A Tremendous amount of discussion has been surrounded NFT’s existing applications, yet few philosophically contemplate the nature of NFTs. Consequently, investors fail to produce a blueprint that can guide investment decisions or predict the evolvement of the NFT landscape.

In this article, we will take a step back to analyze the real nature of Non-Fungibility, the monetizable value of its unique nature, and build a matrix illustrating its potential applications.

Now let’s roll back to the basic idea of Non-Fungibility.

Imagine a group of hostile aliens observing humans from space. Humans would appear indistinguishable from each other, similar to how we feel when watching ants move around. If those aliens decided to enslave humans, then the value of each human would seem interchangeable. To these aliens, humans would be, by definition, fungible.

Then assuming a good alien escaped from the vicious bunch, landed on Earth, and observed humans closely. It would instantly recognize the vast differences among individual humans. Each human does seem unique physically, which does NOT make them non-fungible yet when their value is only defined as an equally exchangeable asset. So the constitution of non-fungibility must occur 1) during exchanges 2) non-equal in value during the exchange

The good alien soon discovered humans are bound to one another through a magical electromagnetic force, called LOVE. To humans, is LOVE fungible or non-fungible?

Philosophers such as Badhwar believe that the object of love is “phenomenologically non-fungible” (2003, p. 63; see also 1987, p. 14).

*Badhwar, N. K., 2003, “Love”, in H. LaFollette (ed.), Practical Ethics, Oxford: Oxford University Press, 42–69.

”To be fungible is to be replaceable by another relevantly similar object without any loss of value.”

*Helm, Bennett, “Love”, The Stanford Encyclopedia of Philosophy (Fall 2021 Edition), Edward N. Zalta (ed.). First published Fri Apr 8, 2005.

The good alien died, for lack of better ending for this Sci-fi example. However, we can derive a formula from this fictitious example, demonstrating the value of non-fungibility.

V1 = V0 + α

V1 non-fungible value

V0 fungible value: commonality

α non-fungible premium: uniqueness

If Bennet Helm is right about LOVE’s non-fungibility, then α must be greater than 0, i.e. replacing a particular person you love would lead to a feeling of loss. Hence if one mints a LOVE NFT symbolizing his/her love towards another human, then that NFT’s value is determined by 1) *V0 *(fungible value): easiness to replace that object of love with a similar human being; 2) α (Non-fungible premium): that feeling of loss after the replacement.

Ok, enough with bantering about LOVE. Let’s continue to explore how to maximize the value of the non-fungible token to map out future trends.

Some say we seem to be trying to make the non-fungible token as fungible as possible. We can consider this as the commonality layer of a non-fungible item. Increasing fungible value is fundamental to adding up the non-fungible value. Hence, adding trading volume and velocity to the NFT market would be essential to a greater NFT market. To add volume, we need more players and a lower entry barrier; and to add velocity, we need more infrastructure, tools, and derivatives around NFTs. The market will evolve from primitive exchange of goods to using complex financial services with NFTs as underlying assets.

From fractionalization (fractional) and fragmentation (fragmint), to protocols that pool NFTs of equal value into index funds (nftx), as well as liquidity providers (charm) and lending platforms (nftfi), the infancy stage of financialization has started. We will take a closer look at the paths of financialization in another article after we analyze the expansion of utilities around NFTs.

From: Messari

The non-fungible premium is about honoring UNIQUENESS in human society. Since such uniqueness is vital to proving existence, we assign great value to them. Expanded utilities around NFTs must develop around proof of uniqueness, and they can be categorized as follows,

“Identity is the qualities, beliefs, personality traits, appearance, and/or expressions that characterize a person or group.”

A unique identity can be as simple as an NFT-based ID card, although, in the Web3 realm, the idea of DID (Decentralized Identity) will provide a unique tracker that can be used to develop on-chain credentials for personal data ownership, e.g. Project Galaxy. Some projects have taken one step further in creating a Web3 ad economy based on DID and related user behavioral data, e.g. Parami Protocol.

*Vitalik even suggests making NFTs *Soulbound *like World of Warcraft Items. The concept of identity reaches far beyond functionality, it can also be an iconography for self-expression. The PFP hype of using blue-chip NFTs such as BAYC and CryptoPunks is prevalent. In relation to the concept of Soulbound, an NFT collection, Meta Astro emerges, allowing one to mint a unique astrological natal chart based on his/her birth date and location. It is certainly a smart and fun idea to utilize someone’s astrological sign as his/her identity in metaverses.

Ownership of unique items has been the first step being taken around NFT utilities. Digital art, unique in-game assets, virtual real estate, and various collectibles successfully created the initial NFT frenzy. Moreover, utilities based around IPs and copyright ownership shall revolutionize the entire creator economy within Web3. Music NFT is a good example.

Ownership of unique items comes with unique rights. Below are some of the emerging applications of unique rights associated with NFTs:

- Access: tickets, badges, etc

- Earning: collateralized lending, yields, shared profits, royalties based on NFTs

- Redeem: rights to claim certain physical/virtual goods, this is especially convenient for pre-sale (e.g. ad spaces/media spots)

- Reward: already widely used among NFT projects for their airdrops (e.g. Azuki, BAYC, etc.). Similar logic also applies in any loyalty program to reward your fans or customers.

Twitter co-founder Jack Dorsey created an NFT out of his first-ever tweet, which sold for $2.9 million.

Unique records of events or ownership can be widely financialized, especially in banking and insurance-related applications.

- Proof of an incident: Instead of having to be notarized, one can use an NFT as proof of incidents for insurance cases.

- Proof of credit: A standby letter of credit from banks can help enterprises to issue bonds at lower financing costs and increase the desire for subscription from investors. Financial instruments as NFTs will enable large amounts of use cases for the next phase of Defi.

A matrix is made based on the analysis of how much application each NFT utility category has been explored. So far, applications have been merely concentrated among digital art collectibles and in-game assets (blue bars). Whereas, powerful NFT applications among socialfi, DAO and Defi are largely untapped (red columns).

In the upcoming article, we will expand this matrix into a full-fledge investment thesis, elaborating how financialization would take place across these utility categories and deep-dive into NFT infrastructure & application use cases among Socialfi/DAO and Defi/Financial Service.

TLDR:

The advent of NFT’s could revolutionize our way of expressing identity, protecting privacy, and exchanging ownership and rights; just like how Bitcoin changed how we think of money.

Thanks for Reading and Feel Free to connect w/ me on Twitter @funky_tooth .