How does a digital collectible work?

Digital collectibles or non-fungible tokens (NFTs) are digital assets that are unique, scarce, and tradable on the blockchain. They have become a popular form of digital ownership which can support various use cases. 

Digital collectibles are tokens created on a blockchain such as Ethereum or Polygon. They are indivisible, immutable, and non-interchangeable, meaning no two are exactly alike. And thanks to a blockchain’s decentralized ledger, matters of ownership and providence are transparent, easy to track, and secure.

Digital collectibles offer real-world benefits such as the ability to tokenize art, memorabilia and souvenirs, and other physical or digital assets such as legal documents or certificates, changing how people think about virtual ownership and secure digital assets.

Even though they seem very complicated, once you break them down into their main components, NFTs are simple concepts to understand.

Similar to cryptocurrencies, digital collectibles are created through a process called minting. When an NFT is minted, its data is entered into the blockchain’s ledger permanently and securely. 

Minting involves using cryptography to create a digital representation of an asset. In a decentralized blockchain, no single entity controls the algorithms that keep the network running–it's the user community itself that validates any and all activity on the network. This makes storing digital assets far more secure than in a centralized platform which is controlled by a single corporate entity or institution. 

Minting involves the use of what’s called a smart contract, which are automated algorithms that execute themselves without human intervention. After an NFT is minted, the token now exists on the blockchain and can then be offered for sale to the public, either through a marketplace or exchange. Once purchased, the token is stored in the buyer’s digital wallet, giving its new owner complete ownership over the asset.

There are three components that make up the creation of an NFT. They are the token, metadata, and the image or visual asset.

The token is the actual digital asset that is securely stored on the blockchain. It is directly related to the smart contract that is associated with the NFT and functions as the unique identifier for the asset.

Metadata is extra information associated with the NFT. This can include the creator, the history of the asset, links to related content and events, and links to websites and social media accounts associated with the asset. Metadata is an important part of ensuring the authenticity and ownership of the asset.

The image or visual asset is a representation of the NFT. This can be a physical image, such as an image of a collectible card or a 3D rendering of a virtual item, or a digital image, such as a JPEG or GIF. This image serves as a visual representation of the asset and is used to promote the asset and help it stand out from other similar NFTs.

The three components of an NFT work together to provide a unique representation of the asset and its ownership. The token ensures that the asset is securely stored on a distributed ledger, the metadata provides additional information about the asset, and the image or visual helps promote the asset and make it stand out from other competitors.

Though cryptocurrencies and digital collectibles are both tokenized assets on the blockchain, the biggest difference is when it comes to ‘fungibility’. Simply put, fungible tokens; such as cryptocurrencies, mean that all coins of a particular type are the same, allowing users to trust that one unit of bitcoin for example, is and will always be worth the same as another bitcoin. Fiat currencies such as dollars and pesos are also fungible units, and their value is determined by the collective market that trades these currencies. 

However, unlike fungible assets, all digital collectibles are unique and non-replaceable, making them ideal for artworks and property rights. Being non-fungible, every NFT’s value is determined by its desirability and uniqueness, similar to how the value of rare paintings in auctions are determined by the bids from interested buyers. 

Aside from digital paintings, NFTs can be collectible cards, tickets, songs or videos, or in-game items, whose value is up to the creators, owners, and traders who market them. 

Royalties refer to a percentage of income from the sale of a digital collectible. This royalty allows the initial creator of the NFT to benefit from the continued sale and trading of the NFT, granting a possible revenue stream. Similar to real-world art, royalties are typically granted to the original creator since they own the copyright for the artwork. 

Scarcity refers to the limited supply of digital collectibles that belong to a collection, or the number of the same NFT which exists on the blockchain (similar to limited prints of a real-world artwork). Since digital collectibles are non-fungible, this means owners can’t make copies in the same way you can create a copy of an image file in your computer. This idea of limited availability makes digital collectibles more valuable since scarcity leads to higher demand. 

The rarer an NFT is, the higher its value becomes, making it more desirable for collectors and investors. Combined with royalties and the potential to appreciate in value over time, this can make digital collectibles a very unique and rewarding asset for creators and traders alike. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical or financial integrity of the digital collectibles or their ecosystems. Any and all trading involving digital collectibles are subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.The digital collectibles traded on the platform are not presently subject to any specific registration requirements under applicable Philippine law and are not registered with any Philippine regulatory authority.

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