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NFT Infrastructures

A high level explanation of the NFT infrastructure and the protocols that support it and its security.
Image of digital network with end nodes showing different NFT images
© RMIT 2022

As you may have gathered from examining the tools of the trade, there are a number of infrastructures that support the NFT ecosystem. Let’s take a closer look at some of them.

The first part of NFT infrastructures we will look at is where they get minted. Minting is taking a digital asset and converting the file into a digital asset stored on the blockchain. NFTs are unique tokens that are generally minted using the project’s website (front-end). This is where the NFT is lodged onto the blockchain which is, as explained previously, the ledger that tracks and traces NFT ownership.

Wallets are another important part of the infrastructure as they allow us to purchase, store and interact with NFTs. Wallets work through public/private key encryption. These keys, once created, are mathematically paired together—private keys generate the public keys which, in turn, are compressed and shortened to form wallet addresses. Once a transaction is sent to a wallet address and is encrypted with a public key, you’ll need the corresponding private key to decrypt it

If you wish to sell your NFT you will often have to interact with the secondary market. Marketplaces and Aggregators have been built to facilitate this. The most popular are currently Opensea, Rarible, and LooksRare, which exist on the Ethereum blockchain. These marketplaces have been created to facilitate exchanges on the secondary market but you can also mint NFTs on these platforms if the project decides not to create their own front-end (website).

Unpacking the blockchain layers

NFTs were first minted on the Bitcoin blockchain in 2011, and were known as Coloured Coins. These early NFTs allowed people to send different colours in their Bitcoin transactions. Later, NFTs re-emerged on the Ethereum blockchain in 2017 with the advent of Crypto Kitties and Crypto Punks.

Ethereum remains the most popular blockchain for NFTs, because it has a mature development of token standards and security protocols. The industry standard token ERC-721 was developed on the Ethereum blockchain and has been adopted by other blockchains. ERC-721s are designed to be immutable and transparent in ownership. Another popular token, ERC-1155, is currently cheaper to mint NFTs with and has more functionality. The interesting part about ERC-1155 tokens is that they have the flexibility to be Non-Fungible, Semi-Fungible or Fungible tokens. However, this flexibility comes at the cost of losing some of the token’s metadata, which can make it difficult to track ownership of the NFT.

The downside of using Ethereum as the primary blockchain (Layer 1) for NFTs is that it currently suffers from network congestion and an inability to scale. This makes the gas fees very high. Gas fees are payments made by users to compensate for the computing energy required to process and validate transactions on the Ethereum blockchain.

Because of this, we are now seeing Layer 2 solutions on the Ethereum blockchain that look to solve these challenges by batch processing NFT transactions and uploading them to the Layer 1 blockchain. Examples of current layer two solutions include Immutable X and Polygon. There are also side chains that look to solve Ethereum’s scalability issue like Ronin. A side chain is a separate blockchain which runs in parallel to Ethereum and operates independently.

Other popular blockchain Layer 1’s such as Solana, Avalanche and Tezos which focus on scalability. These Layer 1s have moved away from the traditional Proof-of-Work consensus mechanism to alternatives that allow them to provide faster and cheaper transactions such as Proof-of-Stake. Proof-of-Stake requires validators to stake a significant sum of the blockchain’s native token, this stake allows validators to approve transactions on the network and acts as incentive to behave in the networks best interest. This is because malicious validators (if caught) are slashed resulting in some (or all) of their stake being taken away.

As a result, they have attracted a large part of the retail market that can’t afford to transact on Ethereum. To capture this new market, developers have migrated their NFT projects and platforms onto these blockchains. Since the rise of these new blockchains, Ethereum has migrated to Proof-of-Stake which has helped to solve some of its scalability issues. However, interestly the communities formed on these alternative Layer 1s has remained and continued to grow.

Additionally, there are NFT-specific blockchains, such as Flow and WAX, that have been created with the sole purpose of building NFT projects.

Security considerations

Questions of security and NFT infrastructure arise firstly in relation to practices of storage, and secondly in response to bugs in the code that can be exploited. Storage security is about securing your NFT safely. The current industry standard is to utilise decentralised storage options such as Inter Planetary File System (IPFS) and Filecoin. Through decentralised storage, the NFT is stored on multiple devices in multiple locations. This ensures that if one location or device is compromised, there is a back-up located somewhere else. However, even decentralised storage providers are not foolproof, and you could still lose your precious NFT.

NFTs are created using Smart Contracts which assign ownership and manage the transferability of the NFTs. This means that, if there is a bug in the contract, malicious actors may be able to exploit it and steal the NFT. Additionally, they could manipulate the contract and change it so that it no longer points to your favourite profile picture. Therefore, it is important to trust the projects that you are purchasing from and ensure that their smart contracts have been audited to protect you from possible exploits.

Now it’s your turn

The rise of Blockchain gaming has seen NFTs being used to represent in-game assets. There are marketplaces being launched on these platforms to facilitate the exchange of assets. Axie Infinity is a great example of this. Visit the Axie Infinity website and see if you can map out the NFT infrastructure behind the exchange of in-game assets.

Try to find the answers to the following questions and share them with your fellow learners in the comments:

  • What blockchain does Axie Infinity run on?
  • How do wallets figure into the exchange? Which wallets can people use?
  • What is the role of marketplaces and aggregators in the asset transaction?
  • How are the assets exchanged securely stored?
© RMIT 2022
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NFTs: A Practical Guide

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