Digital cryptocurrency exchange explanation: Everything collectors need to know about NFT classifications.

What is an NFT?

NFTNFT stands for Non-Fungible Token, a type of token deployed on blockchain networks. The difference between NFTs and regular cryptocurrencies/tokens lies in their uniqueness.

Unlike traditional tokens where each unit is identical, divisible, and interchangeable, in NFTs, each token is a unique, independent entity that cannot be divided or replaced.

To make it easier to understand, let’s look at two examples: US dollars and legal documents.

Dollars are interchangeable tokens. 1 dollar, 2 dollars, or 10 dollars make no difference; they are all the same, can be accumulated, and exchanged. 10 dollars + 10 dollars = 20 dollars. The 10 dollars you own and the 10 dollars someone else owns are identical.

Legal documents are a type of Non-Fungible Token (NFT). Although they are all legal documents and belong to the same legal document system “collection,” each document has its own “document number,” content, and value. Therefore, they cannot be substituted for each other or split into 0.1 or 0.2 parts. NFTs are similar in this regard.

Additional explanation: To further elaborate on this concept and help you understand the essence of NFTs more thoroughly, I will again use US dollars as an example of fungible tokens. However, I have never said that 1 dollar, 2 dollars, or 100-dollar bills are fungible tokens because, in terms of individual bills, they are actually non-fungible tokens. Although each bill has the same monetary value, they all have a unique serial number, giving them different collectible values.

A 2-dollar bill with serial number 888888 is unique and cannot be copied or stamped over; it replaces the 2-dollar bill with serial number 666666. Naturally, people may value these two bills differently for collection purposes. Therefore, the currency itself is a fungible token, while the printed bills are non-fungible tokens.

In summary, you can see some prominent features of NFTs (Non-Fungible Tokens) as follows:

• Uniqueness
• Indivisibility
• Non-replaceability / Stackability

In the following chapters, we will explore different classifications of NFTs.

NFT Classifications

Based on Intended Use

You may be most familiar with the two major types of NFTs that appeared in recent GameFi activities: PFP (Profile Picture NFTs) and in-game items. However, according to this classification, NFTs can be further subdivided into many other subcategories. Below is a summary of NFT categories based on their intended use.

Classifying NFTs by intended use:

PFP

This type of NFT is mainly used for profile pictures, but besides avatars, they can also serve other purposes such as memberships, metaverse characters, or in-game items. However, usually collectors choose this type of NFT as their profile picture. Some popular collections in this category include: Bored Ape Yacht Club (BAYC), Red Bean, Miradi Mek.

In-Game / Metaverse Resources

In-game items such as land, weapons, and characters, when converted into NFTs, fall into this category. The most famous example is undoubtedly the game’s own characters. Infinite axes or entering virtual worlds for decentralization.

Membership

Holding such tokens grants you certain privileges, such as the right to purchase, mint, or attend concerts.

Identification

This line seems to be used for identifying entities in the blockchain space. Notable projects include: Ethereum Name Service (ENS), Space ID, Unstoppable Domains, Lens Protocol.

Additionally, there are POPA (Proof of Attendance Protocol) projects that issue NFTs as proof of participation.

Content - Digital Content

These are digital contents converted into NFTs, such as music, videos, and articles. Platforms supporting NFT content conversion include: CosTV, Mirror.xyz, and others. Open Campus.

Art

This category mainly includes artworks used for collection purposes.

RWA

Real World Assets (RWA) These are real-world assets that are tokenized and connected to blockchain networks; they can be houses, cars, stocks, or bonds. These tokens represent real-world assets linked to the blockchain.

Classification by Storage Characteristics

First, you need to understand that not all NFTs are stored entirely on-chain. Usually, an NFT consists of two parts:

Token: An identifier implemented in a smart contract.

Metadata: Detailed content of the NFT, such as name, creator, description, images, and videos. Metadata is associated with the token via a chain information field called tokenURI.

Typically, only the token part is stored on-chain, while the metadata is stored in decentralized data systems to minimize costs. Some projects choose to store metadata on centralized servers off-chain to save costs and increase flexibility.

NFTs consist of an identifier token and metadata.

Based on storage characteristics, NFTs can be divided into the following types:

Off-Chain Data

In this model, only the token information is implemented via smart contracts; media files are stored on centralized servers to minimize costs and maximize flexibility. Projects can update NFT display content at any time with very low costs.

However, this also means that if the centralized storage server encounters issues, NFT owners might experience unexpected changes or loss of images.

Semi-On-Chain

If the NFT’s metadata is stored on decentralized data systems like IPFS or Arweave instead of off-chain storage, it falls into this category.

Storing data on decentralized servers enhances user data security (security depends on the data storage network chosen by the project). Modifications to NFT data are also more restricted.

This is the most common solution chosen by many projects, as it ensures decentralization and necessary flexibility while saving costs.

Fully On-Chain

This is the most advanced NFT type, where all token information and metadata are fully stored on the main chain. Token information is implemented via smart contracts, and metadata is encrypted and stored directly on-chain.

This allows NFTs to fully inherit the characteristics of the network they are deployed on:

• Decentralization
• Immutability
• Transparency
• License-free
• Trustless operation

Because storage is entirely on-chain, the deployment cost for each NFT is much higher than other forms of storage.

This type of NFT is most common on the Bitcoin network; these fully on-chain NFTs are deployed via the Ordinals protocol. The creator of the Ordinals protocol, Casey Rodarmor, calls these fully on-chain NFTs Digital Artifacts.

Not limited to the Bitcoin network, fully on-chain NFTs can be deployed on any blockchain as long as the entire token and metadata are encrypted and stored on-chain.

By the way, Elon Musk recently publicly supported NFTs on Joe Rogan’s podcast, stating:

“Users should encrypt the image part of the NFT and upload it on-chain, rather than just storing the URL on-chain. Because if the data storage location encounters issues, you might no longer be able to access that image.”

Classification by Standards

Based on the standards used to issue NFTs, they can be divided into different types. Each network has different standards, but Ethereum’s standards are the most common. In this section, we will explore the common standards for non-fungible tokens on the Ethereum network.

Ethereum Standards

ERC-721

ERC-721 is the first standard for issuing non-fungible tokens (NFT) on the Ethereum network. Introduced by Dieter Shirley in 2018, it marked an important step forward in the NFT field. Each token created under this standard is unique and immutable on the Ethereum network. Since its launch, ERC-721 has quickly become the universal standard for NFTs.

ERC-1155

ERC-1155 is a standard designed to support creating and managing various types of digital assets within a single smart contract. It allows issuing and managing multiple different types of tokens (including ERC-20 and ERC-721) on the same smart contract, significantly reducing creation and management costs for creators and users.

Compared to ERC-721, ERC-1155 offers improved performance; however, its complexity may pose challenges in design and operation.

When uniqueness and personalization are needed, ERC-721 is usually the first choice; ERC-1155 is suitable for applications requiring flexibility and frequent switching, such as gaming or the metaverse.

ERC-6551

ERC-6551 is a standard designed to enhance ERC-721 functionality without changing the underlying network infrastructure. ERC-6551 enables NFTs created with ERC-721 to have an independent smart contract account called Token Bound Account (TBA). This opens up unlimited possibilities for interaction with other applications and assets.

To better understand the difference intuitively, imagine that previously each NFT had to be stored in the owner’s wallet. The owner could only hold or transfer it.

However, after tokenization with ERC-6551, the NFT becomes a wallet address (a wallet within a wallet), serving as a new entity or user on the network. Users can send and receive tokens, other NFTs, or use the NFT as an independent entity for authentication signatures.

In summary, ERC-6551 opens countless application scenarios in DeFi and Web3. It is a promising new standard worth attention and in-depth research.

Others

Ordinal Protocol facilitates creating NFTs on the Bitcoin network; NFTs issued via this protocol are called Inscriptions. They are created by encrypting all content of the NFT and storing it directly on the Bitcoin network.

This is a typical example of the fully on-chain NFT category mentioned earlier, based on storage characteristics.

Additionally, there is BRC-20, which is described as a fungible token on the Bitcoin network, but if you understand their nature deeply, they are still inscriptions (non-fungible tokens), and their text content cannot be stacked.

Summary

In the diverse world of NFTs, classification is not just about simple categorization but a way to explore endless creative possibilities. From art to applications, NFTs open up multidimensional innovation spaces and reshape asset ownership models. In the upcoming Web3 era, NFTs show enormous growth potential and broad prospects. **$MEME $NFT **$NFT