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In the last crypto cycle, the term ‘NFT’ became of the one biggest trends in all of crypto. The proclaimed use cases spanned music, art, videos, and even memes. NFTs, or Non-Fungible Tokens, provide a way to prove ownership of digital/physical item. This item could be almost anything, including RWAS(“Real World Assets”) I wanted to create this article from the perspective a true crypto native and show what I believe the real use cases are.
The Elevator Pitch
In its simplest form, an NFT is a digital token on the blockchain representing ownership or proof of authenticity of a digital and now sometimes physical asset. Cryptocurrencies like Bitcoin or Ethereum are fungible meaning they can be exchanged one to one. NFT’s are distinct and cannot be exchanged one to one. Example being Bored Apes and Pudgy Penguins are not the same thing, making them non-fungible. The awesome part about them being on chain means they can be sold and traded.
NFTs were pitched as a new way of owning art, music, memes, or videos. Honestly I don’t believe there is much value in the way NFTs are used today. RWAs or Real World Assets could change my opinion. Imagine your house deed being on-chain and you could sell it without the need of all the 3rd parties that charge fees nowadays. Also think about stock ownership, and even bonds. These are all good use cases for NFTs.
History and Evolution of NFTs
NFTs have been around for a while, but they started gaining traction with projects like CryptoPunks and CryptoKitties. Since then, the NFT marketplace has exploded. There are now millions of NFTs some are worthless while some tokens sell for millions of dollars, like Beeple’s digital artwork which sold for an insane $69 million.
Ethereum has been pretty much the main smart contract platform for crypto for a while. There are others like Solana, Cardano, Avalanche, etc, but the majority of volume happens on Ethereum. The awesome thing is NFTs have evolved today to include some utility/uses for the owner. Some NFTs allow participants to earn extra yield in DeFi and others allow owners to receive airdrops.
The biggest use case we have seen in the current market is gaming. NFTs being owned by users in video games allows the users to own their assets and then trade them freely on the marketplace. An example of this would CSGO players being able to sell their gun skins freely on the open marketplace for thousands of dollars. Users also like the idea of being able to keep their assets across multiple game titles, an example of this would be keeping your skins(downloadable content) across every Call of Duty title.
How NFTs Work
NFTs are created by a process, known as ‘minting,’ in which the minter uploads a digital file to a blockchain network. The minting process creates a digital certificate of ownership that can be bought, sold, or traded. NFTs can be bought and sold on NFT Marketplaces like OpenSea or Rarible. Smart contracts built into NFTS can pretty much do whatever the creator wants, such as a %5 lifetime royalty. The contracts can also have governance functionality as well. Example being if you own a specific NFT you can vote on the future of a specific ecosystem.
ERC-721 is a NFT Standard published in 2018. It is recognized as the foundation of the NFTs we have today. It created a standard for smart contracts to inherit from, thus creating a standard the rest of the world could use and build upon. There have been other standards built like ERC-1155, which allows for a small level of fungibility, and then other standards built by other blockchains.
The Value Proposition of NFTs
The value of NFTs has for a while been up in the air. For some, they represent a new frontier in digital art and ownership, while others view them as a huge bubble. The value often is very subjective and based on things like the buyer’s emotional attachment to a project, who the creator is, or even pure speculation.
What is the value of a musical compositions, virtual real estate, or in-game items? All NFTs have unique properties and price is typically driven by market demand and not any fundamentals.
For example 90% of NFTS lost all of their value during the last market downturn(bear market) was it because people stopped wanting NFTs or was it that 90% of NFTs had no value?
The way I view NFTs is purely utility, if you can do something with it other than hold it then there may possibly be value there. Even then that value must also been seen by the market. So before you go gung-ho buying NFTs remember most of them are only worth what the next person is willing to pay for them.
Controversies and Challenges
NFTs do have one main problem. Currently ownership of an NFT does not grant copyright, intellectual property rights, or any legal rights over the digital file. It also doesn’t restrict it from being copied and reused in another NFT. This could lead to users being scammed without knowing the true NFT contract address.
Another problem is NFT projects that rug pull their users. Sometimes NFT developers make a project purely to create hype and then run away with user funds and never update/work on the community ever again. While that risk should be obvious when buying a NFT, some users will believe because they bought a dog picture for 2 ETH, then someone else should also buy it for 2 ETH. To seasoned crypto-people this is obvious, but no so much for noobs.
Celebrities/Influencers have also been known to create junk NFTs that have no value other than the fact they were created/associated with the celebrity. These NFTs usually end going to zero and can’t be sold typically unless the price is marked way down. This is a big thing to watch out for if your getting into NFTs.
How To Buy NFTs
- Set up a digital wallet like MetaMask or Phantom.
- Buy cryptocurrency, such as Ethereum, using an app, such as Coinbase or your wallet itself.
- Connect your wallet to a NFT marketplace (OpenSea, Rarible, .etc).
- You can either mint an NFT Release, or start bidding on existing NFTs. Sometimes you can buy the NFT outright if it has a price set.
The Future of NFTs
Games
Video games may be the biggest and most obvious use case for NFTs going forward. As discussed earlier, NFTs can represent anything in a game. Think virtual real estate in the meta-verse, skins, 3d models, or even in-game resources.
CryptoKitties was successful with making virtual tradeable cats as NFTS. There are games currently coming out like Shrapnel(FPS) and Metaverse titles like Decentraland, Sandbox, Pavia, and Cornucopias. These games will all leverage NFTs to build their player economy. This will give the power back to players and allow them to truly own their in-game assets. It’s an exciting time in the game industry to see what ways developers choose to deploy this new technology.
Identity
Identity has long been something that has been wanted on chain. Think about licenses, IDs, possibly even birth certificates. There are tons of identity platforms being built on blockchain tech. Including Civic, Atala Prism, World ID, etc.
I think this is one of the last major steps to allow uncollateralized lending and true KYC on chain. These technologies will help make sure someone is who they say they are and also possibly help stop theft on-chain in the future.
RWAs – Real World Assets
Real World Assets are a sleeping giant that when awakened will provide one of the biggest use cases for blockchain going forward. Real World Assets can be brought on-chain and traded and sold.
RWAs include bonds, treasuries, stocks, and possibly even some things like wine and fine art. We could potentially track and trade some of most widely used physical items in the world. If stocks were tokenized we could see every trade on the blockchain and stop wondering what all the hedge funds and banks are doing behind the curtain.
Conclusion
NFTs represent an idea of how we could bring about putting things on chain other than simple cryptocurrencies. While they present challenges currently, I’m confident the community will eventually solve those problems. The use cases are truly endless and if used correctly we can fix a lot of the problems with centralization of our current system.