In 2017, Bitcoin and cryptocurrencies first started dominating the mainstream news as each of these assets reached incredible highs. Now, a new trend to come out of the crypto space is creating the same degree of media attention. Non-fungible tokens, or NFTs for short, are turning people into millionaires overnight. But what exactly are NFTs, and why have they become so popular?
What are NFTs?
Most cryptocurrencies (and currencies in general) possess a characteristic called fungibility. This means that any given currency unit can be exchanged for a proportional amount of that same currency. In other words, each unit of currency is interchangeable. For example, you can trade someone a $10 bill for two $5 bills and no value is lost.
On the other hand, non-fungible tokens are not interchangeable and are essentially one-of-a-kind. With blockchain technology, it’s possible to encode authenticity into these tokens, resulting in digital objects that are wholly unique.
Now, a whole new category of digital collectibles is available online.
At the moment, the Ethereum blockchain is the primary foundation for NFTs and their marketplaces. Ethereum uses what are called ERC-721 tokens to encode NFT metadata. This is in comparison to ERC-20 tokens, which are Ethereum’s widely used fungible cryptocurrency. Read this article to learn more about the Ethereum blockchain and its various token types.
Any other blockchain using smart contracts — such as Cardano, Polkadot, or Binance Smart Chain — has the ability to mint and facilitate NFT transactions as well. In the future, multiple blockchains may become foundations for NFT marketplaces.
One of the first popular applications for digital collectibles came in the form of Cryptokitties, a blockchain-based marketplace where you can buy and trade digital felines.
Since then, the company behind Cryptokitties (Dapper Labs) has worked with several other companies to bring digital collectibles to different niches. One example is NBA Top Shot which has one of the most significant trading volumes of any NFT marketplace.
NFTs lately have found perfect application in the world of digital art. This is where most of the current hype has come from.
Recently, a famous digital artist named Beeple sold his first batch of NFTs for a few million dollars. Later, he would sell a collage of his “The First 5,000 Days” collection for $69 million.
Countless other artists have been able to capitalize from selling their art online as well, including musicians like Grimes and Kings of Leon. Popular YouTuber Logan Paul sold an NFT collection for millions of dollars too. And there are many other high-profile examples.
Once a collector owns an NFT, they can resell them on various marketplaces, often for much higher prices. And thanks to blockchain technology, it’s possible for the original creator to continue earning royalties on their art as it is continually resold.
Essentially, NFTs have opened a new way to generate scarcity and provided content creators with a new royalties system.
Other NFT use cases
The use cases for NFTs stretch far beyond digital art collectibles. It is technically possible to tokenize just about anything with value. Below are a few use cases for NFTs that go beyond digital collectibles:
1. Digital identity
If NFTs can be used to verify the one-of-a-kind authenticity of an object, then it may be possible to use them as a way to prove one’s identity online. This has implications for everything from health care to social media and democratic voting.
Verifying one’s digital identity via blockchain technology could open up the pathway for data monetization. In particular, social media companies are notorious for data mining individuals using their platforms and profiting immensely from them. Instead of blindly allowing social media companies to harvest data for free, NFTs could create a mechanism for distributing some of those profits to the people being mined.
Similarly, the health care system can use a verifiable digital identity to make sure health data about patients is accurately and securely shared among databases.
And finally, the prospect of blockchain-enabled voting will require verifiable identities to solve voter fraud and accessibility in a democratic system. Decentralized Autonomous Organizations (DAOs) and NFTs may act as a model for enabling blockchain voting
Like with digital art, gaming is another industry that is perfectly matched for NFTs. There are already dozens of gaming NFT projects underway, including a partnership between Enjin and Microsoft.
Many video games include a digital collectible aspect, such as different skins for characters, weapons, or other unique items. Players would also be able to track the ownership of certain items, just like what is now possible on NFT marketplaces.
Massively Multiplayer Online (MMO) games are best suited for NFTs, as they usually involve players searching for rare items and creating fully customized characters. Utilizing NFTs, a player’s character could potentially increase in monetary value the more they play.
3. Real estate
Not only can NFTs create authenticity for virtual assets, but they can also be used to represent physical assets. Being one of the most lucrative investment markets, real estate is poised to become “tokenized” now that NFTs are entering the mainstream. Tokenizing a physical asset such as real estate creates benefits such as making the buy/sell process more seamless and allowing for fractional ownership of properties.
Moving into the digital realm, virtual real estate is becoming increasingly popular at the intersection of NFTs and video games. Projects like Decentraland are already attracting attention as they enable people to invest in digital real estate.
Much like the famous cyberpunk novel Snow Crash, people may soon be able to log into virtual reality metaverses where virtual real estate is just as important (and as lucrative an investment) as physical real estate.
4. Content creator ecosystems
As mentioned above, digital artists and musicians are flocking to NFTs as an additional revenue source for their work, and as a way to engage with fans. New content ecosystems are opening up for creators to monetize and increase fan engagement.
Along with their NFT album release, Kings of Leon also bundled concert tickets into the purchases. This is just a small example of what can be done by packing metadata into an NFT token. Fans who purchase NFTs can further participate in an artist’s creative process, or they can earn VIP access to events and online channels.
And, of course, NFTs open up the ability for fans to really invest in their favorite artists. Especially for those who are good at spotting up-and-coming artists, it will be possible to purchase an NFT of that artist and sell it for many times more in the future once the artist is mainstream.
The future of NFTs
At the time of writing, the NFT space looks like a financial bubble, similar to what was seen in the 2017 initial coin offering (ICO) era of cryptocurrencies. NFTs are being sold for ridiculous amounts to rich people who seem to have the spare change to play around with.
Eventually, however, the funny money will most likely leave the space as the novelty dies down. When this happens, there may be a drastic drop in what society perceives these NFTs to be worth. But after that, we will most likely start seeing far more innovative use cases for NFTs, such as those listed above.