NFTs

How Do NFTs Work?

Principle

What Is The Working Principle Of NFTs

NFTs differ from ERC-20 tokens such as DAI and LINK in that each token is unique and cannot be divided. NFTs allow you to claim or assign ownership of any piece of unique digital data. This information can be tracked using Ethereum’s public ledger. An NFT is created from digital objects and can be used to represent digital or non-digital assets. An NFT might represent:

Digital Art

  • GIFs
  • Collectibles
  • Music
  • Videos

Real World Items

  • Transfer a deed to a vehicle
  • Tickets for a real-world event
  • Tokenized invoices
  • Documents legal
  • Signatures

There are many other options available to you!

An NFT can only be owned by one person at a given time. The uniqueID and metadata manage ownership. No other token can duplicate them. Smart contracts are used to create NFTs. These smart contracts assign ownership and manage the transferability. A person creates or mints an NFT by executing code stored in smart contract that conforms to different standards such as ERC-721. This information is added into the blockchain that is managing the NFT. These are the steps involved in minting a coin from a high-level perspective.

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Create a new block

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Validating information

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Information into the Blockchain

NFTs possess some unique properties.

  • Each token is issued with a unique identifier, which can be directly linked to an Ethereum address.
  • They are not interchangeable with any other tokens 1:1. One ETH can be exactly the same as another ETH. NFTs are not like this.
  • Each token has a owner, and this information can easily be verified.
  • They are available for purchase and sale on every Ethereum-based NFT marketplace.

Also, if you own a NFT

  • It is easy to prove that you have it.
    • It is similar to proving that you have ETH in an account to prove you have an NFT.
    • Let’s take, for example, the purchase of an NFT. The ownership of the unique token will be transferred to your wallet via a public address.
    • The token is proof that the digital file you have downloaded is your original copy.
    • Your private key proves ownership of the original.
    • Public keys of content creators serve as certificates of authenticity for a particular digital artifact.
      • The token’s creator’s public key is basically a permanent record of its history. The public key of the creator can be used to prove that the token you have was created by a specific individual and thus contributes to its market value (vs. a counterfeit).
    • Signing messages is another way to prove that you are the owner of the NFT can be used to your advantage.
      • Your private key, as mentioned above is proof of ownership of the original. This means that the NFT is controlled by the private keys associated with that address.
      • You can use a signed message to prove that you have your private keys, without having them revealed to anyone.
  • It is impossible to manipulate.
  • It can be sold, and in certain cases it will earn the original author resale royalty payments.
  • You can also keep it forever and rest assured that your Ethereum wallet is protecting your asset.
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Scarcity

The creator of an NFT has the final say on the scarcity of their asset.

Consider a ticket for a sporting event. The creator of an NFT can also decide how many copies are available, just as the organizer of an event can decide how many tickets to sell. These replicas can be exact copies, such as the 5000 General Admission tickets. Sometimes, several tickets are minted with very similar designs, but each one is slightly different. Another possibility is that the creator wants to create an NFT in which only one of these coins is produced as a rare collectible.

Each NFT would have an unique identifier, similar to a bar code on a ticket, and only one owner. It is up to the creator whether the NFT will be scarce. The creator might want to make every NFT unique in order to create scarcity or may have reasons to make several thousand copies. This information is public.

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Royalties

When they are sold, some NFTs automatically pay royalties to their creators. Although this is still a new concept, it is one of the most powerful. EulerBeats Originals owners earn an 8% royalty each time the NFT goes on sale. Some platforms, such as Foundation or Zora support royalty payments for artists.

This process is fully automated so creators can simply sit back and enjoy royalties from the sale of their work. Unfortunately, the process of calculating royalties is still very tedious and inaccurate. Many creators don’t get what they deserve. You won’t miss out if your NFT has royalty programming.

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