An NFT is a non-interchangeable unique unit of data stored on a blockchain; a kind of digital signature verifiable publicly
Breaking Down the Mechanisms
A public blockchain consists of nodes which include any computer system storing the chain’s software and continuously updating records. All nodes are equal and make simultaneous updates to the ledger reflecting newly added transactions. Any node is eligible to participate in creating new blocks, and it is the function of the consensus algorithm to decide which nodes become validators or miners.
The consensus mechanism is the protocol by which the blockchain determines how crypto transactions are validated, and new blocks are added to the blockchain. Distributed consensus is the backbone of the blockchain since it ensures the decentralization and immutability of the network. There exist two primary methods of enforcing distributed consensus, the Proof-of-Work model and the Proof of Stake model.
Proof-of-Work versus Proof-of-Stake
The Proof-of-Work mechanism involves the mining of coins and was introduced by the first-ever cryptocurrency, Bitcoin. This process requires huge processing power since Proof-of-Work chains are secured by nodes around the globe competing to solve a mathematical puzzle. The winner is rewarded with the right to update the blockchain with the latest verified transactions and is awarded cryptocurrency.
With more miners incentivized to join the network, the value of cryptocurrency rises, leading to higher processing power and security of the network. It becomes impractical for any person to meddle with the cryptocurrency’s blockchain.
However, mining is an energy-intensive process that has caused a lot of concerns about environmental impact and sustainability. Proof-of-Work systems may also have challenges in scaling to accommodate a large number of transactions, leading to the need for an alternative consensus mechanism.
The proof of stake mechanism was developed to cure some of the limitations of the Proof-of-Work model. The Ethereum blockchain also started with a Proof-of-Work system and quickly realized they would face scalability issues. Ethereum’s DeFi protocols subsequently amassed popularity and the blockchain struggled to keep up, causing gas fees on the chain to spike.
As opposed to the Bitcoin network, which only needs to process incoming and outgoing transactions, Ethereum is a more programmable network with an array of DeFi services, smart contracts, NFT minting, and sales, as well as DApps. The Proof-of-Work model simply was not cutting it for Ethereum, so they came up with Eth2, which utilises the Proof-of-Stake consensus mechanism. The Proof-of-Stake mechanism maximizes on speed and efficiency of the network while lowering gas fees.
Staking in the Proof-of-Stake system is analogous to mining in the Proof-of-Work model. It is the process by which a network participant is chosen to add the latest block of transactions to the blockchain earning crypto in the process.
While particular details may vary from project to project, in general, Proof-of-Stake blockchains consist of a network of ‘validators’ who stake their own crypto in exchange for the opportunity to validate new transactions, update the blockchain and earn crypto rewards; this process is minting of coins.
The network selects the winner based on how much crypto they have staked in the pool and the length of time they have had it there; the participants with the highest stake stand higher chances of being picked.
Once the winner has validated the latest batch of transactions, other validators attest to the accuracy, and when a certain threshold of attestations is met, the blockchain is updated. All validators who participate in this process are rewarded in the blockchain’s native cryptocurrency, and it is done in proportion to each validator’s stake.
A high level of technical knowledge is required for one to be a validator due to the enormous responsibility that comes with the task. The minimum crypto amount that validators are required to stake is usually quite steep, e.g., 32ETH for ETH2. Validators also stand to lose part of their stake through a process called slashing if their node goes offline or they validate a ‘bad’ block of transactions.
The essential difference between mining and minting is the consensus mechanism utilised to determine the node or entity that adds blocks to the chain. Proof-of-Stake mechanism of minting is better suited to scalable blockchain networks such as Ethereum which makes use of smart contracts. SolidProof provides specialised audits, using both manual and automated tests, of source codes and smart contracts to find any vulnerabilities and suggests solutions, helping boost confidence of the community as they engage in activities like staking crypto on the network.
Cryptocurrency exists in two major forms, coins or tokens. Although there is often overlap in the use of these terms in literature, there are fundamental differences between the two. Coins have their own blockchain platforms like Bitcoin, Ethereum and Dogecoin, while tokens are created on already existing blockchain platforms. Coins are used to facilitate transactions amongst different users over the entire network.
Coins are much harder to mint than tokens since to mint coins one needs to construct a blockchain platform from scratch. Minting tokens, on the other hand, does not require extensive knowledge of the blockchain code and leverages on the existing blockchain to attract customers.
An NFT (non-fungible token) is a non-interchangeable unique unit of data stored on a blockchain; a kind of digital signature verifiable publicly. NFTs are linked with distinct digital or physical assets such as artwork, videos, and photos, and may be traded on particular online marketplaces like OpenSea and Rarible. Most NFTs are minted and run on the Ethereum blockchain.
To mint NFTs, a person needs to follow the following steps:
- Open a crypto wallet – connect the wallet to an NFT marketplace like OpenSea.
- Upload digital file – name the file and set up a royalty fee rate to stipulate how much royalties will be paid upon sale of the NFT on the secondary market. After uploading, the NFT will be minted.
- Fund crypto wallet – a user needs to have a funded crypto wallet to make a sale. To complete a sale, however, the user will need to buy some Ether and deposit it into the wallet. These transactions will incur gas fees.
- Sell NFT – as soon as minted, the NFT may be sold on the marketplace.