NFTs
This page is a high-level overview of NFTs in the blockchain space and the various approaches to NFTs within the Polkadot ecosystem.
Fungibility
NFT stands for non-fungible token. Fungibility is defined as interchangeability inside of a group. All valid issued $1 notes are a group to itself. A $1 note is always interchangeable with any other $1 note. It is not, however, interchangeable with $20, $50 or $100 dollar notes (these are separate note groups).
A fungible item may be unique. In the currency note example, each issued note has a serial number making it a unique member of the group
A case where a fungible item is not unique is a simple plastic betting chip. Each chip in its pristine state is indistinguishable from any other chip and each is interchangeable within its own group.
On the other hand, an NFT is unique and has features that allow for its uniqueness.
NFT Anatomy
Every NFT has three common components irrespective of the chain it belongs to or originates from that make it unique.
- Identity: Defined via a property, address or a contract.
- Ownership: Determined via a contract or a wallet address.
- Metadata: Can be a single reference to an off-chain object (digital asset or contract) or, in case of advanced NFTs, an elaborate data structure containing both on-chain data and off-chain references.
NFT Purpose
What purpose does a unique digital asset provide? The answer to this question lies in the two distinct ways an NFT is utilized.
The first is the use of NFTs as a speculative store of value derived from their uniqueness (rarity, implied, or intrinsic worth). This initial novelty aspect of NFTs initiated an era of collectibles and tradeables and instantiated the appearance of the mass markets where NFTs were traded as a commodity. This is also recognized as the era of the simple NFT, otherwise known as static NFT. The Uniques pallet was created to facilitate this implementation of the NFT.
The second implementation is as a utility. As mentioned, when we define an NFT, it can store data on-chain. By convention, we call this NFT component the NFT’s metadata. Generally, an NFT is an independent, sovereign data record. This is where the utility aspect of an NFT lies. An NFT can be a digital key, a collection of documents, an atomic data fragment, or a unique personal set of related assets and information that can be owned. An example of NFT utility is the OG WUD Burn NFT Collection where each NFT grants some benefits within the FlappyWUD game.
These two roles are not mutually exclusive. An NFT can be a store of value only, a value-less utility token exclusively, or both at the same time if it has worth on the market as a utility token or, inversely, if it is primarily a token of worth with additional utility.
It is the utility aspect of the NFTs that has been the driving force behind the development of and transition to the advanced NFT concept central to Polkadot’s NFTs pallet development.
NFT Standards
Due to its heterogeneous nature, the Polkadot ecosystem supports differing implementations of NFTs. Polkadot’s core blockchain technology is based on Substrate. Accordingly, NFTs created in substrate-based context are called “native” NFTs. Native NFTs are created through dedicated methods available in pallets, collections of functions written as Wasm code. Polkadot Uniques and NFTs pallets and Unique Network’s NFT utility pallet bundle provide a way to do this. Here a common standard for metadata may provide direct interoperability and efforts in that direction are being made through the XCM initiative (RFC-0125: XCM Asset Metadata).
Polkadot’s Ink! language for writing contracts in Substrate provides a separate mechanism for creating NFTs. Astar has been spearheading this effort and one example of this is their PSP34 (Polkadot Standards Proposals) initiative for standardizing NFTs using the Contracts pallet.
The availability of Ethereum Virtual Machines (EVM) in the Polkadot ecosystem provides yet another way to create and manage NFTs using Solidity contracts just like on the Ethereum network. Such NFTs are built in adherence to the corresponding ERC standards adopted from the Ethereum network.
Birth of NFTs - The EVM Domain
A general-purpose blockchain is not built to natively support the concept of NFTs. It is only natively aware and optimized for its own native fungible tokens, and implementations built on such a chain are essentially "special case smart contracts".
For example, Ethereum is a general-purpose blockchain that does not have the concept of "tokens" at all (fungible or not) built-in. Tokens in Ethereum are essentially spreadsheets of information to be interpreted and read in a certain way by various user interfaces via an executable code named a “smart contract”. An agreement on the structure of such a construct is declared a standard and is designated by the Ethereum Request For Comments (ERC) document.
The core NFT EVM standard is defined in ERC721, but there are extended implementations that introduce some aspects of advanced NFT features like ERC1155.
This approach’s significant shortcoming is its inability to combine standards implicitly. This introduces the necessity of creating custom contract implementations for specialized use cases where one might desire combined features. Each ERC that provides an advanced NFT feature is an isolated subset. As will be shown later, this is not the case for Polkadot native NFTs.
A blockchain must provide a mechanism for overcoming these limitations to facilitate the creation of advanced NFT tokens, as we will see in the upcoming section.
A typical NFT on Ethereum**
For the sake of reference, we can refer to these as static NFTs that are almost exclusively image-based collectibles of varying rarity.
NFTs in Polkadot & Kusama
As mentioned, standardized pallets provide a decentralized processing mechanism through Wasm contracts, specifically optimized for an NFT implementation’s advanced functionality. Two examples are the Polkadot NFTs pallet and the Unique Network’s collection of NFT utility pallets. This approach allows any parachain in the ecosystem to access advanced NFT features without building a contract framework from scratch.
With the introduction of NFT capabilities to the cross-chain messaging format (XCM), a direct inter-chain NFT transfer solution is becoming a reality.
A critical aspect of NFT interoperability hinges on the ability of differing networks to agree on a common metadata format. This greatly simplifies interoperability and removes the need for metadata conversion steps. In this regard, an effort is underway to make this a reality in this proposal RFC-0125: XCM Asset Metadata.
The other option of building a framework of Solidity contracts as the scaffolding for advanced features within an EVM is also viable. Still, it is hampered by the necessity of using bridging mechanisms for cross-chain transfers and a lack of a derivative NFT solution. This approach exhibits much less efficient transaction processing than the native substrate solutions.
See this page for more information about specific NFT project on Polkadot and Kusama.
Cross-Chain Transfers
Transfer of NFTs across chains is one of the most engaging issues in blockchain. In terms of the mechanism through which a transfer of the NFT can occur on the Polkadot network, two distinct approaches exist:
- Asset teleportation
- Asset reservation via sovereign account mechanism - derivative NFTs
Cross-chain transfers within the Polkadot Substrate ecosystem are exclusively executed through the XCM (Cross-Consensus Messaging) system. This system provides native, trustless security at the protocol level, eliminating the need for external bridge solutions. The XCM implementation significantly enhances security by removing the trustful aspect of the transactions, which is typically required by bridge architectures and represents potential points of failure and security risk in cross-chain communication.
NFT transfers can be decomposed into two independently transferable components:
- core asset properties, consisting of identity and ownership data, and
- optional metadata attributes.
In certain cross-chain operations, such as staking, complete NFT teleportation is unnecessary. This was demonstrated through a successful XCM implementation between Unique Network and Acala, where a derivative NFT was created on the Acala chain representing the original NFT from Unique Network. The derivative implementation required only core asset properties, as metadata transfer was nonessential for staking and collateral use cases where only identity and ownership verification are required.
Teleportation, i.e., a complete transfer of identity ownership and metadata, may be the optimal solution for a complete asset migration and the only available option for bridging mechanisms.
Bridging to and from Substrate chains and EVM chains takes much effort but is a highly desired feature in the NFT industry. Merging the collector and customer base has significant implications, so multiple projects focus on making this possible.
What’s Next From Here?
Utility NFTs are at a very early adoption stage.
If you consider an NFT an ownable, universal digital encapsulation of data, it has a role as significant as that of a smart contract. Real-world asset tokenization, tradable digital coupons, virtual digital keys and badges, bundles of utility, resource, and accomplishment tokens, data wrappers… a likely advent of the era of discovery lays ahead.