Blockchain and NFT Basics

Hi, Welcome to the 2nd edition of NFT for business newsletter, where we talk about NFT potential in digital business transformation. In the previous issue, I explored why NFT is a prefect tool for managing assets. In this issue, we want to learn more about Blockchain, Tokenization, smart contracts, and NFTs basics, as a manager.

Blockchain, Tokenization, and NFTs

Blockchain is a type of distributed database that keeps track of a growing collection of documents known as blocks that are linked together and safeguarded by encryption. Each block has a timestamp and a reference to the one before it. Blockchains are often run by a network of computers called nodes, which utilize cryptography to validate each block's veracity and legitimacy. As a result, blockchains are impervious to data tampering, giving them a safe and secure method of storing data.

There is a myth that says the blockchain is a database. It is not a database. It is not feasible to store high-volume data files like videos on a blockchain. It may cost a million dollars. Instead, blockchain keeps records of transactions only. Blockchain is a stateful network that keeps records of ownership, rights, and permissions in an immutable manner.  

Blockchain is a trustless technology. This means that people or entities interacting under a blockchain protocol do not need to know and trust each other. “Code is the rule,” and every party should play by the rules to be accepted into the network. Blockchain has some unique characteristics:

• Distributed ledger: in a blockchain, all nodes have equal access to the ledger
• Immutable: the cryptographic and consensus mechanism prevents altering records as the block is closed and added to the chain
• Decentralized: no centralized entity is in charge of managing the network, however, it is valid for public blockchains. In private blockchains, a central entity runs the blockchain. 
• Transparency: as all the nodes have access to the ledger, every transaction is transparent for all the nodes and users. This is the base for on-chain analysis in the cryptocurrency market. 
• Smart contracts: the most important feature of the blockchain in business, which consists of a program or logic based on real business cases. The code is stored and executed on the blockchain based on the predetermined conditions of an event. 

Tokens, also referred to as cryptocurrencies, are assets or representatives of real-world assets transferred in a blockchain between two or more parties. Tokens could also be explained as smart contract projects defined on a blockchain. The token contains a piece of code that is stored and self-executed on a blockchain. Tokens are used to represent ownership or access rights to a specific asset or service. Tokens can be fungible or non-fungible, depending on their interchangeability. Fungible tokens, like cryptocurrencies such as Bitcoin or Ethereum, are identical and can be exchanged on a one-to-one basis. On the other hand, non-fungible tokens are unique and cannot be exchanged on a like-for-like basis. Tokenization is the process of converting a real-world or digital asset into tokens on a blockchain. 

What is an NFT?

Fungible versus non-fungible assets

Fungible assets are interchangeable and identical to one another, such as currency or commodities like gold. On the other hand, non-fungible assets are unique and indivisible, like your car or house. In some cases, an asset could be changed from fungible to non-fungible. Imagine a new paper book being launched. The books on the shelves of bookstores are fungible; you purchase one and give it to the author to sign it for you. Now the book is non-fungible as it is signed in your name. Therefore, in business cases, it is vital to determine when and where an asset is fungible or non-fungible in its lifecycle.

NFT stands for non-fungible token. We already discussed the non-fungibility of an asset. Also, we discussed what a token is. So, put it all together: NFTs are: 

• Unique assets: it is not interchangeable and fungible. 
• Transferable: as it is a token, it could be transferred through a blockchain
• Authentic: due to the statefulness of blockchain networks, ownership of NFTs could be verified. 
• Rare: NFTs could be rare, but it is not NFTs’ intrinsic character, usually the designer of the NFT define the rarity characteristics. 
• Indivisible: fundamentally, NFTs could not be divided into smaller parts. However, we discuss fractionalized NFTs in the next chapter. 
• Controlled decentrally: no centralized entity can control NFTs as they are issued on a blockchain. 

According to a study published in Scientific Reports, NFTs are digital assets that represent objects like art, collectibles, and in-game items. They are traded online, often with cryptocurrency, and are generally encoded within smart contracts on a blockchain. (Nadini et al., 2021). Another study published by MDPI describes NFTs as immutable digital assets that reflect works of art, musical compositions, and other real-world artifacts that reside on a blockchain. (Taherdoost, 2022). Deloitte defines NFTs as a bundle of rights in the form of a unique digital asset. 

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