If you’ve heard about Cryptopunks, Hashmasks, NBA Top Shots, or even celebrity tweets being sold for millions, then you’re likely already aware of the craze around NFTs – Non-Fungible Tokens.
What is NFT?
NFTs are not cryptocurrencies. Cryptocurrencies, such as Bitcoin or Ether are the native payment currencies of a blockchain, a chain of blocks produced by miners that represents an incorruptible ledger of transactions. Platforms such as Wirex allow you to buy, hold and exchange different cryptocurrencies, meaning you can use them to purchase just about anything. However, unlike NFTs, cryptocurrencies are deemed fungible, interchangeable, and indistinguishable, like any commodity or traditional currency change the world. You can trade one Bitcoin for another, and both Bitcoins will always be worth exactly the same as each other.
On the other hand, an NFT is a unique token that is conceived, for the large majority, on the Ethereum blockchain. As such, NFTs are governed by Ethereum smart contracts, and transfers of ownership are written into the blockchain. These smart contracts are made up of a specific code which contains all the essential information and handles all the important actions relating to an NFT such as its transfer and verification. These actions constitute the foundation of Ethereum’s ERC-721 protocol, wherein the uniqueness of an NFT is DEFIned by the information stored within the NFT’s metadata, among which is a ‘token ID’ that points to an image, web domain, artwork or any valuable digital resource.
In short, an NFT is an untampered and tamperproof certificate of authenticity and ownership. It is used for instance by WISeKey or Arianee to track the provenance of luxury goods, by yInsure to create tradable insurance policies, or by Ethereum Name Service to track domain ownership.
The monthly volume of NFTs traded has exploded since September 2020 and has grown from a few million to $241 million, as recorded by NonFungible. The NFT craze is a phenomenon that is shaking the traditional art, game, sports, and insurance sectors with the markets being accessible to anyone ready to open an Ethereum wallet and connect to the blockchain. Case in point – In February 2021, a LeBron James dunk sold for $208,000 on NBA Top Shots and Jack Dorsey sold his first tweet for $2.9m.
Real-World Cases of NFT’s
- Digital Content — this is one use case that is most popular now. It allows artists to sell directly to their audience, without any middle men. It also allows people to support their favourite artists very easily.
- Gaming — currently in game assets, purchased by players are stored on the game server. If they shut down the game for some reason, all your assets are gone with it. But by creating in-game assets as NFTs, players have full ownership. They could sell it for real money, exchange it on other markets, or even use it in other games.
- Physical Items — in the future NFTs could be used to own physical items like a car or a piece of land. Maybe even use NFTs as collateral, or document verification. Imagine an NFT passport. The fashion industry is also exploring NFTs to sell unique pieces of clothing.
- Patents and Intellectual property — people could easily patent technologies and discoveries using NFTs.
- E-Commerce – NFTs could have the potential to replace SKUs with blockchain-based analog, as well as encourage one-of-a-kind products. The model could also support a more equitable profit-sharing system, particularly for emerging brands that are looking to establish themselves in e-commerce. Furthermore, NFTs could enable e-commerce data tracking, as users can have lifetime access to every data point across the product’s life span.
What Happens Next
NFTs create opportunities for new business models that didn’t exist before. Artists can attach stipulations to an NFT that ensures they get some of the proceeds every time it gets resold, meaning they benefit if their work increases in value. Admittedly football teams have been using similar contractual clauses when selling on players for a while, but NFTs remove the need to track an asset’s progress and enforce such entitlements on each sale.
New art platforms, such as Niio Art, are able to demonstrate in a really simple way that they own digital works. When customers borrow or buy art from the platform, they can display it on a screen in the knowledge that there is no issue with copyright or originality because the NFT and blockchain ensures that ownership is authentic. NFTs give musicians the potential to provide enhanced media and special perks to their fans. And with sports memorabilia, between 50% and 80% of items are thought to be fake. Putting these items into NFTs with a clear transaction history back to the creator could overcome this counterfeiting problem.
But beyond these fields, the potential of NFTs goes much further because they completely change the rules of ownership. Transactions in which ownership of something changes hands have usually depended on layers of middlemen to establish trust in the transaction, exchange contracts and ensure that money changes hands. None of this will be necessary in future. Transactions recorded on blockchains are reliable because the information cannot be changed. Smart contracts can be used in place of lawyers and escrow accounts to automatically ensure that money and assets change hands and both parties honour their agreements. NFTs convert assets into tokens so that they can move around within this system.
This has the potential to completely transform markets like property and vehicles, for instance. NFTs could also be part of the solution in resolving issues with land ownership. Only 30% of the global population has legally registered rights to their land and property. Those without clearly defined rights find it much harder to access finance and credit. Also, if more of our lives are spent in virtual worlds in future, the things that we buy there will probably be bought and sold as NFTs too.
There will be many other developments in this decentralised economy that have yet to be imagined. What we can say is that it will be a much more transparent and direct type of market than what we are used to. Those who think they are seeing a flash in the pan are unlikely to be prepared when it arrives.
NFTs – Non-Fungible Tokens / What is NFT? – https://www.uktech.news/news/the-future-of-nfts-a-hype-or-hope-for-crypto-economy-20210324
How NFT’s Could Change The World – Changing The Rules Of Ownership / What Happen’s Next? – https://theconversation.com/nfts-are-much-bigger-than-an-art-fad-heres-how-they-could-change-the-world-159563
More Future Real-World Cases of NFT’s – https://levelup.gitconnected.com/nfts-explained-what-they-are-how-they-work-and-their-future-8808937d92b3