nfts are revolutionizing the world of digital art and collectibles. digital artists are seeing their lives change thanks to huge sales to a new crypto audience. and celebs band together as they spot a new opportunity to connect with fans. but digital art is just one way of using nfts. they can actually be used to represent ownership of any single asset, such as an article writing in the digital or physical realm.
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if andy warhol had been born in the late 90s, he probably would have coined campbell soup as an nft. it’s only a matter of time before kanye puts a yeezys streak on ethereum. and one day it could be proven that you own your car with an nft.
Reading: Is building nft platform on ethereum
what is an nft?
nfts are tokens that we can use to represent ownership of unique items. they allow us to tokenize things like art, collectibles, even real estate. they can only have one official owner at a time and are protected by the ethereum blockchain: no one can modify the ownership record or copy/paste a new nft into existence.
nft stands for non-fungible token. non-expendable is an economic term you might use to describe things like your furniture, a song file, or your computer. these things are not interchangeable with other items because they have unique properties.
Expendable items, on the other hand, can be traded because their value defines them rather than their unique properties. for example, eth or dollars are fungible because 1 eth / $1 usd is redeemable for another 1 eth / $1 usd.
net of assets
nfts and ethereum solve some of the problems that exist on the internet today. As everything becomes more digital, there is a need to replicate the properties of physical items like scarcity, uniqueness, and proof of ownership. Not to mention, digital items often only work in the context of your product. For example, you may not resell an iTunes mp3 you purchased, or you may not exchange loyalty points from one company for credit from another platform, even if there is a market for it.
This is what an nfts internet looks like compared to the internet most of us use today…
The nft world is relatively new. In theory, the scope of nfts is anything that is unique and needs a provable property. here are some examples of nfts that exist today, to help you get an idea:
- a unique digital artwork
- a unique sneaker in a limited run fashion line
- an in-game item
- an essay
- a digital collectible
- a domain name
- a ticket that gives you access to an event or a coupon
- purchase real world assets
- fractional real estate
- degree certificates
- music royalties via nfts
- move 2 gain
- digital identity
examples from ethereum.org
We use nfts to give back to our supporters and even have our own nft domain name.
poaps (assist protocol test)
If you contribute to ethereum.org, you can claim an nft poap. these are collectibles that prove you participated in an event. Some crypto meetups have used poaps as a form of entry to their events. more information on how to contribute.
This website has an alternative domain name powered by nfts, ethereum.eth. our .org address is centrally managed by a domain name system (dns) provider, while ethereum.eth is registered with ethereum through the ethereum name service (ens). and is owned and managed by us. check our ens registry
how do nfts work?
nfts are different from erc-20 tokens, such as dai or link, in that each individual token is completely unique and is not divisible. nfts provides the ability to assign or claim ownership of any single piece of digital data, traceable by using the ethereum blockchain as a public ledger. An NFT is minted from digital objects as a representation of digital or non-digital assets. for example, an nft could represent:
- digital art:
- car deeds
- tickets to a real world event
- tokenized invoices
- legal documents
an nft can only have one owner at a time. ownership is managed through unique identification and metadata that no other token can replicate. NFTs are minted through smart contracts that assign ownership and manage the transferability of NFTs. when someone creates or mints an nft, they execute code stored in smart contracts that conform to different standards, such as erc-721. this information is added to the blockchain where the nft is managed. The minting process, from a high level, has the following steps it goes through:
- create a new block
- validate information
- write information to the blockchain
nfts have some special properties:
- Each token minted has a unique identifier that is directly linked to an ethereum address.
- They are not directly interchangeable with other tokens 1:1. for example 1 eth is exactly equal to another eth. this is not the case with nfts.
- every token has an owner and this information is easily verifiable.
- they live on ethereum and can be bought and sold on any ethereum based platform. nft market.
in other words, if you own an nft:
- You can easily prove you own it.
- Proving you own an nft is very similar to proving you have eth in your account.
- For example, let’s say you buy an nft, and ownership of the unique token is transferred to your wallet via your public address.
- the token proves that your copy of the digital file is the original.
- its the private key is proof of ownership of the original.
- the content creator’s public key serves as a certificate of authenticity for that particular digital artifact.
- the creator’s public key is essentially a key permanent part of the history of the token. the creator’s public key can prove that the token you hold was created by a particular individual, which contributes to its market value (versus a fake).
- As mentioned above, your private key is proof of ownership of the original. this tells us that the private keys behind that address control the nft.
- a signed message can be used as proof that you own their private keys without revealing them to anyone, and thus prove that you also own the nft!
and if you create an nft:
- you can easily prove that you are the creator.
- you determine the scarcity.
- you can earn royalties every time it is sold.
- you can sell it on any nft or peer-to-peer marketplace. you are not locked into any platform and you do not need anyone as an intermediary.
the creator of an nft decides the scarcity of his asset.
For example, consider a ticket to a sporting event. just as an organizer of an event can choose how many tickets to sell, the creator of an nft can decide how many replicas there are. sometimes it’s exact replicas, like 5,000 general admission tickets. sometimes several are minted that are very similar, but each slightly different, like a ticket with an assigned seat. in another case, the creator may want to create an nft where only one is minted as a special rare collectible.
In these cases, each nft would still have a unique identifier (like a barcode on a traditional “ticket”), with only one owner. The predicted scarcity of the NFT matters, and it depends on the creator. a creator may intend to make each nft completely unique to create scarcity, or have reasons to produce several thousand replicas. remember, this information is all public.
Some nfts will automatically pay royalties to their creators when they are sold. this is still a developing concept, but it is one of the most powerful. original owners of original eulerbeats earn an 8% royalty every time the nft is sold. and some platforms, like foundation and zora, allow royalties for their artists.
This is completely automatic, so creators can sit back and earn royalties as their work is sold from person to person. At the moment, calculating royalties is very manual and lacks precision: many creators do not receive the payment they deserve. If your nft has a royalty scheduled, you’ll never miss out.
what are nfts used for?
here is more information on some of the best developed use cases and visions for nfts on ethereum.
- digital content
- game items
- domain names
- physical items
- investments and guarantees
maximize creator profits
The greatest use of nfts today is in the realm of digital content. that is because that industry today is bankrupt. content creators see their profits and earning potential absorbed by the platforms.
An artist posting work on a social network generates money for the platform which sells ads to the artist’s followers. they get exposure in return, but the exposure doesn’t pay the bills.
nfts powers a new creator economy where creators don’t transfer ownership of their content to the platforms they use to advertise it. the property is embedded in the content itself.
When they sell their content, the funds go directly to them. If the new owner sells the NFT, the original creator may even receive royalties automatically. this is guaranteed every time it is sold because the creator’s address is part of the token’s metadata, metadata that cannot be changed.
the copy and paste problem
Detractors often mention the fact that nfts “are dumb”, usually along with an image of them taking a screenshot of nft artwork. “Look, now I have that picture for free!” they say smugly.
well, yes. but does googling an image of picasso’s guernica make you the proud new owner of a multi-million dollar work of art?
Ultimately owning the real thing is only as valuable as the market makes it. the more a piece of content is captured, shared, and generally used, the more value it earns.
owning something real that can be verified will always have more value than not having it.
boost game potential
nfts has generated a lot of interest from game developers. nfts can provide ownership records for in-game items, boost in-game economies, and bring a host of benefits to players.
In many normal games you can buy items to use in your game. but if that item was an nft, you could get your money back by selling it when you’re done with the game. you might even make a profit if that item becomes more desirable.
for game developers, as nft issuers, they could earn a royalty every time an item is resold on the open market. This creates a more mutually beneficial business model where both players and developers profit from the secondary nft market.
This also means that if the developers no longer maintain a game, the items you’ve collected will still be yours.
Ultimately, the items you seek in the game may outlast the games themselves. even if a game is no longer maintained, its elements will always be under your control. this means that in-game items become digital memories and have value outside of the game.
decentraland, a virtual reality game, even lets you buy nfts that represent virtual parcels of land that you can use as you see fit.
make ethereum addresses more memorable
Ethereum’s naming service uses nfts to give your ethereum address an easier-to-remember name, like mywallet.eth. this means you can ask someone to send you eth via mywallet.eth instead of 0x123456789……
This works similar to a website’s domain name, making an ip address easier to remember. And just like domains, ens names have value, usually based on length and relevance. With ens you do not need a domain registration to facilitate the transfer of ownership. instead, you can trade your ens names on an nft market.
your name ins can:
- receive crypto and other nfts.
- point to a decentralized website, like ethereum.eth. learn more about decentralizing your website
- store any arbitrary information, including profile information such as email addresses and twitter handles.
tokenization of physical items is not yet as developed as its digital counterparts. but there are plenty of projects exploring real estate tokenization, unique fashion items, and more.
since nfts are essentially deeds, one day you could buy a car or a house using eth and receive the deed as nft in return (in the same transaction). As things get more and more high-tech, it’s not hard to imagine a world where your ethereum wallet becomes your car or house key – your door is unlocked by cryptographic proof of ownership.
With valuable assets like cars and properties representable on ethereum, you can use nfts as collateral in decentralized loans. this is particularly useful if you don’t have cash or crypto, but do have physical items of value. more about defi
nfts and defi
the nft world and the decentralized finance (defi) world are starting to work together in some interesting ways.
nft backed loans
There are defi apps that allow you to borrow money by using collateral. for example, it guarantees 10 eth so you can borrow 5000 dai (a stable coin). this guarantees that the lender receives the refund; If the borrower does not repay the dai, collateral is sent to the lender. however, not all of them have enough crypto to use as collateral.
projects are beginning to explore the use of nfts as collateral instead. imagine you bought a rare cryptopunk nft in the past – they can get $1000 at today’s prices. By putting this up as collateral, you can access a loan with the same set of rules. if you don’t pay the dai, your cryptopunk will be sent to the lender as collateral. this could eventually work with anything you tokenize as nft.
and this is not difficult for ethereum, because both worlds (nft and defi) share the same infrastructure.
nft creators can also create “shares” for their nft. This gives investors and fans the opportunity to own a piece of an NFT without having to buy the whole thing. This adds even more opportunities for nft minters and collectors alike.
- Fractional nfts can be traded on dexes like uniswap, not just nft markets. that means more buyers and sellers.
- the overall price of an nft can be defined by the price of its fractions.
- you have more opportunities to own and profit from the items you care about . it’s harder to stop paying to own nfts.
This is still experimental, but you can learn more about the fractional ownership of nft on the following exchanges:
In theory, this would unlock the ability to do things like own a picasso piece. You’d become a shareholder in a Picasso NFT, which means you’d have a say in things like revenue sharing. owning a fraction of an nft will most likely one day enter it into a decentralized autonomous organization (dao) to manage that asset.
These are ethereum-powered organizations that allow strangers, such as global shareholders of an asset, to coordinate securely without necessarily having to trust other people. that’s because you can’t spend a single penny without group approval.
As we mentioned, this is a popup space. nfts, daos, fractional tokens are developing at different rates. but all of their infrastructure exists and they can easily work together because they all speak the same language: ethereum. so take care of this space.
more information about data
certificates of authenticity
Companies offering fake college degree certificates are reported to be a multi-billion dollar industry that nfts can help combat. nfts can be a safe and fast way to verify someone’s degree credentials.
in south korea, a university is already issuing degree certificates as nft, with the hope that nft will improve access to administrative services and prevent forgery or alteration of the degree. trinity business school (tbs) in ireland also plans to offer nfts from 2023.
ethereum and nfts
ethereum makes it possible for nfts to work for several reasons:
- transaction history and token metadata can be verified publicly: it is easy to prove ownership history.
- once a transaction is confirmed, it is almost impossible to manipulate that data to “stealing” ownership.
- trading nfts can occur peer to peer without the need for platforms that can take huge cuts as compensation.
- all ethereum products share the same ” back end”. Put another way, all ethereum products can easily understand each other; this makes nfts portable across products. You can easily buy an NFT on one product and sell it on another. As a creator, you can list your nfts on multiple products at the same time – each product will have the most up-to-date ownership information.
- Ethereum never goes down, meaning your tokens will always be available to sell.
the environmental impact of nfts
nfts are gaining in popularity, which means they are also subject to increased scrutiny, especially when it comes to their carbon footprint.
to clarify a few things:
- nfts do not directly increase ethereum’s carbon footprint.
- the way ethereum keeps your funds and assets safe is currently very energy intensive, but it’s about to get better.
- once upgraded, ethereum’s carbon footprint will be 99.95% better, making it more energy efficient than many existing industries.
To explain more, we’re going to have to get a bit more technical, so bear with us…
don’t blame the nfts
The entire nft ecosystem works because ethereum is decentralized and secure.
decentralized, meaning you and everyone else can verify that you own something. all this without entrusting or granting custody to a third party who can impose their own rules at will. it also means your nft is portable across many different products and markets.
secure, which means no one can copy/paste your nft or steal it.
These qualities of ethereum make it possible to digitally own unique items and get a fair price for their content. but it has a cost. Blockchains like bitcoin and ethereum consume a lot of energy right now because it takes a lot of energy to preserve these qualities. if it was easy to rewrite the history of ethereum to steal nfts or cryptocurrencies, the system collapses.
the job of minting your nft
When you mint an nft, a few things have to happen:
- must be confirmed as an asset on the blockchain.
- the owner’s account balance must be updated to include that asset. this makes it possible for it to then be verifiably “owned” or traded.
- transactions confirming the above must be added to a block and “immortalized” on the chain.
- the lock must be confirmed by everyone on the network as “successful”. This consensus eliminates the need for intermediaries because the network accepts that your NFT exists and belongs to you. and it’s chained up so anyone can check it out. this is one of the ways ethereum helps nft creators maximize their profits.
all these tasks are performed by miners. and they inform the rest of the network about their nft and who owns it. This means mining needs to be hard enough, otherwise anyone could claim to own the NFT you just minted and fraudulently transfer ownership. There are many incentives to ensure that miners act honestly.
more information about mining
protect your nft with mining
The difficulty of mining comes from the fact that it takes a lot of computing power to create new blocks on the chain. more importantly, blocks are created consistently, not just when needed. they are created every 12 seconds or so.
This is important to make ethereum tamper-proof, one of the qualities that makes nfts possible. the more blocks, the more secure the chain. If your nft was created at block #600 and a hacker tried to steal your nft by changing your data, the fingerprint of all subsequent blocks would change. that means anyone running ethereum software would be able to detect it right away and prevent it from happening.
however, this means that computing power must be constantly used. it also means that a block containing 0nft transactions will still have roughly the same carbon footprint, because computing power will still be consumed to create it. other non-nft transactions will fill the blocks.
blockchains consume a lot of energy right now
so yes, there is a carbon footprint associated with mining blocks, and this is also an issue for chains like bitcoin, but not directly the fault of nfts.
much mining uses renewable energy sources or untapped energy in remote locations. And there is an argument that the industries that nfts and cryptocurrencies are disrupting also have huge carbon footprints. But just because existing industries are bad doesn’t mean we shouldn’t strive to be better.
and we are. ethereum is evolving to make the use of ethereum (and, by virtue, nfts) more energy efficient. and that has always been the plan.
We are not here to defend the environmental footprint of mining, but to explain how things are changing for the better.
a greener future…
For as long as ethereum has existed, mining power consumption has been an area of great interest for developers and researchers. and the vision has always been to replace it as soon as possible. more about the ethereum vision
This vision is being fulfilled right now.
a greener ethereum
ethereum is currently undergoing a series of updates that will replace staking mining. this will remove computing power as a security mechanism and reduce ethereum’s carbon footprint by ~99.95%1. In this world, stakeholders commit funds rather than computing power to protect the network.
the power cost of ethereum will become the cost of operating a home computer multiplied by the number of nodes in the network. If there are 10,000 nodes in the network and the cost of running a home computer is about 525kwh per year. that’s 5,250,000kwh1 per year for the entire network.
we can use this to compare the future of ethereum with a global service like visa. 100,000 visa transactions use 149kwh of energy2. on proof-of-stake ethereum, that same number of transactions would cost 17.4kwh of energy or ~11% of total energy3. that’s without taking into account the many optimizations being worked on in parallel with the consensus layer and shard chains such as digests. it could be as little as 0.1666666667kwh of energy for 100,000 transactions.
Importantly, this improves energy efficiency while preserving the decentralization and security of Ethereum. many other blockchains may already use some form of staking, but they are secured by a select few participants, not the thousands that ethereum will hold. the more decentralization, the more secure the system.
more information on energy estimates
We have provided the basic comparison with visa to compare your understanding of ethereum proof-of-stake power consumption with a household name. however, in practice, it is not really correct to compare based on the number of transactions. Ethereum’s energy production is based on time. if ethereum made more or less transactions from one minute to another, the energy production would be the same.
It’s also important to remember that ethereum does more than just financial transactions, it’s a platform for applications, so a fairer comparison might be with many companies/industries including visa, aws and more.
the process has already started. The beacon chain, the first update, was shipped in December 2020. This provides the basis for staking by allowing participants to join the system. the next relevant step for energy efficiency is to merge the current chain, the one secured by miners, into the beacon chain where mining is not needed. Timelines cannot be exact at this stage, but this is estimated to happen sometime in 2022. This process is known as merging (previously known as docking). more about fusion.
build with nfts
Most NFTs are built using a consistent standard known as ERC-721. however, there are other standards that you may wish to examine. the erc-1155 standard allows semi-fungible tokens, which is particularly useful in the realm of gaming. and, more recently, eip-2309 has been proposed to make minting nfts much more efficient. this standard allows you to mint as many as you like in a single transaction!
- crypto art data – richard chen, updated automatically
- opensea: the nft bible – devin fizner, jan 10, 2020
- a beginners guide to nfts – linda xie, January 2020
- everything you need to know about the metaverse: foundation team, foundation.app
- no, crypto artists are not harming the planet
- the value of a country of power, no more – carl beekhuizen, May 18, 2021
footnotes and sources
This explains how we arrived at our energy estimates above. these estimates apply to the network as a whole and are not just reserved for the process of creating, buying, or selling nfts.
1. 99.95% mining energy reduction
The 99.95% reduction in power consumption from a mining-protected system to a stake-protected system is calculated using the following data sources:
44.49 twh of annualized electrical energy is consumed by ethereum mining – digiconomist
the average desktop computer, all that is needed to run the proof of stake, uses 0.06 kWh of energy per hour: silicon valley energy table (some estimates are a bit higher at 0.15 kWh )
At the time of writing, there are 140,592 validators for 16,405 unique addresses. Of these, 87,897 validators are assumed to be betting from home.
The average home staker is assumed to use a 100-watt desktop PC configuration to run an average of 5.4 validator clients.
The 87,897 validators running from home gives us 16,300 users consuming ~1.64 megawatts of power.
The rest of the validators are run by escrow agents, such as exchanges and staking services. it can be assumed that they use 100w for 5.5 validators. this is a huge overestimate so be on the safe side.
In total, proof-of-stake ethereum consumes something on the order of 2.62 megawatts, which is about the same as a small American city.
This is at least a 99.95% reduction in total energy usage from digiconomist’s estimate of 44.94 twh per year currently consumed by ethereum miners.
2. view energy consumption
cost of 100,000 visa transactions is 149 kwh: average energy consumption per transaction of bitcoin network compared to visa network as of 2020, statista
As of September 2020, 140,839,000,000 transactions were processed: Visa Financial Report Q4 2020
3. power usage for 100,000 transactions on a fragmented proof-of-stake network
Scalability updates are estimated to allow the network to process between 25,000 and 100,000 transactions per second, with 100,000 being the theoretical maximum at this time.
vitalik buterin in transactions per potential second with fragmentation
At a minimum, sharding will allow for 64 times the amount of transactions that take place today, which works out to around 15 transactions. that is the number of shard chains (additional data and capacity) that are introduced. more on fragment chains
That means we can estimate how long it will take to process 100,000 transactions so we can compare it to the visa example above.
- 15 * 64 = 960 transactions per second.
- 100,000 / 960 = 104.2 seconds to process 100,000 transactions.
In 104.2 seconds, the ethereum network will use the following amount of energy:
1.44 kWh of daily use * 10,000 network nodes = 14,400 kWh per day.
There are 86,400 seconds in a day, so 14,400 / 86,400 = 0.1666666667kwh per second.
If we multiply that by the amount of time it takes to process 100,000 transactions: 0.1666666667 * 104.2 = 17.3666666701 kWh.
That’s 11.6554809866% of the energy consumed by the same number of visa transactions.
and remember, this is based on the minimum number of transactions ethereum will be able to handle per second. If ethereum reaches its potential of 100,000 transactions per second, 100,000 transactions would consume 0.1666666667kwh.
To put it another way, if Visa handled 140,839,000,000 transactions at a cost of 149 kWh per 100,000 transactions, that’s 209,850,110 kWh of energy consumed per year.
ethereum in a single year consumes 5,256,000 kwh. with a potential of 788,940,000,000 – 3,153,600,000,000 transactions processed in that time.