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  • Non-fungible tokens are unique digital tokens used to represent the ownership of a specific item.
  • Introduces a new market which provides a number of benefits for buyers, sellers, and NFT creators.
  • Pitfalls and security concerns include duplication of tokens and cloning of data.

What are NonFungible Tokens?

A non-fungible token, also known as an NFT, is a new form of digital token. Fungible goods refer to items that can be traded for or replaced by another of the same exact thing (such as cryptocurrency). On the other hand, non-fungible means that each item or token is unique.

Unlike the ERC-721 protocol which allows for up to 20 fungible tokens to be stored on a single smart contract, NFTs are stored independently on specialised smart contracts called “descriptors” or “items”.

How Do NFTs Work?

You can think of non-fungible tokens as specialised digital certificates that are used to represent the ownership of a specific item. For example, non-fungible tokens are used to represent various items in online games such as weapons or armor. These items can be bought and sold on online marketplaces, using either in-game currency or real money.

Taking a look at the more technical side of things, NFTs operate using blockchain technology. A blockchain is a digital ledger of economic transactions, used to record transactions between people that involve money or records of ownership. The use of blockchain technology with NFTs allows for the verification of ownership records, the token’s singularity, and more.

Why Should I Care about NonFungible Tokens?

Alongside the increased popularity of NFTs, we have seen the emergence of a new market presenting economic opportunities for both artists and consumers. Artists looking to sell their creations and receive income can enjoy lower barriers to entry. Artists can also configure their created NFT to pay automatic royalties, meaning the creator receives income for all future sales of that specific token. Consumers have a convenient method to engage in the collection and exchanging of tokens, which they can make profits from.

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NFTs are relatively new, but are quickly rising in popularity. As the NFT market grows, prices will exponentially increase and lead to extremely profitable opportunities. Furthermore, various industries are finding uses for NFT and blockchain technology. For example, NFTs are likely to become a prominent medium of exchange in the Metaverse, a virtual reality iteration of the internet.

Security Concerns and Pitfalls

One of the biggest problems with NFTs is that they can be duplicated and then cloned. For example, let’s say that you create a program where anyone can purchase a token to play a game. This token is an NFT and, as such, is stored on a blockchain. Now, someone can come along and purchase this token and then clone it to use the copied token to play the game.

This is a huge problem for NFTs because it means that all the data associated with the token will be copied as well. So, if you’re selling a digital asset and it has some form of digital data on it, then you could end up getting copied and cloned.

The solution to this is to use a system that prevents copying, such as the ERC-721 protocol. Unfortunately, this protocol has its own problems.

The ERC-721 protocol doesn’t allow for the tokens to interact with each other; they all exist separately. This is an issue because it means that these tokens can’t be exchanged or traded with one another. As a result, people are not incentivised to trade their tokens with others who may offer more value.

Conclusion

Non-fungible tokens are unique digital tokens used to represent the ownership of a specific item, which operate using the application of blockchain technology. The emergence of NFTs introduces a new market which provides a number of benefits for buyers, sellers, and NFT creators. More and more industries are finding uses for NFTs, especially the Metaverse, in which tokens will be used as a medium of exchange. Although NFTs are an exciting new technology that will have a significant impact on society, there are pitfalls and security concerns such as the duplication of tokens and cloning of data.