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Yasmine Hafza
June 16, 2024
What Is ERC 721? Unraveling the Mystery of NFTs
Demystifying ERC-721: A Comprehensive Guide to Non-Fungible Tokens (NFTs), Their Creation, and the Future of Digital Ownership

From cartoon bored apes selling for millions to exclusive virtual lands next to Paris Hilton, the NFT craze has taken the world by storm, reshaping the landscape of digital ownership. Many still wonder what NFTs are and why they captivate so many people. At the core of this phenomenon is ERC-721, a technical standard on the Ethereum blockchain that defines how to create and manage these unique tokens. ERC-721 is crucial because it ensures each NFT is distinct and individually trackable, enabling unprecedented possibilities for digital art, gaming, real estate, and more. In this blog post, we will demystify NFTs, exploring the ERC-721 standard, how NFTs work, their creation and tradability, and what the future holds for this revolutionary technology. Whether you're an artist, investor, or simply curious, this comprehensive guide will provide you with the insights you need to navigate the fascinating world of NFTs.

What is ERC-721 and How Does it Work? 

Non-Fungible Tokens (NFTs) Explained

Non-fungible tokens (NFTs) are digital cryptographic intangible assets that represent forms of data (such as JPEG, GIF, or MP4) and exist on the blockchain through their smart contracts. 

  • The term “non-fungible” signifies that it’s irreplaceable. 
  • Often referred to as “digital collectibles”.
  • These Tokens follow the ERC-721 standard.
  • NFTs are not like cryptocurrency. Therefore, you can not trade one NFT for another in the same way you can trade one bitcoin for another bitcoin. Simply because there are no two NFTs that hold the exact same value. 
  • Cryptocurrencies are used to purchase NFTs.


Essentially, an NFT is a bunch of code (Token ID and Smart Contract) that links to a digital file data (such as JPEG, GIF, or MP4). This file is stored either on-chain (in the blockchain) or off-chain (in a separate server such as IPFS).

The Role of Smart Contracts

The ERC-721 standard utilizes smart contracts on the Ethereum blockchain to create and manage NFTs. Here are the key points of the smart contract’s role:

  • When an artist or anyone wants to create an NFT, after designing the artwork (for example JPEG file of a cartoon character) they must create a smart contract.
  • The smart contract keeps a record of who owns the NFT. If someone buys the NFT, the smart contract updates the ownership records automatically, ensuring the new owner gets the digital item.
  • Some NFTs have built-in royalties. This means every time the NFT is sold to someone new, the original creator automatically gets a percentage of the sale. The smart contract handles this payment without any manual effort.
  • Smart contracts ensure that the NFT is authentic and not a copy. They store all the important details about the NFT, like who created it and its unique characteristics, making it easy to verify its legitimacy.

Key Features of ERC-721

Unique Identification:

Each ERC-721 token has a unique ID that differentiates it from every other token. This unique identifier ensures that no two NFTs are the same, providing a way to distinctly identify and verify each token. It’s like a tracker chip for the blockchain universe.

Metadata:

Metadata in ERC-721 tokens describes the properties and attributes of the NFT. This can include information such as the name, description, and any other relevant details that define what the token represents. Metadata is crucial for providing context and value to the NFT, much like the label on a collectible card that details all the important information, making the NFT unique, verifiable, and valuable.

Ownership and Transfer:

ERC-721 smart contracts track the ownership of each NFT, recording who owns what on the blockchain. This transparent tracking system ensures that ownership is clear and indisputable. The capability to transfer ownership is fundamental to the buying, selling, and trading of NFTs. It’s like traditional trading, but every move is permanently recorded for everyone to see.

Uses of ERC-721 Tokens 

The ERC-721 standard allows NFTs to have a wide array of use cases across different industries. You’ll be shocked it’s about way more than just art!

Digital Art and Collectibles:

NFTs offer artists direct access to a global market, eliminating intermediaries and allowing them to retain more profit. They also enable artists to earn royalties on secondary sales, providing ongoing income. For example Beeple's "Everydays: The First 5000 Days" sold as an NFT for $69 million.

Furthermore, digital collectible NFTs , such as Crptopunks, offer instant global trading, verifiable ownership, and security against counterfeits. It’s really akin to trading Pokemon cards with different values and rarity, except with NFTs all the obstacles are eliminated.

Gaming:

NFTs can become in-game assets where items like weapons, skins, and characters can be tokenized, allowing players to own, trade, and sell them outside of the game's ecosystem. One prominent example is Axie Infinity, where players own, breed, and battle digital creatures.

Also, virtual worlds like Decentraland use NFTs to represent ownership of virtual land parcels. Users can easily buy, sell, and develop virtual land in a metaverse.

Identity, Certification, and IP:

The ERC-721 standard allows NFTs to become unique identifiers for digital identities, ensuring secure and verifiable personal data. One example is Microsoft’s ION project, a decentralized identity network built on Bitcoin.

Similarly, educational certificates, professional licenses, and other forms of credentials can be tokenized to verify authenticity. For example, Blockcerts is an open standard for blockchain-based educational credentials.

Patents, trademarks, and copyrights can be represented as NFTs, facilitating easier management and transfer of ownership. For example, IBM’s blockchain-based patent platform.

Finance:

NFTs can represent fractional ownership of assets like stocks and bonds, enabling new forms of investment and trading, exemplified by platforms like tZERO. Additionally, in decentralized finance (DeFi), NFTs can be used as collateral or represent unique positions in financial instruments. An example of this is Aavegotchi, where NFTs represent staked DeFi assets, blending gaming with financial applications and expanding the utility of NFTs in the financial sector.

Virtual Goods:

NFTs are increasingly used in virtual goods, such as fashion wearables for avatars in virtual worlds and games. These digital items allow users to personalize their online presence and showcase unique styles. For instance, RTFKT Studios creates virtual sneakers and other digital wearables, while brands like Gucci have launched virtual accessories in platforms like Roblox. 

Sports:

NFTs have found a significant use case in the sports industry, allowing for the tokenization of memorable sports moments and athlete engagement. Platforms like NBA Top Shot enable fans to buy, sell, and trade officially licensed NBA collectible highlights, creating a new form of digital memorabilia. Additionally, athletes can create and sell their own NFTs to connect with fans, as seen with Rob Gronkowski's Championship Series NFT collection.


Music
:

Musicians can release exclusive tracks or albums as NFTs. For example, 3LAU, an electronic music producer, sold an album as NFTs for over $11 million. Snoop Dogg is also very well-known to adopt this Music NFT paradigm.

Furthermore, musicians and creators can tokenize their work, granting ownership and revenue rights to holders. Kings of Leon released an album as an NFT, offering exclusive content to holders.

NFTs can be used for concert tickets and exclusive merchandise, such as The Weeknd’s NFT collection, which included unreleased music and art.

ERC-721 vs. Other Token Standards 

Fungible Versus Non-Fungible Tokens


Fungible tokens (ERC-20 standard) are identical and interchangeable, much like currency, and are used primarily as a medium of exchange and store of value in a stable, high liquidity market. In contrast, Non-fungible tokens (ERC-721 standard) are unique and non-interchangeable, suited for digital art, collectibles, and ownership, providing provenance and authenticity in an unstable market.

Advantages of ERC-721 Standard for NFTs

Unique Identification: ERC-721 tokens assign a distinct identifier to each token, ensuring each one is unique and individually trackable. This feature is vital for representing unique digital assets like artworks, collectibles, and in-game items.

Metadata Capabilities: These tokens can store extensive metadata, detailing the asset’s name, description, properties, and other attributes. This is particularly important for digital art and collectibles, where specific characteristics and provenance determine value.

Provenance and Ownership: ERC-721 ensures secure tracking of token provenance and ownership on the blockchain, providing transparency and reducing fraud risk, thereby verifying the authenticity of digital assets.

Interoperability: As a widely adopted standard, ERC-721 tokens are compatible with numerous platforms, wallets, and marketplaces, facilitating easier buying, selling, and trading of NFTs across different ecosystems.

Security and Immutability: Transactions involving ERC-721 tokens are securely recorded on the Ethereum blockchain. Once created and ownership is transferred, these records are immutable, ensuring the integrity and permanence of ownership records.

Creating and Managing ERC-721 Tokens

Brief Overview of NFT Creation Process

If you’re familiar with development, the process of creating NFTs with the ERC-721 standard is not that complicated. It is made up of 6 major steps:


Set Up Wallet
: Install a Web3 wallet like MetaMask. Ensure your wallet is funded with enough ETH to cover gas fees, which are transaction fees required for interacting with the Ethereum blockchain.

Create Token Metadata: Prepare the metadata that describes your NFT. This typically includes the token’s name, description, and a link to the asset (e.g., an image or video). This metadata can be created using JSON format.

Upload Assets to IPFS: Upload your digital assets to the InterPlanetary File System (IPFS), a decentralized storage solution. After uploading, you'll receive a unique URL (CID) for each asset, which will be included in the token metadata.

Develop Smart Contract: Use a development framework like OpenZeppelin to create a smart contract. This contract should include functions to mint new tokens and reference their metadata. OpenZeppelin provides secure and reusable templates for ERC-721 contracts.

Deploy Contract: Use a development environment like Hardhat or Truffle to deploy your smart contract to the Ethereum network. This involves compiling the contract, deploying it to the blockchain, and paying the necessary gas fees.

Mint Tokens: Once the contract is deployed, you can use it to mint new tokens. Each token will reference its unique metadata. This process involves calling the minting function of your smart contract and specifying the metadata URL.

Popular ERC-721 Creation Platforms

The process mentioned above is extremely summarized, and it takes lots of time and expertise. If you want to experiment with creating NFTs, there are easier ways to start. Some platforms offer solutions to create the NFT for you, or even generate the art itself. Here are some you can keep in mind:

OpenSea & Rarible

Platforms like OpenSea and Rarible are popular for creating, buying, and selling NFTs, featuring user-friendly interfaces and large communities. You can create the art and these platforms can create the code for you, however, they are not entirely free of cost.

OpenSea charges a 2.5% marketplace fee per sale, with gas fees paid by the buyer. Rarible takes a 1.5% fee from both the buyer and seller. While these platforms offer a lazy minting feature to defer initial gas fees, costs will still apply later. These fees ensure the platforms can maintain their services and provide secure transactions for users.

NFT Art Generator

Features: Supports images, GIFs, videos; generates smart contracts; user-friendly.
Pricing: Free basic tools, premium from $199.

Appy Pie NFT Generator

Features: No-code development, pre-built templates, scalable.
Pricing: Free plan, Pro plan at $6/month.

SketchAR

Features: AI-powered, augmented reality, mobile support.
Pricing: Free, with in-app purchases.

Storing and Trading ERC-721 Tokens

ERC-721 Compatible Wallets

As is the case with real money you need a safe place to store them. Virtual wallets do an excellent job at storing both cryptocurrencies and NFTs. 

MetaMask

  • Features: Supports Ethereum and Ethereum-compatible networks (e.g., Polygon, Optimism). Available as a browser extension and mobile app.
  • Pros: Widely used, integrates with most NFT marketplaces and DeFi platforms, noncustodial with private key management.
  • Cons: Only supports Ethereum and compatible networks.

Trust Wallet

  • Features: Supports multiple blockchains including Ethereum, Binance Smart Chain, and more. Available as a mobile app.
  • Pros: User-friendly interface, supports a wide range of networks and tokens, including ERC-721 and ERC-1155.
  • Cons: Limited support for hardware wallets, primarily a mobile app.

MyEtherWallet (MEW)

  • Features: Supports Ethereum and all ERC-20, ERC-721 tokens. Available as a web wallet, mobile app, and browser extension (Enkrypt).
  • Pros: Supports integration with hardware wallets, multi-chain support with Enkrypt extension.
  • Cons: Web and mobile versions have limited network support compared to Enkrypt.

Ledger (Hardware Wallet)

  • Features: Provides secure storage for NFTs with devices like Ledger Nano S and Ledger Nano X.
  • Pros: High security, supports multiple blockchains and token standards.
  • Cons: Requires hardware device purchase.

NFT Marketplaces

NFT marketplaces are digital platforms that facilitate the buying, selling, and discovery of NFTs. They function kind of like Amazon, allowing users to browse through various digital items, compare prices, and make purchases using cryptocurrencies.

For creators, these marketplaces offer a way to turn their digital art, music, or other creations into NFTs and list them for sale, with options for fixed prices or auctions. Additionally, creators can earn royalties from resales of their NFTs. 

Marketplaces also help users discover new and trending digital items by showcasing popular collections and highlighting artists, thus connecting buyers with unique digital works they might not find otherwise. 

This makes NFT marketplaces crucial for both creators and collectors in the digital asset ecosystem. Renowned marketplaces to start with are OpenSea, Rarible, Nifty Gateway, and SuperRare.

Security Considerations

When using NFT marketplaces and wallets there is always the risk of scams and phishing attacks. Scams can involve fake NFT listings where malicious actors sell counterfeit or non-existent digital assets. Phishing attacks trick users into providing their private keys or login information, often through fake websites or deceptive emails.

To stay safe:
→ Always verify the authenticity of the marketplace and the NFTs you're interested in. 

→ Use well-known and reputable platforms like OpenSea and Rarible. 

→ Be cautious with links and emails, ensuring they come from official sources.

→ Never share your private keys or seed phrases, and use wallets with strong security features, such as MetaMask or Trust Wallet. 

→ Enable two-factor authentication (2FA) and keep your software up-to-date.

Investing in ERC-721 Tokens 

Factors Influencing NFT Value

Rarity

The rarity of an NFT is a major factor influencing its value. Unique or limited-edition NFTs are often more valuable because their scarcity makes them more desirable to collectors. For instance, NFTs from collections like CryptoPunks, where each item is unique and part of a limited series, tend to fetch higher prices due to their rarity.

Creator Reputation

The reputation and popularity of the creator significantly impact the value of an NFT. Well-known artists or celebrities can command higher prices for their NFTs because their established fan base is more likely to invest. For example, digital artworks by Beeple sold for millions due to his established reputation in the digital art community.

Utility

The utility of an NFT refers to the benefits or functionalities it provides beyond ownership. NFTs with additional uses, such as in-game items, virtual real estate, or tokens that grant access to exclusive content or events, are often more valuable. For instance, owning a BAYC NFT grants access to its holder with exclusive events, games,fancy real-life events, and a private online community.

Risks of NFT Investing

Volatility

The NFT market is highly volatile, meaning the value of NFTs can fluctuate dramatically over short periods. Prices can skyrocket due to hype, media attention, or celebrity endorsements, but they can also plummet just as quickly when interest wanes. This volatility can result in significant financial losses if an NFT's value drops after purchase. For example, during the NFT boom in early 2021, some NFTs sold for millions of dollars, but many saw their prices fall sharply as the initial excitement faded.

Illiquidity

Illiquidity refers to the difficulty of selling an asset quickly without substantially affecting its price. The NFT market is relatively illiquid compared to traditional markets like stocks or real estate. Finding a buyer willing to purchase an NFT at the desired price can be challenging, especially for lesser-known or less desirable NFTs. This lack of liquidity can make it difficult to exit an investment promptly, potentially trapping investors with assets they can't sell or forcing them to sell at a loss.

Key Points to Consider:

  • NFT prices can be heavily influenced by trends, making it crucial to stay informed about the market landscape.
  • The value of an NFT often depends on the interest of potential buyers, which can be unpredictable.
  • High transaction fees, such as gas fees on the Ethereum network, can add to the cost of buying and selling NFTs, affecting overall profitability.

Strategies for NFT Investors

Research

Thorough research is crucial for making informed NFT investments. Here are some tips:

  • Understand the Market: Familiarize yourself with how the NFT market works,and stay updated with market trends and news via X (Twitter) and Discord.
  • Evaluate the Creator: Investigate the background and reputation of the NFT creator. Established artists or developers with a strong following are generally safer bets.
  • Verify Rarity and Utility: Check the rarity of the NFT and its potential uses. Rarer items and those with added utility (like in-game items or access tokens) often have higher value.
  • Examine Historical Sales: Look at the NFT’s sales history to understand its price trends and demand. Tools like Coingecko and NFTGo provide valuable data on NFT transactions.


Diversification

Diversification helps spread risk across different assets:

  • Don't put all your funds into one type of NFT. Diversify across digital art, collectibles, virtual real estate, and other categories.
  • Combine investments in high-risk, high-reward NFTs with more stable, established assets.
  • Consider using multiple NFT marketplaces to avoid dependency on a single platform.


Set a Budget

Setting a clear budget can prevent overspending and manage financial risk:

  • Decide how much you are willing to invest in NFTs without impacting your financial stability. This should be an amount you can afford to lose.
  • Divide your budget among different NFTs and categories to spread risk.
  • Keep track of all associated costs, including gas fees, transaction fees, and any additional costs for storing or displaying your NFTs.
  • Consider holding NFTs long-term, as their value might increase over time as the market matures and more people enter the space.

The Future of ERC-721 and NFTs 

Emerging Trends in NFTs As of 2024

Cross-Chain NFTs:
The ability to transfer NFTs across different blockchain networks is gaining traction. This interoperability enhances liquidity, expands market reach, and allows for a more interconnected ecosystem, making it easier for collectors and creators to engage with NFTs on multiple platforms​.


Environmental Sustainability
:
In response to concerns about the environmental impact of blockchain technology, there is a push towards eco-friendly NFT solutions. This includes adopting blockchains with lower energy consumption and exploring sustainable practices to reduce the carbon footprint of NFT transactions​.


AR and VR Enhancements
:
The integration of augmented reality (AR) and virtual reality (VR) with NFTs is set to create immersive experiences. Collectors can interact with their digital assets in virtual spaces, such as exploring virtual galleries or showcasing collections in AR environments​.


Real Estate and Fractional Ownership
:
NFTs are being used to streamline real estate transactions, offering faster and more transparent processes. Additionally, fractional ownership allows individuals to invest in portions of high-value properties, democratizing real estate investments and increasing accessibility​.


Soulbound Tokens (SBTs)
:
A new category of NFTs, SBTs are non-transferable tokens that represent achievements or aspects of an individual’s identity, such as educational credentials or professional milestones. These tokens are intended to provide verifiable proof of personal accomplishments and history​.


Alternative Token Standards
:
The development of new token standards, such as ERC-1155 and ERC-6551, is expanding the utility of NFTs. These standards allow for the creation and management of multiple token types within a single contract and enable NFTs to hold and transfer other tokens, enhancing their functionality and application​.

Challenges of NFTs

Environmental Impact:
The energy consumption of blockchain networks, especially those using Proof-of-Work (PoW) like Bitcoin, has been a major concern. Despite efforts to move towards more sustainable models, the environmental impact remains a critical issue​. 

Scalability and Interoperability:
As the popularity of NFTs grows, the ability to handle large numbers of transactions efficiently (scalability) and the ability to operate across different blockchain platforms (interoperability) are significant technical challenges. Solutions like Layer 2 protocols and cross-chain compatibility are being developed to address these issues.

Legal and Regulatory Uncertainty:
The regulatory landscape for NFTs is still evolving. Issues such as intellectual property rights, taxation, and compliance with financial regulations are not uniformly defined, creating uncertainty for creators, buyers, and platforms​. 

Market Volatility:
The NFT market is highly speculative and can be extremely volatile. Prices can fluctuate wildly, leading to significant financial risks for investors​. 

Security Concerns:
NFTs are susceptible to fraud, theft, and cyber-attacks. Ensuring the security of NFT platforms and the assets they trade is an ongoing challenge. There have been countless incidents of counterfeit NFTs and hacking, undermining trust in the market. 

Wrapping Up

NFTs powered by the ERC-721 standard have revolutionized the digital landscape by enabling the creation of unique, verifiable NFTs, which are transforming industries like art, gaming, real estate, and entertainment. These tokens offer unprecedented opportunities for digital ownership, provenance, and interoperability. The impact of ERC-721 is profound, providing new revenue streams for creators, enhancing digital experiences, and introducing innovative ways to engage and trade digital assets across various platforms.

They say beauty is in the eye of the beholder, and the same goes for the hype around NFTs. While the initial frenzy may have subsided, it's undeniable that many people made substantial profits. The real value of NFTs lies in their data security, verified ownership, and blockchain technology, which extend far beyond just expensive JPEGs for niche collectors. Explore creating your first NFT or share this article with a friend; who knows, it might lead to something valuable!

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