NFTs are a new technology that is quickly gaining popularity. I wrote this article to explain the history and basics of NFTs to those who are not familiar with the topic. The crypto world is constantly changing, so this article may not be up-to-date with the latest developments. However, it is still a good resource for understanding the basics of NFTs.
The internet of assets
NFTs and Ethereum help to solve some of the problems that exist on the internet today by replicating the properties of physical items such as scarcity, uniqueness and proof of ownership. Additionally, digital items often only work in the context of their product, so for example you can’t re-sell an iTunes mp3 you’ve purchased, or you can’t exchange one company’s loyalty points for another platform’s credit even if there’s a market for it.
If the internet today is based on a system of copying and pasting, an internet of NFTs would be based on a system of trading and collecting.
A comparison
| An NFT internet | The internet today |
|---|---|
| NFTs are digitally unique, no two NFTs are the same. | A copy of a file, like an .mp3 or .jpg, is the same as the original. |
| Every NFT must have an owner and this is of public record and easy for anyone to verify. | Ownership records of digital items are stored on servers controlled by institutions – you must take their word for it. |
| NFTs are compatible with anything built using Ethereum. An NFT ticket for an event can be traded on every Ethereum marketplace, for an entirely different NFT. You could trade a piece of art for a ticket! | Companies with digital items must build their own infrastructure. For example an app that issues digital tickets for events would have to build their own ticket exchange. |
| Content creators can sell their work anywhere and can access a global market. | Creators rely on the infrastructure and distribution of the platforms they use. These are often subject to terms of use and geographical restrictions. |
| Creators can retain ownership rights over their own work, and claim resale royalties directly. | Platforms, such as music streaming services, retain the majority of profits from sales. |
| Items can be used in surprising ways. For example, you can use digital artwork as collateral in a decentralised loan. |
NFT examples
The NFT world is relatively new. Here are some examples of NFTs that exist today, to help you get the idea:
- A unique digital artwork
- A unique sneaker in a limited-run fashion line
- An in-game item
- An essay
- A digital collectible
- A domain name
- A ticket that gives you access to an event or a coupon
- Buy real world goods
- Fractionalized real-estate
- Degree Certificates
- Music royalties via NFTs
- Move 2 earn
- Digital identity
We use NFTs to give back to our contributors and we even have our own NFT domain name.
POAPs (Proof of attendance protocol)
If you contribute to ethereum.org, you can claim a POAP NFT. POAPs are collectibles that serve as proof of participation in an event. Some crypto meetups have used POAPs as tickets to their events.
Technical Background & Capabilities
Below is an overview of how the underlying blockchain technology of NFTs works. You can choose to read it, skim it, or skip it altogether.
How Blockchains Work
Each user on the Ethereum blockchain has a “wallet,” which stores a user’s cryptocurrencies. Cryptocurrencies are a type of digital asset that can be exchanged in a peer-to-peer transaction. In order to create an NFT, a user first needs to mint the NFT on the Ethereum blockchain. NFTs were originally created on the Ethereum blockchain and most still are. The Ethereum blockchain is a decentralized public ledger that uses a consensus algorithm to agree on the history of transactions and the current state of the blockchain without relying on a central authority. Each user on the Ethereum blockchain has a wallet that stores their cryptocurrencies. In order to create an NFT, a user first needs to mint the NFT on the Ethereum blockchain.
Bitcoin was the first cryptocurrency to use a Proof-of-Work system, which is a mechanism that requires significant computing power and energy to function. Ethereum also uses this system, though it is very inefficient in terms of energy usage. Ethereum is planning to transition to a more efficient Proof-of-Stake system in the future.
A decentralized network relies on other members of the blockchain to verify transactions. This is done by solving math problems and publishing the solutions. The more difficult the problem, the more computers and electricity are required. Those who arrive at the solution first are rewarded with currency from that block.Because PoW relies on a large number of miners to secure the network, it is expensive in terms of electricity and computing power. It would be prohibitively expensive to try to control enough resources to outnumber all the other miners on the network.
ERC-721 and NFT technologies
The ERC-721 is an Ethereum Standard for NFTs, meaning that these NFTs are built on the Ethereum blockchain. The main feature of ERC-721 is that each Token is unique and can have a different value from other Tokens from the same Smart Contract. Smart contracts are programs that live and run on the blockchain and create and govern NFTs or decentralized apps. Mechanically, all NFTs have a uint256 variable called tokenId and for any ERC-721 Contract, the pair contract address, tokenId must be globally unique. Then, a dApp can have a “converter” that uses the tokenId as input and outputs a range of media type, including an image, music, or more.
The ERC-721 standard is very popular for NFTs today. It was originally proposed by William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs in January 2018.
As NFTs have grown more popular, some companies have started using private blockchains to power them. In particular, the Flow blockchain, operated by Dapper Labs (and supporting NBA Top Shot), is devoted to NFT transactions and can be more efficient. However, the use of private blockchains goes against the original purpose of a decentralized network, which was meant to be a place where anyone could make transactions without oversight by any one institution.
Business Capabilities, and Why NFTs Represent a New Possibility Frontier in Crypto
NFTs are not based on the supply and demand for a commodity or currency, but rather on the ownership of an asset represented by each token.
NFTs in Collectibles
Clearly, the possibilities of non-fungible tokens (NFTs) as collectibles have already been demonstrated – from the $100,000+ CryptoKitties to $11M+ CryptoPunk to a Top Shot 2019-2020 LeBron James dunk moment, to of course, Beeple’s art collection sold for $69M (7). It seems likely that this market will continue at the high end for as long as those with new wealth from cryptocurrencies remain wealthy – driven by a powerful combination of the pursuit of social status and financial investing. In addition, some believe that players like NBA Top Shot and Autograph are bringing in the non-crypto audience as well.
NFTs in Art
Anybody can view that piece of art, and the artist maintains creative control. Art can be seen as a type of collectible, or at least as something that overlaps with collectibles and art in its purest form. This is because art involves expression and appreciation of human creativity. NFTs are a way of representing art digitally on the Ethereum blockchain. This process is known as minting. Minting involves adding a representation of the artwork to the Ethereum public ledger. Anyone can view the piece of art, but the artist retains creative control.
The NFT ecosystem might be important for artwork because it allows people to buy and sell art more easily. It also makes it easier to verify that the art is genuine, and it could increase the value of the art because NFTs are scarce and there is a lot of interest in digital artwork.
NFTs include a feature that allows the original artist to receive a percentage of each sale every time the NFT is resold. This could provide artists with a way to get tangible value from their artwork as it changes hands.
My friend posted on Twitter that a collector bought all of her paintings through the NFT artwork marketplace OpenSea. She would not have been able to sell her paintings as easily without NFTs and crypto capital. Now that she has access to this new world, her income as an artist is much higher.
It’s interesting how traditional art and digital, programmatically generated art intersect. Cryptopunks fall into this category because each one was generated using algorithms based on a set of traits. Each trait had a certain number of variations and different levels of rarity. In 2021, the creators of Cryptopunks made Meebits, using the same method, a custom generative algorithm.
NFTs in Gaming
Certain early pioneers of mobile games, such as Machine Zone CEO Leydon, believe NFTs have the potential to revolutionize gaming. For example, games traditionally make most of their revenue from in-game purchases (e.g., of weapons, character customizations, or other benefits). However, when someone stops playing a game, the items they bought no longer have any value. Imagine if players could then sell their items and make money, or bring their items with them across games into another game. Moreover, the players of a game are currently at the mercy of the game creators – players have to follow game rules and receive none of the value or revenues generated by the game. In a world of NFTs, a game in which players can buy NFTs used in the game (e.g., plots of land) means that suddenly, the players become owners and investors in the game.
NFTs as Access Tokens
An NFT can also be used to give the holder access to certain experiences, products, or services. For example, a celebrity might create an NFT-based membership program that offers fans exclusive products, musical drops, or experiences. A fan could purchase an NFT access token and enjoy the offerings. If the fan no longer wants the offerings or the value of the artist’s token has increased, they could sell the access token.
One example of a startup using NFTs is Centerstage. It’s a digital events platform that sells seats as NFTs. Users create online stadiums and use the revenue from NFT seat sales to book artists to perform. NFT seat holders can trade NFTs based on upcoming artists or hold onto their own seats and watch every show.
NFTs could potentially be used as a form of equity ownership in music, writing, and other creative endeavors. This would allow creators to maintain control over their work and receive royalties for its use. It could also provide a way for fans to directly support their favorite artists.
To me, NFTs have created a paradigm shift where anything digital can be owned and have financial value. This means that digital assets can be used as a new financial asset.
A Few Conclusions: NFTs as Equity Ownership of Anything, and Ushering in the Digital New World
NFTs have gradually evolved over many years, with a significant increase in the last 12 months. This is likely due to a combination of factors, including the pandemic leading to more digital experiences, the stock market and low interest rates leading to capital seeking new assets, and the increase in size of the cryptocurrency market.
Regardless of where the zealous interest and capital has come from, one thing is for sure: the popularity of NFTs has created a zeitgeist and permanent paradigm shift in business models. Namely:
- NFTs enable the creation of equity ownership in anything, while
- greatly reducing the friction and increasing the acceptance of valuing, owning, and trading digital assets.
There is a good chance that the NFT economy is here to stay given how much interest and value it has generated.
For example, you can buy and trade fractional ownership of a piece of writing from Mirror.xyz as an NFT to show support for the writer or agree with their ideas. Patrons who have purchased an NFT for a particular piece of writing display it on their profile. Similarly, Royal.io is a music platform where you can buy ownership of a song directly from the artist and earn royalties alongside them.
The new NFT economy represents a paradigm shift where anything can be turned into an asset and both user/fan/audience and creator can take part in the financial, equity ownership and financial appreciation of that asset.
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