NFTs: Glossary of Terms

7 May 2022

Photo by SuprV

Non-fungible tokens (NFTs) are unique digital assets, meaning that each one is different from the next. They are often used to represent items in games or can be purchased and sold as digital collectibles. NFTs are stored on a blockchain, which makes them secure and tamper-proof. 

The term "non-fungible" is because these tokens are not interchangeable, unlike traditional currency or other digital assets. This makes them ideal for representing unique items, such as collectibles, artwork, or real estate. In addition, because they are stored on a blockchain, NFTs can be easily transferred between users and used as collateral for loans or other financial transactions.

This article provides a guide with glossary terms related to NFTs, including assets, blockchain, fungibility, and scarcity, to help you understand them better.

We also outline the key considerations when designing and launching an NFT platform.

NFTs 101

Non-fungible tokens (NFTs) are a type of cryptocurrency that is unique and cannot be divided into smaller parts. NFTs represent unique physical or digital assets and are stored on a blockchain. Because they are not interchangeable, NFTs can describe different items, such as tickets to a concert, virtual game assets, or real estate.

NFTs are created when a user "burns" another type of cryptocurrency, such as Bitcoin or Ethereum, to mint the new NFT. The act of burning destroys the original currency and creates a new token associated with the asset. This process ensures that each NFT is unique and can't be replicated.

NFTs are often used for trading digital collectibles, such as rare video game skins or artwork.

How do NFTs work?

Non-fungible tokens, or NFTs, are unique digital assets that can be divided and transferred like any other cryptocurrency. However, NFT's special is that every unit is unique and can not be replaced by another token. This makes them perfect for digital collectibles, gaming, and other applications where uniqueness is key.

NFTs are created through a process called "minting." When a new NFT is minted, it is given a unique identifier (usually a random string of letters and numbers) and added to the blockchain. It can be traded or used in whatever application its creator desires.

The beauty of NFTs is that they can be used to represent almost anything. For example, one popular application for NFTs is digital collectibles.

Why is it important to learn the NFTs terms?

A recent trend in the cryptocurrency world is non-fungible tokens, or NFTs. These tokens are different from traditional cryptocurrencies because they are unique and cannot be replaced by another token of the same type.

This makes them perfect for use in digital asset ownership and gaming applications. While NFTs are becoming more popular, there is still some confusion about what they are and how they work.

That's why it's important to learn the terms associated with this technology. Here is a brief glossary of some of the most common NFT-related terms:

Glossary of terms

Cryptocurrencies and blockchain technology are still in their early days, with new terms and concepts being coined daily.

This can make it difficult for newcomers to understand what's going on. One important area that can be confusing is non-fungible tokens (NFTs). So here I provide a brief glossary of some key NFTs terms to help you get started.

A glossary of key terms related to non-fungible tokens (NFTs):

Blockchain: is a digital ledger of all cryptocurrency transactions. It is constantly growing as "completed" blocks are added with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.

Ethereum: is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of fraud or third-party interference. In addition, Ethereum is unique in that it allows for creating custom tokens, called non-fungible tokens.

Smart Contract: A smart contract is a self-executing contract with the terms of the agreement directly written into lines of code. Smart contracts are executed by computers, eliminating the need for a third party to mediate or enforce the agreement. Smart contracts are often used to facilitate the trading of NFTs.

Token: A token is a digital asset used to represent value in a game, application, or marketplace setting. Tokens can be used to purchase items or services within a game or application or traded on exchanges.

ERC20 token: is a type of cryptocurrency that uses the Ethereum network. These tokens are built on top of the Ethereum blockchain and follow its specific rules and standards. This makes them easier to trade and use, as they are compatible with the many applications and wallets on the Ethereum network.

Asset: Anything that can be owned or traded. An asset is a valuable thing that a person or company owns. Assets can include anything of value, such as stocks, bonds, real estate, and precious metals.

Scarcity: is the condition of having a limited amount of something. In the context of cryptocurrencies, this usually refers to the limited number of available tokens. For example, Bitcoin has a maximum supply of 21 million tokens.

Cryptoasset: digital or virtual tokens that use cryptography to secure their transactions and control the creation of new units. Cryptoassets are decentralized, meaning they are not subject to government or financial institution control. The most well-known type of crypto asset is Bitcoin, a digital currency created in 2009.

ERC721: is the technical standard used to create non-fungible tokens on the Ethereum blockchain. This standard allows for creating unique digital assets that can be traded and exchanged on decentralized platforms.

Non-fungible tokens (NFTs): are unique digital tokens that cannot be replicated. They are often used in gaming and other applications where security and ownership of assets are important.

Represent a unique asset, such as virtual goods or privileges. Unlike traditional cryptocurrencies, which can be traded and exchanged like commodities, NFTs are indivisible and cannot be divided into smaller units.

Fungible: interchangeable and indistinguishable from other units of the same type. For example, one kilogram of gold is equivalent to any other kilogram of gold.

Fungibility: The property of a good or asset whereby every unit is interchangeable with other units of the same type. Fungible tokens can be easily replaced with other units of the same type without affecting the underlying asset.

Airdrop: is a distribution of tokens or assets, usually for free, to the holders of a particular cryptocurrency. Airdrops can also be used to bootstrap the usage of a new blockchain or protocol. The term “airdrop” comes from the military term for parachuting soldiers and equipment into a battle zone.

Flip or Flipping: an NFT means buying and selling it quickly, within a few days. This is done to take advantage of price fluctuations rather than holding onto the token for a longer period.

Cryptokitties: One of the first widespread applications built on top of the ERC721 standard, Cryptokitties allows users to trade and breed digital cats.

Beeple is an artist who creates digital art using software such as Autodesk Maya and Maxon Cinema 4D. His work is often distributed as digital files that can be shared online. In 2017, Beeple began experimenting with blockchain technology and non-fungible tokens to create and distribute his art.

Floor Price: is the lowest price at which a security or commodity can be sold. The purpose of a floor price is to provide a minimum price that participants are willing to sell at to prevent excessive declines in prices.

In cryptocurrencies, floor prices can stabilize prices and reduce volatility. For example, if a cryptocurrency has a floor price of $1, its value cannot drop below. This can help to minimize panic selling and stabilize the market.

Fear of Missing Out, or "FOMO,": is a common phenomenon that affects many people. It's the constant worry that you're missing out on something great, and it can be especially strong when it comes to new technology or financial investments.

Fractional ownership is holding a stake or share in a company or other asset less than 100%. Fractional ownership can take different forms, such as owning a partial interest in a property or owning shares in a company.

Fractional ownership can provide investors with opportunities to invest in assets that they may otherwise not be able to afford.

For example, by owning a fractional interest in an expensive property, an investor can gain exposure to the real estate market without purchasing the entire property.

Minting: is the process of creating a new non-fungible token (NFT) on a blockchain. The act of minting usually requires the input of a certain amount of another currency or asset, which is then used to create the new NFT. This new token can be sent to other users or sold on decentralized exchanges.

Minting can be used to create custom tokens that represent unique assets or rights. These tokens can then be traded on decentralized exchanges, providing liquidity and value to holders. Additionally, minting can help to bootstrap new blockchains and economies, giving users an incentive to participate in these networks.

Gas Fees: are a type of fee paid to the miners of a blockchain network to propagate and validate transactions. Gas fees are paid in the form of gas, a unit of measurement used to calculate the amount of work required to validate a transaction or contract. The higher the gas price, the more incentive for miners to include a transaction in their block.

The InterPlanetary File System (IPFS): is a distributed file system that seeks to connect all computing devices to create a single global network. IPFS is based on blockchain technology and uses non-fungible tokens (NFTs) to store files. NFTs are unique and cannot be replicated, making them ideal for storing files on a distributed network.

NFT wallets: are a key part of the crypto ecosystem. They allow users to store, send, and receive tokens. NFT wallets come in many different shapes and sizes. Some are desktop wallets, while others are mobile wallets. There are also web wallets and hardware wallets.

When choosing an NFT wallet, it is important to consider the security features offered. For example, some wallets offer two-factor authentication or multi-signature support. Others have built-in encryption features. It is also important to ensure the wallet is compatible with the tokens you want to store.

Metadata: Understanding the metadata is key for non-fungible tokens (NFTs); this data defines ownership and differentiates one NFT from another. It can be on-chain or off-chain, depending on the platform.

OpenSea: An online marketplace that allows users to buy and sell digital assets, OpenSea is quickly gaining popularity among cryptocurrency enthusiasts. The site uses non-fungible tokens, unique digital assets that cannot be divided or combined with other tokens, as its currency. This makes it possible for users to buy and sell items such as video game skins, collectible cards, and even whole virtual worlds.

NFT marketplace: are websites or applications that allow users to buy, sell, or trade non-fungible tokens. NFTs are unique digital assets that cannot be replicated and have different values depending on their use case. For example, they are often used to represent unique items in video games, virtual worlds, or online communities.

Royalties: In the context of non-fungible tokens, royalties are payments made to content creators or owners to use their work. These payments can be in the form of NFTs or other cryptocurrencies.

They can be a great way for content creators to earn income. They can also help incentivize content creation and ownership. In addition, token issuers can ensure that their tokens maintain value and are not simply used as currency by using royalties.

Utility-focused NFTs: are tokens that serve a specific function or provide a specific utility within a dApp or platform. This might include providing access to a service, granting voting rights, or serving as a form of currency.

Compared to other NFTs, utility-focused tokens tend to have less value on the open market. They are not typically traded as investments but rather used to interact with the app or platform they were created for.

Off-chain metadata: is data that is stored on a blockchain but not included in the block itself. This data can track the movement and ownership of tokens and other information about transactions. Off-chain metadata is stored in a separate database and accessed through an off-chain API.

Final Thought

You must become familiar with the NFTs terminology to communicate with others in the industry effectively.

By understanding the basics of this terminology, you will be able to follow along with news and discussions relating to NFTs and potentially even participate in them yourself.

With new blockchain projects being launched every day, it is important to stay ahead of the curve and understand these projects' technology. This will help you better understand articles and announcements in the space.

Additionally, it will help you communicate with other enthusiasts and investors in the space of NFTs and identify new opportunities in the industry.

It is important to remember that while there is potential for high returns in the NFTs market, there is also a higher risk of losing funds. As always, do your research before investing in any project.

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