Non Fungible Tokens (“NFTs”) exploded onto the tech scene in 2021, during what was described as the DotCom bubble of the new era. Exponential gains were met with huge levels of speculation and volatility. The hype is dying down with minimal (and often misleading) mainstream media coverage, but that doesn’t mean that the technology is dead. Far from it, and development is ramping up during the bear market.
So now is the time to educate yourself on what the technology is and how it will revolutionize the internet and the world as we know it.
This article reviews the history of NFTs, establishes key properties, and provides insights into use cases going forward.
Background
What is an NFT?
What are the key properties?
History of NFTs
Examples of NFTs
Future Utility
Closing Remarks (TL;DR)
Let’s start by defining a fungible token, as these tokens are more widely known by the general public.
A) Fungible Token
Fungibility is the divisibility, exchange or accumulation of an identical token. A good and frequently used real world example of fungibility is fiat currency. Similarly, Bitcoin can be broken up into Satoshis, or Ether can be divided into Gwei, to make a payment for another item that may be worth less than a single token. Satoshis and Gwei are often used to transact on the Bitcoin and Ethereum networks, respectively. Fungibility facilitates the ability to trade freely without having to return to a barter system. It constitutes one of the five properties of money.
Example:
If one was to offer two apples for one chicken, then this may not necessarily be a fair exchange. Using a fungible currency enables a more equitable means of trade.
B) Non Fungible Token
A non-fungible token (NFT) is a token on a crypto network that is not able to be divided and is unique from one token to the next. It can be attributed to a single asset, whether physical or intangible. When we see reference to tokenization of a real world asset, this would be done using NFTs, not fungible tokens, otherwise there would be no way of distinguishing between the true owner of the asset if multiple parties hold a similar token attributable to proof of ownership.
The key characteristics of an NFT are that it is:
Unique - Able to identify that token for a particular purpose. Another identical token does not exist.
Transferable - Are able to send the token to another person and prove that it is the same as the original token sent. This was always part of the double spend problem prior to blockchain technology.
Indivisible - Unable to break the token into several smaller denominations. There are ways of indirectly doing fractional ownership by setting up another NFT collection and including a NFT within a DAO structure. But it is not possible to do this directly.
Able to prove scarcity - Blockchain tech offers an immutable record of all prior transactions on an open network. Its transparent broadcasting of all transactions enables the ability to prove the scarcity of that token by the unique identifier on the network.
Overlaying these characteristics with the properties of the blockchain network can provide an incredible solution that has not been available previously. Blockchain enables a secure consensus mechanism using cryptography and distributed ledger technology to provide an immutable, transparent record of all transactions since the inception of the first transaction on the chain. To overpower and defraud the ledger would require significant financial or computing power.
The first NFT collection (Colored Coin) was minted on the Bitcoin Network in December 2012. It was the first method of tokenizing and managing real-world assets on the Bitcoin network.
The next 10 years have seen a significant evolution with the introduction of smart contract functionality. The following provides a timeline of NFT activity up until the NFT boom in 2021:
We now have NFTs on multiple chains all competing for different market segments and use cases while promoting different properties to attract a variety of applications.
The main chain used is Ethereum with the ERC-721 or ERC-1155 token standards. The latter offers slightly more flexibility than the former.
Other chains like Solana have introduced their own NFTs that are faster and less expensive to transact. This could lend itself to utility that requires faster and greater throughput, but at the expense of security, which is not a problematic tradeoff in the case of low value assets.
NFTs can be used in a wide range of forms, not just profile pictures or personal branding on Twitter. Venture Capital funds tend to categorize NFTs into seven segments. With gaming receiving the most funding as at Q2 ‘22, partly because it is predicted by many to have the largest potential. But NFTs have huge potential beyond gaming. Let’s take a look.
1/ Gaming
This could be in game assets such as skins, items or characters that are then able to be traded externally from the game. The players own these assets, rather than in web2 where the centralized gaming companies own all the digital assets and associated fees.
https://twitter.com/7even11_eth/status/1586147347981127680?s=20&t=ZZs8Usn65jLDiG7zCZLHsg
2/ Collectibles
NFT collectibles are similar to card game collectibles, but in a digital verifiable format. Pokemon cards are a nostalgic physical collectible, but an equivalent for NFTs would be the Rare Pepes given the roots in internet culture.
The authenticity and scarcity can be traced on the blockchain, meaning that the original can be verified without a shadow of a doubt. This differs from physical collectibles, which can be forged convincingly and tend to require centralized authentication authorities, like the PSA, to validate the provenance.
3/ Entertainment
We’ve seen NFTs feature in music or films, with most IP licenses (and royalties) residing with holders. In many CC0 license cases, the holder owns the rights and can do whatever they please with the NFT. We recently saw this with Eminem and Snoop Dogg, who rocked their Bored Ape Yacht Club NFTs as characters in a music video.
4/ Marketplaces
Imagine eBay on the blockchain. Marketplaces are being established to enable easy trade of NFTs between unknown market participants. The user experiences and interfaces are getting closer to the familiarity of web2 infrastructure, so sooner than later the transition could be seamless.
Opensea currently dominates the Ethereum trading volume. But there are other chains or projects with native marketplaces. We could see event tickets transacted as NFTs on marketplaces in the near future, using applications like Tokenproof to verify an NFT is present within your wallet, effectively serving as the next technological iteration of the QR code. Ticketmaster has already minted 5 million NFTs on the Flow blockchain, all without event goers realizing — this is only likely to increase.
5/ Metaverse
The Otherdeed for Otherside launched by Yuga Labs is a metaverse land collection. Yuga is creating a digital virtual world that will have functionality and benefits for the Otherdeed holders.
The rarity and functionality is dependent on what is on the land owned by the holder. Those that have Kodas are observed to be the rarest, but the benefits are purely speculative at this point. It is anticipated that holders will be able to use their character NFTs within the Otherside metaverse once it has been developed.
Other examples could be online gaming centers or other virtual entertainment venues, like casinos —effectively anything that will capture a person’s attention and increase activity or traffic in that particular digital location. This then gives that virtual land its value.
6/ Art
Generative art recently took the art world by storm. Many being auctioned in reputable art auction houses such as Christies. The main utility is the aesthetics and being able to prove you own an original from a reputable artist.
An example is Tyler Hobbs who created the Fidenza collection, and subsequently theQQL project also.
Similarly, renowned British artist Damien Hirst launched the Currency project, which was an experimental piece that enabled the NFT holder to redeem (and burn) the NFT for the physical version of the artwork. Failure to do so within a year would mean the physical would be burned and the NFT retained. The decision demonstrated the preference of holders for a physical or digital equivalent.
7/ Infrastructure
NFT infrastructure can overlay applications onto blockchain and NFT technology. It can increase the functionality of the NFT. The NFT contains numerous security and verification benefits which create a strong foundation to build from. After all, if you can build infrastructure around an immutable database, wouldn’t that make more sense than a centralized corporate database that is victim to cyber attacks and hacks?
Examples include:
A ticketing system that verifies a wallet holds a specific NFT (E.g. Tokenproof), thus enabling access to a physical event or token gated part of the internet.
A web2 application, like Twitter enabling hexagon PFPs or Tweet tiles to allow holders to digitally flex an NFT similar to rocking a Rolex or driving a Ferrari in central London.
Digital art galleries enabling NFTs to be displayed online. Unlike many physical assets, digital assets can be stored transparently on the blockchain for anybody to see. An API interacts with the blockchain and could pull the data into a single place to create a visually appealing gallery or enable enhanced functionality.
Augmented reality applications can allow NFTs to be seen through a phone camera moving around in our physical world. An early application of this was Pokemon Go.
We have only scratched the surface of NFTs utility.
I like to break it down to the underlying NFT properties, then apply this to real world problems to find a solution. There are numerous niche challenges that we face in our everyday life that are well suited to NFTs as a solution. It’s where we will likely see consulting firms up-skill their staff to provide clients solutions for their business problems. For instance:
Sales of hotel rooms as NFTs. Enabling authenticated, verified tokens sold on secondary markets. Fluctuating with demand but maximizing cash flows for hotels up front.
Supply chain tracking of real world assets using tokenization.
Improved, immutable and decentralized healthcare records. Increasing secure patient data transfer between hospitals.
Carbon credits as NFTs being traded on an open market seamlessly.
Sales of real estate as NFTs, offering verified fractional ownership. Improving registration of title deed records and reducing the risk of fraud and lengthy settlement periods.
Improved royalty management systems for the likes of publishing, using smart contract functionality.
Improved traceability of renewable energy sources, improving the reliability of data around ESG disclosures for companies.
These are but a few examples of the potential NFTs have. An NFT is not just a pretty JPEG, but significant potential to improve every industry to varying degrees. Here is a non-exhaustive list of several industries that can use NFTs as a means of solving existing challenges:
The lack of fungibility enables many applications to do more than your traditional fungible tokens, like Bitcoin.
The more advanced NFTs with smart contract functionality can enhance solutions for problems. The NFT has evolved significantly since its inception in 2012, and will likely continue to do so.
NFTs are unique, indivisible, able to prove scarcity and transferrable.
Gaming is huge for the NFT market given the ability to transfer assets in and out of gaming ecosystems. The funding from VC firms is huge, demonstrating the forecasted potential. However, there are numerous other market sub segments that will benefit from the technology and will grow in tandem with the other utilities.
We have barely scratched the surface of NFT utility. It can solve many real world problems, including many industry challenges.
Despite the first NFT being created a decade ago, we are early. Smart contract functionality only recently took off with the development of the Ethereum network. There was primitive functionality in 2017, but it wasn’t until 2021 before the real explosion in interest occurred.
Retail investors have mostly capitulated now, but there are numerous builders continuing to innovate behind the scenes. It’s only a matter of time before real world applications are discovered that cause the tech to be embedded within every aspect of our lives.
At OriginsNFT we leverage data-driven decision making, educational resources, and proprietary analytics to remain ahead of the curve with respect to blockchain tech and specifically NFTs. To find out more, please visit our website or Twitter.
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