Architecture of an NFT - Proof of Ownership Explained

Key takeaways

• NFTs represent Proof of Ownership of a Digital File linked to a Blockchain Wallet.
• NFTs follow the ERC-721 Token Standard that consists of a token and metadata.
• A Creator can code Royalties into the smart contract such that he/she can make a fixed % amount of the sale value on every sale.
• NFTs can be used for various use cases where proof of ownership of any digital file or identity is involved.

Overview

Our previous blog on NFTs and how to mint one covered the basics of NFTs and how you can mint one. If that got your nerves excited about learning more and how you can build applications that are powered by NFTs, this blog will be a great read. NFTs are not limited to representing artwork, they represent Proof of Ownership of a digital file. 

For example, If a university owns a blockchain wallet and it converts its digital certificates into NFTs and stores it in that wallet, it would mean it is the original creator of those certificates and owns the certificates. Students can then create individual wallets and claim those certificates in their respective wallets. 

Now it is easily possible to prove the authenticity of that digital certificate because the blockchain can be used to prove that the University created the certificate and that it is now owned by the individual student. Similarly NFTs can be used to prove ownership for any digital artwork, club memberships and so on.

Architecture of an NFT

An NFT is ultimately a Blockchain Token that contains the link to a file located on a centralised or decentralised storage. The file can also be stored on the Blockchain but storing data on the blockchain can be expensive. Ethereum has various token standards for different types of tokens but an NFT or a Non-Fungible Token follows the ERC-721 standard. This standard allows metadata to be linked or attached to the token.

Let’s analyse an NFT on Opensea to understand all the components:

The above is one of the 10000 NFTs issued by Bored Ape Yacht Club numbered 8240.

• Title: Bored Ape Yacht Club #8240 - The title consists of the name of the collection on the top, plus the identifier given to the NFT for the collection, which in this case is #8240.
• Image: The image of the NFT - An NFT can link to a file (image, video, pdf, gif etc.). In this case it is a png file of BAYC #8420. This is usually stored in a decentralised storage with IPFS such as web3.storage or pinata. For more information on how the files are stored in IPFS check out our blog on Decentralised Storage.

• Creator: BoredApeYachtClub - The creator of an NFT is the one who mints the NFT. Mint is the term used for creating an NFT. This is the wallet address of the creator.
• Description: Collection Description - Since this is an NFT collection of 10000 NFTs, every NFT can be attached with a common collection Description as shown in the About section.
• Traits: Properties of the NFT - Traits or metadata describe key characteristics such as Background - Army Green, Earing - Silver Stud etc. Observe that there is a % associated with each trait. If your NFT has a rare trait within a collection it will be valued higher and considered rare!

All the above information is consolidated into a metadata file (json format) and is linked to the token.

Metadata can be Frozen or Dynamic (i.e. can be changed later). When Metadata is frozen, it means that these traits won’t be changed by the creator. Say you want to create a game wherein you have a weapon such as a sword as an NFT. 

When you level up in the game the sword levels up as well. If the sword’s level is one of the traits of the NFT then it requires to be dynamic such that it can be updated later. However, in cases such as rare artwork, you do not want the creator to change anything later on. Hence the creator must decide to freeze the metadata.

Royalties

Did you observe Creator Earnings? It is nothing but royalties that the creator will receive on the sale of a single NFT. Say the NFT is sold for 11.99 ETH. Then the smart contract will distribute 1% i.e. 0.1199 ETH to the creator Bored Ape Yacht Club’s wallet address and the rest 99% to the seller of the NFT. It is possible to code royalties into an NFT’s smart contract. Royalties are also part of the NFT metadata and are usually set before launching the collection.

Conclusion

Exploring on Opensea and going through the NFT smart contracts on explorers can further strengthen your understanding on how these tokens look on the blockchain. 

NFTs are used for various use cases such as brand loyalty and engagement, limiting access to online content (you can ask someone to connect their wallet and check if they hold a particular NFT before showing them content), educational documents and land records, proof of house ownership, in-game items, digital twins, artwork and so on. If you plan to build use cases of NFTs, understanding the architecture of an NFT is crucial to design a solution to a problem.