the value the owner has placed upon them. For instance, an artist could create a painting, take a photo of it (which has metadata attached) and tokenise it on a blockchain. Whoever is assigned the private keys to that token owns whatever rights have been assigned to it.

Cryptocurrencies are a type of token too. However, the distinguishing factor is that cryptocurrencies are fungible assets, i.e. cryptocurrencies from the same blockchain are interchangeable. With NFTs on the other hand, two NFTs on the same blockchain may appear identical, but they are not interchangeable.

Despite only becoming popular relatively recently, NFTs have been around for a while. The first NFT sold was reportedly Quantum, which was designed and tokenised by Kevin McKoy in 2014 on a blockchain called Namecoin, then minted on Ethereum and sold in 2021.

Each NFT contains a digital signature that makes it unique, meaning it cannot be replaced. Common examples of NFTs include trading cards, games, sports collectibles, comic books and art. They are created following the Ethereum Request for Comment (ERC) #721 standard, which dictates methods for confirming transactions, how ownership is transferred and how applications handle safe transfers. Approved six months after ERC-721, the ERC-1155 standard improves on ERC-721 by clumping multiple NFTs together in a single contract, thereby reducing transaction costs.

Financial experts consider NFTs a high-risk market due to its notoriously volatile highs and lows. For those considering purchasing NFTs, it is important to conduct careful research, gaining a clear grasp of the process. The first step to investing in NFTs is opening an account on a crypto exchange or crypto platform. Crypto exchanges are digital platforms that enable users to buy and sell different types of cryptocurrency.

To purchase NFTs, the user creates an account on their chosen platform. They also need a crypto wallet to store the keys that provide access to their digital asset. Wallets can either be hosted on an exchange or operated independently. Where the investor opts to operate their crypto wallet independently, they are responsible for the wallet and private keys. If they use an exchange, the company holds their private keys and is responsible for ensuring the safety of their digital assets. Alternatively, if the investor wants to purchase and sell NFTs with no third-party involvement they can use a wallet tied directly to the blockchain.

NFTs are an evolution of the cryptocurrency concept, enabling representations of real-world assets to be stored digitally. Some users hail NFTs as a major step forward in the reinvention of this infrastructure. However, it is important for those considering investing in NFTs to do their homework, building a solid understanding of the processes and risks involved.

Claire James