Whether you’re a long-time NFT collector or a “newbie,” do you know all the ways to classify NFTs? Join Tonraffles in today’s article to find out!
Table of Contents
What is an NFT?
NFT stands for Non-Fungible Token, a type of token implemented on the Blockchain network. The difference between NFTs and regular coins/tokens lies in their uniqueness.
While regular tokens are identical, divisible, and interchangeable, each NFT is a unique, indivisible entity that cannot be replaced by another.
To understand this better, let’s consider an example involving two types of items: the US dollar and legal documents.
The US dollar is a form of fungible token. There is no difference between each $1, $2, or $10; they are all the same, can be added together, and can replace one another. $10 + $10 = $20. The $10 you own is the same as the $10 anyone else owns. Legal documents are a form of non-fungible token. Although they are all legal documents and part of the same “collection” of the legal system, each document has a unique “document number,” content, and usage value. Therefore, they cannot replace one another, nor can they be divided into 0.1 document or 0.2 document. NFTs are similar in this regard.
Bonus: To add a bit more nuance and help you understand the nature of NFTs more deeply, let’s revisit the example of the US dollar as a fungible token. However, I have never said that individual bills of $1, $2, or $100 are fungible tokens, because when referring to each individual bill, it is actually a non-fungible token. This is because, although the spending value of each bill is the same, they each have unique serial numbers, which gives them different collectible values.
A $2 bill with the serial number 888888 is unique and cannot be duplicated or stacked to replace a $2 bill with the serial number 666666, and of course, the price people are willing to pay for these bills for collection purposes will differ. Thus, currency is a fungible token, but the printed bills are non-fungible tokens.
To summarize, you can see some specific characteristics of NFTs (non-fungible tokens) as follows:
- Uniqueness
- Indivisibility
- Non-interchangeability / Non-stackability
In the following sections, we will explore the different classifications of NFTs (non-fungible tokens).
NFT Classification
By Purpose of Use
You are probably most familiar with the two main types: PFP (NFTs used as profile pictures) and In-game items (items within games) from the recent GameFi trend. However, according to this classification method, NFTs can be categorized into many other categories. Here are the NFT categories based on their purpose of use as observed by the author:
- PFP (Profile Picture NFTs): These NFTs are primarily used as profile pictures on social media platforms. They often feature unique and artistic designs, making them popular for showcasing individuality and digital identity.
- In-game Items: These NFTs are used within video games and can include weapons, skins, characters, and other virtual goods. They often enhance the gaming experience by providing players with unique and tradable assets.
- Art NFTs: Digital artworks that are tokenized and sold as NFTs. Artists can monetize their digital creations, and collectors can own and trade these unique pieces.
- Music NFTs: These NFTs represent ownership of music tracks, albums, or other audio content. They allow musicians to sell their work directly to fans and offer exclusive content or experiences.
- Virtual Real Estate: These NFTs represent ownership of virtual land or property within digital worlds or metaverses. Owners can build, trade, and monetize their virtual real estate.
- Collectibles: These NFTs include a wide range of digital collectibles, such as trading cards, memorabilia, and limited-edition items. They are often sought after for their rarity and unique attributes.
- Utility NFTs: These NFTs provide specific utilities or functions, such as access to exclusive content, events, or services. They often serve as membership tokens or access passes.
- Domain Names: NFTs can represent ownership of blockchain-based domain names, providing a decentralized alternative to traditional domain registration.
- Financial NFTs: These NFTs include financial instruments like insurance contracts, bonds, and other tokenized financial products. They can be traded and used within decentralized finance (DeFi) ecosystems.
- Identity and Certification: These NFTs can represent personal identification, certifications, diplomas, and other official documents. They provide a secure and verifiable way to manage digital identities and credentials.
In the following sections, we will delve deeper into each of these NFT classifications, exploring their unique characteristics and use cases.
By Storage Characteristics
Firstly, you need to know that not all NFTs are fully stored on-chain. Typically, an NFT consists of two parts:
- Token: The identifier part implemented via a smart contract.
- Metadata: The detailed content of the NFT, such as the name, author, description, images, or videos. Metadata is linked to the Token through an on-chain information field called tokenURI.
Usually, only the token part is stored on-chain, while the metadata is stored in decentralized data systems to minimize costs. Some projects choose to store metadata off-chain on centralized servers to maximize cost savings and increase flexibility.
Based on their storage characteristics, NFTs can be categorized as follows:
Off-chain Data For this type, only the token information is implemented via a smart contract, while the media is stored on centralized servers to minimize costs and increase flexibility. This allows projects to update the display of the NFT at any time with minimal cost.
However, this also means that the NFT owner might experience unwanted changes or loss of display if the centralized storage server encounters issues.
Semi On-chain If the metadata of an NFT is stored on decentralized data systems such as IPFS or Arweave instead of off-chain, it falls into this category.
Storing data on decentralized servers makes user data more secure (security depends on the chosen data storage network). Changes to the NFT data will be more limited.
This is the solution chosen by most projects because it ensures decentralization, provides necessary flexibility, and saves costs.
Fully On-chain This is the highest form of NFT, where all token and metadata information is stored entirely on the main blockchain. The token information is implemented via a smart contract, and the metadata is also encrypted and stored directly on the blockchain.
This ensures that the NFT fully inherits the properties of the network it is implemented on:
- Decentralization
- Immutability
- Transparency
- Permissionless
- Trustlessness
Due to the fully on-chain storage, the deployment cost for each NFT is significantly higher compared to other forms.
The most popular fully on-chain NFTs are on the Bitcoin network, deployed through a protocol called Ordinals. Casey Rodarmor, the creator of the Ordinals protocol, refers to these fully on-chain NFTs as Digital Artifacts.
By Usage Standards
According to the usage standards for issuing NFTs, we can categorize them into different types. Each blockchain network has its own standards, but the most widely used is Ethereum. In this section, we will explore the common standards for non-fungible tokens on the Ethereum network.
ERC-721
ERC-721 is the first standard for issuing non-fungible tokens on the Ethereum network. Introduced by Dieter Shirley in 2018, this standard marked a significant advancement in the development of the NFT field. Each token created under this standard is a unique and immutable version on the Ethereum network. ERC-721 has quickly become the common standard for NFTs since its launch.
ERC-1155
ERC-1155 is a standard designed to support the creation and management of various digital assets within a single smart contract. It allows for the issuance and management of different types of tokens (both ERC-20 and ERC-721) within the same smart contract, thereby reducing costs for both creators and users.
Compared to ERC-721, the efficiency of ERC-1155 is significantly improved, though it may pose challenges in design and operation due to its complexity.
ERC-721 is often preferred when uniqueness and distinctiveness are emphasized, while ERC-1155 is useful for purposes requiring flexibility and high turnover, such as games and the metaverse.
ERC-6551
ERC-6551 is a standard aimed at enhancing ERC-721 without changing the network infrastructure. ERC-6551 provides NFTs created by ERC-721 the ability to own a separate smart contract account, known as a Token-bound Account (TBA). This opens up numerous possibilities for interaction with other applications and assets.
To visualize its difference, imagine that previously each NFT had to reside in an owner’s wallet, and the owner could only hold or transfer it.
However, after being token-bound by ERC-6551, the NFT itself becomes a wallet address (a wallet within a wallet), acting as a new entity or user on the network. The user can use the NFT to send and receive other tokens, interact with other NFTs, or sign authentication as an independent entity.
Overall, ERC-6551 opens up many use cases in both the DeFi and Web3 spaces. Although it is a new standard, its application potential is vast and worth attention and research.
Other Standards
Ordinals is a protocol for creating NFTs on the Bitcoin network, with NFTs issued through this protocol called Inscriptions. They are created by encoding the entire NFT content and storing it directly on the Bitcoin network.
This project is a prime example in the fully on-chain NFT category mentioned in the storage characteristics section above.
Additionally, we have BRC-20, introduced as fungible tokens on the Bitcoin network. However, upon closer inspection, they are still Inscriptions (non-fungible tokens) with the content being non-stackable text.
Conclusion
In the diverse world of NFTs, categorizing them is not merely about organization but about exploring the boundless potential of creativity. From art to applications, NFTs open up multidimensional spaces for innovation and redefine asset ownership. In the upcoming Web3 space, NFTs are a promising component with immense potential for growth.
FAQ NFT
What are metaverse NFTs?
Metaverse NFTs represent digital assets within virtual worlds, like virtual land, avatars, or in-game items.
What are some of the potential future applications of NFTs?
NFTs have the potential to revolutionize various industries, including supply chain management, identity verification, and intellectual property protection.
How are NFTs different from traditional digital assets?
Traditional digital assets, like photos or music files, can be easily copied and distributed. NFTs, on the other hand, are unique and verifiable, making them scarce and valuable.
Why are NFTs gaining popularity?
NFTs offer new ways to create, own, and trade digital assets, enabling creators to monetize their work and investors to gain exposure to emerging markets.
