Source-linked AI summary
Non-Fungible Token (NFT): Overview, Evaluation, Opportunities and Challenges
Qin Wang, Rujia Li, Qi Wang, Shiping Chen
TL;DR
NFT research lacked a systematic study of a rapidly expanding but technically immature ecosystem. This report surveys NFT designs and components, evaluates security, discusses opportunities, and outlines challenges, concluding that current solutions require further development before mass-market penetration.
Problem
NFT technologies are still in an early stage, while a systematic study of current NFT solutions is absent.
Method
The report analyzes NFT technical components, design models, protocols, standards, and properties, then applies STRIDE to evaluate security and discusses opportunities and challenges.
Results
The report provides a timely analysis and summary of existing NFT solutions, projects, security issues, opportunities, and research challenges.
Takeaways & Limitations
NFT systems may reshape digital and virtual assets, but existing research challenges must be solved before mass-market penetration.
Takeaways & Limitations
Blockchain-based NFT systems still confront privacy issues and data inaccessibility.
Abstract
from arXiv · showhide
The Non-Fungible Token (NFT) market is mushrooming in recent years. The concept of NFT originally comes from a token standard of Ethereum, aiming to distinguish each token with distinguishable signs. This type of token can be bound with virtual/digital properties as their unique identifications. With NFTs, all marked properties can be freely traded with customized values according to their ages, rarity, liquidity, etc. It has greatly stimulated the prosperity of the decentralized application (DApp) market. At the time of writing (May 2021), the total money used on completed NFT sales has reached $34,530,649.86$ USD. The thousandfold return on its increasing market draws huge attention worldwide. However, the development of the NFT ecosystem is still in its early stage, and the technologies of NFTs are pre-mature. Newcomers may get lost in their frenetic evolution due to the lack of systematic summaries. In this technical report, we explore the NFT ecosystems in several aspects. We start with an overview of state-of-the-art NFT solutions, then provide their technical components, protocols, standards, and desired proprieties. Afterward, we give a security evolution, with discussions on the perspectives of their design models, opportunities, and challenges. To the best of our knowledge, this is the first systematic study on the current NFT ecosystems.
1 Introduction
NFTs are Ethereum-derived, uniquely identifiable digital-asset tokens whose market expanded rapidly while the ecosystem remained technically immature and lacked a systematic study. The report surveys NFT designs, evaluates security, examines opportunities, and identifies open challenges.
- NFT background: NFTs are unique, non-fungible tokens that can identify digital assets and support ownership proofs and royalties through Ethereum smart contracts.Examples include videos, images, art, and event tickets.
- Market growth: 34,530,649.86 USD was spent on 25,729 completed NFT sales by May 2021.The reported 24-hour NFT trading volume averaged 4,592,146,914 USD and represented 1.3% of cryptocurrency-market liquidity.
- Market examples: CryptoPunks, CryptoKitties, and NBA Top Shot illustrate NFT adoption across collectibles, games, and digital sports videos.CryptoKitties’ highest reported sale exceeded 999 ETH, while NBA Top Shot collectors acquired over 7.6 million moments.
- Report scope: The report abstracts NFT design models and presents their technical components, protocols, standards, and targeted properties.It aims to provide a systematic summary for newcomers following current NFT solutions.
- Report scope: Security evaluation uses STRIDE to investigate potential issues and corresponding defense measures in current NFT systems.The report also explores future opportunities and practical NFT projects across fields.
- Open challenges: Open challenges include privacy issues and data inaccessibility in blockchain-based NFT systems.The report highlights these issues as barriers requiring attention in the developing ecosystem.
2 Technical Components
NFT systems combine blockchain, smart contracts, addresses and transactions, and data encoding to support storage, ownership, and exchange. These components provide the technical foundations for functional NFT schemes.
- Blockchain: Blockchain supplies the distributed ledger, consensus, immutability, and smart-contract execution environment underlying NFT schemes.Ethereum is the prevailing platform, while Flow, EOS, Hyperledger, and Fast Box are also identified.
- Smart contracts: Smart contracts use Turing-complete scripts and consensus-based state replication to execute functionality and enable exchanges without trusted third parties.Ethereum further developed smart contracts within blockchain systems.
- Addresses and transactions: Blockchain addresses identify users, while transactions transfer NFTs through private-key possession and correct digital signatures.The transfer operation is typically performed through a cryptocurrency wallet and invokes smart contracts.
- Data encoding: Data encoding converts NFT data into blockchain-compatible representations, commonly using hexadecimal values for transaction elements.NFT activities such as buying, selling, trading, and auctioning are processed through smart-contract phases.
3 Protocols, Standards and Properties
NFT schemes use top-to-bottom or bottom-to-top protocols, token standards such as ERC-20, ERC-721, and ERC-1155, and ledger-backed properties including verifiability and persistence. These designs structure minting, trading, and ownership.
- Top to Bottom: Top-to-bottom protocols digitize, store, sign, and submit NFT data before smart-contract confirmation persists the NFT on-chain.The owner verifies the file, title, and description, stores raw data externally or on-chain, and signs a transaction containing its hash.
- Protocols: NFT minting and trading invoke smart contracts, and confirmed transactions provide persistent blockchain-address evidence or on-chain storage.Blockchain blocks create a permanent linked history for NFT transactions.
- Bottom to Top: Bottom-to-top protocols begin with a founder-defined template, then randomize additional features when a buyer bids before minting and trading.This design supports buyer customization using features selected from a predefined database.
- Token Standards: ERC-20 standardizes fungible tokens, whereas ERC-721 represents unique tokens identified by a contract-address and tokenId pair.ERC-721 tokenId values can also support special identifications such as generated character images.
- Token Standards: ERC-1155 extends tokenId representation to support independently configurable fungible and non-fungible token types.Its interface can represent any number of tokens, unlike the single-type arrangements described for ERC-20 and ERC-721.
- Key Properties: NFT systems inherit properties including verifiability, transparent execution, availability, tamper-resistance, atomicity, and tradability from public ledgers.Confirmed metadata and trading records are described as persistent and resistant to manipulation.
4 Security Evaluation
The report evaluates NFT security across blockchain, storage, and web-application components using STRIDE, identifying threats and corresponding defenses. Blockchain protections preserve confirmed on-chain records, but off-chain data and poorly designed components remain vulnerable.
- Security evaluation: NFT security evaluation uses STRIDE across blockchain, storage, and web-application interfaces, covering authenticity, integrity, non-repudiability, availability, and access control.The evaluation investigates potential security issues and proposes corresponding defense measures.
- Authenticity: Private-key theft or authentication flaws can enable unauthorized NFT transfers, motivating formal smart-contract verification and cold-wallet use.
- Integrity: Confirmed blockchain metadata and ownership resist malicious modification under stated ledger and hash assumptions, but external data may still be manipulated.The report recommends sending both hash and original data to buyers during NFT trades.
- Non-repudiation: Blockchain records make NFT transfers non-repudiable, yet tampered hashes or incorrect address bindings can undermine that guarantee.The report suggests multi-signature contracts as a partial remedy because bindings require multiple confirmations.
- Confidentiality and availability: Transparent smart-contract state and hash–transaction linkability expose information, while centralized applications and off-chain data remain vulnerable to denial-of-service.Privacy-preserving smart contracts are recommended for disclosure risks.
- Authorization: Poorly designed smart contracts can grant excessive selling permissions, creating elevation-of-privilege risks in NFT systems.
5 Opportunities
The report identifies gaming, virtual events, digital collectibles, and metaverse activities as opportunity areas for NFTs. Across these applications, NFTs support distinctive ownership records, trading, and blockchain-based participation.
- Boosting Gaming Industry: NFT games use breeding, rarity, ownership records, and secondary-market trading to create economic opportunities for players and developers.Developers can earn royalties from resold items, while players obtain exclusive game assets.
- Flourishing Virtual Events: NFT-based tickets can represent unique, scarce entitlement to access events and support transparent trading among organizers and customers.
- Protecting Digital Collectibles: Digital collectibles span trading cards, wines, images, videos, virtual real estate, domain names, diamonds, crypto stamps, and other properties.
- Inspiring the Metaverse: Blockchain provides a decentralized environment for metaverse activities and virtual shared spaces involving digital participation.
6 Challenges
NFT adoption faces usability, security, governance, and extensibility barriers arising from blockchain constraints, data and privacy risks, regulation, and ecosystem isolation. These challenges span both system-level limitations and human factors.
- Usability: NFT systems inherit Ethereum’s low performance, causing slow confirmations; addressing this requires blockchain redesign, structural optimization, or platform improvements.The report contrasts Bitcoin at 7 TPS with Ethereum at 30 TPS.
- Usability: Minting an NFT costs over USD 60, while a simple NFT trade can cost USD 60–100 because smart contracts require computation and storage.
- Security and privacy: Off-chain NFT files may become inaccessible when hashes point to lost, damaged, unreplicated, disconnected, or erroneous storage content.IPFS availability depends on at least one node continuing to host the content.
- Security and privacy: Ethereum provides pseudo-anonymity rather than strict privacy, leaving activity observable when addresses are linked to real identities.
- Governance: NFT governance must address regulatory scrutiny involving commodities, cross-border transactions, KYC data, trading restrictions, and inconsistent legal frameworks.The report emphasizes due diligence before serious NFT investment.
- Governance: NFT sales may fall outside existing taxable-property frameworks in many jurisdictions, potentially increasing financial-crime risks under NFT trading.
- Extensibility: NFT ecosystems are isolated by their underlying blockchains, limiting cross-network trading and making cross-chain communication dependent on external trusted parties.
- Extensibility: Updatable NFT schemes inherit blockchain-update tradeoffs and must tolerate adversarial behavior while remaining online during updates.
7 Conclusion
The report surveys NFT technologies, evaluates their security, discusses applications and opportunities, and outlines challenges requiring resolution before mass-market penetration.
- The report analyzes NFT components, design models, and properties, then evaluates security and discusses applications, opportunities, and research challenges.It aims to provide a timely summary of proposed solutions and projects for newcomers.
Appendix A. Version Control
Appendix A documents version updates and notes that dynamic NFT market data remain fixed to a May 2021 snapshot.
- Dynamic prices, sales, and market-cap data remain unchanged from the May 2021 snapshot.The report describes itself as an ongoing updated technical report.
- The appendix includes a table of NFT version updates.
Appendix B. Top Sales of NFT Properties
Appendix B presents an all-time NFT collectible ranking by sales volume, using data captured on May 10, 2020.
- The appendix provides an all-time ranking of NFT collectibles by sales volume.
- The underlying data were captured on May 10, 2020, from CryptoSlam.
Appendix C. Overview of Existing NFT solutions
Appendix C surveys existing NFT projects as of May 2021 and identifies the sources used for the report’s data.
- The appendix provides an overview of existing NFT projects as of May 2021.
- The report draws its project and market information from NonFungible, CryptoSlam, DefiPulse, CoinGecko, and DappRadar.
Appendix D. Analysis of Loot
Appendix D analyzes Loot, a text-based NFT project using an Ethereum ERC protocol, its randomized game-gear attributes, and its current limitations.
- Loot overview: Loot contains 8,000 entries, with 7,778 available for trading and 222 allocated to team incentives.
- Loot overview: Loot represents game-gear attributes as eight lines of text rather than images, statistics, or other representative formats.
- Loot implementation: The minting function deterministically selects attribute strings and conditionally adds suffixes or generated names based on a token-specific random value.
- Loot limitations: Loot’s uncertain value, difficult minting, high Ethereum gas fees, and lack of a front-end DApp limit participation.Each trading or minting operation can cost tens to hundreds of dollars.
- Loot limitations: Loot’s experimental version covers only eight explicit RPG attributes and provides no space for on-top applications.