A Comprehensive Overview of the Development History of NFTs

This article was published on Medium on July 10, 2019, with the original title: The History of Non-Fungible Tokens (NFTs), by Andrew Steinwold.

This is a historical review of NFTs written by Andrew Steinwold in October 2019. Although the NFT space saw significant advancements in 2020, and almost everyone in the crypto world became aware of and participated in it, I believe that few people are familiar with the history of NFTs. This article is a great supplementary resource; if you want to sound more knowledgeable when discussing NFTs with friends, this is a must-read! Unfortunately, Andrew got a bit lazy and didn't include the 2020 content, which is a slight regret.

(The article was originally published on my Medium on July 10, 2019)

What are Non-Fungible Tokens (NFTs)?

Non-fungible tokens are simply unique digital assets. Assets like Bitcoin are fungible, meaning all Bitcoins are the same and interchangeable. An example of a non-fungible token is artwork. I can own two identical digital artworks, but each piece is unique. The examples below show two NFTs from crypto artist Josie. Her two works "Choose" edition #4 and "Choose" edition #5 may look identical, but to the blockchain, both are unique.

Now that we understand what NFTs are, let's formally delve into the history of these assets.

Some might say that Colored Coins were the earliest NFTs. Colored Coins are made up of small denominations of Bitcoin, as small as one satoshi (the smallest unit of Bitcoin). Colored Coins can symbolize various assets and have multiple use cases, including:

• Property
• Coupons
• Ability to issue your own cryptocurrency
• Issuing company shares
• Subscriptions
• Access tokens
• Digital collectibles

Colored Coins represented a significant leap in Bitcoin use cases; however, their drawback is that they can only represent certain values if everyone agrees on their worth. Clearly, Bitcoin's scripting language was not designed to facilitate this behavior on its network, so the power of Colored Coins depends on their weakest participants. For example, if three people agree that 100 Colored Coins represent 100 company shares, if even one participant decides not to equate Colored Coins with company shares, the entire system collapses.

The earliest mention of Colored Coins seems to originate from a blog post by Yoni Assia in early 2012. In this post, he discussed Colored Coins but did not mention the various assets or use cases they could represent. Instead, he claimed that Colored Coins were unique because they were part of the "genesis transaction" and could be identified from regular Bitcoin transactions. It wasn't until December 4, 2012, when Meni Rosenfeld published a paper titled "Overview of Colored Coins," that the potential of these new assets seemed to be explored. A few months later, in 2013, another paper titled "Colored Coins --- BitcoinX" was published, which not only delved deeper than the former but also included authors you might be familiar with: Yoni Assia, Vitalik Buterin, Lior Hakim, and Meni Rosenfeld.

However, the flaws of Colored Coins are also evident. The system works best in a permissioned environment, meaning in some cases, it is better to simply use a database. Nevertheless, Colored Coins opened the door for further experimentation and laid the groundwork for NFTs. The immense potential of bringing real-world assets onto a distributed ledger is clear, but achieving this requires a more extensible blockchain.

2014 --- Counterparty

The emergence of Colored Coins made many people aware of the immense potential of issuing assets on the blockchain. However, it also became clear that Bitcoin itself did not intend to enable these additional features in its current iteration. In 2014, Robert Dermody, Adam Krellenstein, and Evan Wagner founded Counterparty: a peer-to-peer financial platform and a distributed open-source internet protocol built on the Bitcoin blockchain. Counterparty supports asset creation, has a decentralized exchange, and even has an XCP contract token. It hosts many projects and assets, including card games and meme trading.

April 2015 - Spells of Genesis on Counterparty

The developers of "Spells of Genesis" were not only pioneers in issuing in-game assets onto the blockchain via Counterparty but were also among the first to launch an ICO. In fact, ICOs were referred to as crowdfunding long before. "Spells of Genesis" funded its development by issuing a token called BitCrystals, which was also used as currency within the game.

August 2016 - More Trading Cards on Counterparty

In August 2016, Counterparty collaborated with the popular card game "Force of Will" to issue their cards on the Counterparty platform. "Force of Will" is the fourth best-selling card game in North America, behind "Pokemon," "Yu-Gi-Oh," and "Magic: The Gathering." This event was significant because "Force of Will" is a large mainstream company with no prior experience in blockchain or cryptocurrency, and their entry into the ecosystem demonstrated the value of bringing such assets onto the blockchain.

October 2016 - Rare Pepes on Counterparty

It was only a matter of time before memes began to transition to the blockchain. In October 2016, people started issuing "rare pepes" as assets on the Counterparty platform. Rare pepes are a type of meme featuring this frog character.

These memes have a large fan base, and there is even a meme exchange called Rare Pepe Meme Directory.

It seems that merely existing on the Bitcoin blockchain was not enough; the "experts" in the Rare Pepe Meme Directory proved the rarity of pepe memes. Setting aside the quirky aspect, this example indeed introduced many people to unique digital goods.

Today, Counterparty has built a multitude of projects on its platform, many of which involve assets similar to NFTs. You can browse various projects on Counterparty here.

March 2017 - Rare Pepes on Ethereum

With the rise of Ethereum in early 2017, meme trading also began to appear on Ethereum. In March 2017, a project called Peperium was announced as a "decentralized meme marketplace and trading card game (TCG) where anyone can create memes that are permanently stored on IPFS and Ethereum." Similar to Counterparty, Peperium also had an associated token: RARE, which was used to create memes and pay listing fees.

June 2017 - CryptoPunks

With the increase in trading of rare pepes on Ethereum, two "creative technologists" decided to create their own NFT project with subtle modifications. John Watkinson and Matt Hall realized they could create unique characters native to the Ethereum blockchain. The total supply of these characters was capped at 10,000, and no two characters could be the same. They named their project CryptoPunks, a tribute to the Cypherpunks of the 90s who influenced Bitcoin.

Surprisingly, Watkinson and Hall chose to allow anyone with an Ethereum wallet to claim a CryptoPunk for free. All 10,000 CryptoPunks were quickly claimed, leading to a thriving secondary market where people traded CryptoPunks. Interestingly, CryptoPunks did not follow the ERC721 standard, as that standard had not yet been invented, and due to its limitations, they were not entirely ERC20 either. Therefore, it is best to describe CryptoPunks as a hybrid of ERC721 and ERC20.

What are Ethereum Token Standards (ERC)

On Ethereum, different types of tokens have different technical standards to ensure their interactions work correctly. "ERC" stands for "Ethereum Request for Comment." The most common ERC standard is ERC20, which has rules that allow tokens to interact as expected. This standard framework is very useful for developers when creating tokens that need to interact with other tokens or applications on Ethereum. Although ERC20 tokens work perfectly in many scenarios on Ethereum, they are not the best choice for creating "unique tokens." For this purpose, the ERC721 standard was born. While similar to ERC20 in many ways, ERC721 is specifically designed as the technical standard for non-fungible tokens on Ethereum. The main difference between the two standards is that ERC721 tracks the ownership and transfer of individual tokens within blocks, allowing the chain to recognize non-fungible tokens. The first project to use the new NFT technical standard was the famous CryptoKitties.

October 2017 - CryptoKitties

With the emergence of CryptoKitties, NFTs became mainstream. CryptoKitties is a blockchain-based virtual game that allows players to adopt, feed, and trade virtual cats. Cats, on the blockchain!

Perhaps because this game caused network congestion on Ethereum, or perhaps because people were making crazy profits trading them, this amazing project quickly appeared in numerous news outlets like CoinDesk and CNN.

Some virtual cats even sold for over $100,000.

CryptoKitties was launched in October 2017 by a Vancouver-based company called Axiom Zen. The team had been working on the project for several months when they released the Alpha version during the ETH Waterloo Hackathon (the largest Ethereum ecosystem hackathon in the world). At that time, over 400 developers participated in the hackathon, making it an excellent venue and time to introduce the game. The CryptoKitties team won first place in the hackathon competition, and the game quickly went viral.

The rise of CryptoKitties coincided with the bull market of 2017, making it unstoppable. People frantically bought, bred, and traded virtual cats. This allowed many to see the potential of non-fungible tokens. Subsequently, Axiom Zen spun off a company called Dapper Labs, which raised 15 million dollars from top investors like a16z and Google Ventures. After witnessing the frenzy of the CryptoKitties community and Dapper Labs securing investments from top investors, people began to recognize the true power of NFTs.

2018-2019 - The Cambrian Explosion of NFTs

In 2018 and 2019, the NFT ecosystem experienced massive growth, with over 100 projects in this space and many more in development. Led by OpenSea and SuperRare, the NFT market was thriving. Although its trading volume was still small compared to other cryptocurrency markets, it was growing rapidly and making significant progress. With Web3 wallets like Metamask continuously improving, joining the NFT ecosystem became easier. Recently, Dapper Labs also launched a Dapper wallet that does not require gas fees. Additionally, there are now some websites, such as nonfungible.com and nftcryptonews.com (shameless plug), that delve into NFT market metrics, game guides, and provide standard information about the field. This image from The Block illustrates the current NFT ecosystem well.

CryptoKitties expanded the territory of NFTs, but without the earlier projects, CryptoKitties would not have achieved its current success, as these projects laid the foundation for NFTs by establishing unique digital assets. This interesting chart released by nonfungible.com shows the importance of CryptoKitties to the current NFT ecosystem.

This chart shows that people who own CryptoKitties tend to play other NFT games, while those who play other NFT games usually do not play other games. CryptoKitties is the perfect gateway into the world of NFTs.

Due to the ability to breed different cats, CryptoKitties experienced tremendous growth, creating a whole new category of cats or ERC721 tokens. Now, NFTs have endless functionalities, including character names (similar to domain names), virtual land, virtual clothing, event tickets, asteroid mining resources, and more. Perhaps the most exciting area of development is that countless NFT games and projects are interoperable, allowing projects to interact with each other. For example, a player in one game might own a sword that can be brought into another game, becoming a rare piece of clothing. With interoperability, the possibilities are endless.

Future Outlook

The history of non-fungible tokens is much longer than most people imagine. The first attempts at NFTs were during the Colored Coin era in 2012-2013, but I believe that even though it is now 2019, we are still in the very early stages. Despite the tremendous growth we have experienced over the past two years, the NFT ecosystem is still very young, so growth will only continue. In fact, I believe that as more people and companies realize the impact NFTs can have and implement them further, the growth of the NFT ecosystem will accelerate. Developers will continue to create innovative uses for NFTs, and interoperable projects will fundamentally change the game. I predict that in five years, the landscape of the NFT space will be transformed, and by then, I will have to update the history of the NFT ecosystem again!