An NFT is a unique token that represents a digital file. That is, it has a unique identifier that is immutably registered on a blockchain. Among the metadata necessary to guarantee its authenticity are the author, the characteristics, the address of the contract (to identify the authenticity of the piece) and the royalties (or benefit that the author acquires each time it is marketed).
Nfts And The Introduction Of Digital Scarcity
The simple fact that a good or asset becomes unique by having a unique token has important impacts . These are the most important:
- Traceability. Non-fungible tokens can change owners but their full history is always accessible and is recorded in the original, immutable record of a blockchain.
- Anyone can issue them, own them, or buy and sell them, without needing to create an entire market, as is the case with cryptocurrencies. This makes them more agile instruments.
- Other uses beyond the work of art. They can be borrowed and lent, collateral for fractional ownership (for example, or used as collateral for a loan.
- New spaces for art. They can be displayed in online collections as a SuperRare profile , as well as in virtual worlds.
- Creators’ ability to earn significant revenue from their creations. The development of NFTs enable true digital ownership, opening the door to myriad new business models.
- Monetize and culture. Rex Woodbury explains how we are moving from an advertising – based model to a commerce – based one . In the current web2, the contents are infinitely commodified on the platforms without the author obtaining income beyond a percentage of the advertising displayed. By tokenizing creative work, it can be sold to people who truly appreciate it and are willing to pay a higher price ( passion economy ).
- A culture of ownership is created . Jesse Walden , owner of venture capitalist Variant, coined this concept to explain that non-fungible tokens “have the potential to upend the media ownership model , offering creators, their audiences, and the developers who build for them, a viable alternative to platform-driven monetization.”
- It gives rise to a digital renaissance . Rex Woodbury , one of the best analysts on web3, explained in a long article how the monetization of individuals “will facilitate a long-awaited reshaping of how art is made and shared”.
Let’s go to the technical part to understand how the new token economy works. To do this, think of a cake with several layers:
- Layer 0. In the background, this is where the blockchain technology runs . Provides the networking capabilities needed to build peer-to-peer networks. If we talk about digital money like Bitcoin, everything happens in this layer.
- Layer 1. This layer provides the functionality of distribution and interaction. The great contribution of Ethereum was to turn a cryptocurrency into a platform on which developers can create anything, from applications to entire organizations, as is the case with DAOs . This happens in this layer, which we could say is the layer of the protocol and smart contracts.
- Layer 2. According to W3f , “an enhancement layer for the lower layers of the Web 3 technology stack. Included in this component are metaprotocols, or Layer 2 protocols, that provide enhanced features such as scaling, computation, and encrypted messaging.” It’s where builders create Lego blocks of protocols and smart contracts that can be arranged in myriad combinations and formations to make anything from mint art to trading cryptocurrency directly, without the need for a third party. I will give you 3 examples:
- Zora is an NFT protocol that allows any creator to mint, own, and sell their work.
- The Uniswap protocol is a decentralized exchange that allows “developers, liquidity providers, and traders to participate in a financial market that is open and accessible to all.”
- Mirror’s decentralized publishing platform “revolutionizes the way we express, share and monetize our thoughts.”
- Layer 3. It is the layer of code libraries and human-readable languages that facilitate development.
- Layer 4. This is the top layer of the Web technology stack 3. This is the layer where the user most easily interacts with Web technology 3. These are the wallets and dAPPS that users have that become their door entrance to the world web3.
How does it affect non-fungible tokens? To facilitate the issuance of non-fungible tokens, several frameworks have been created:
- ERC-20: ERC-20 tokens are blockchain-based assets that have value and can be sent and received. The main difference is that instead of running on their own blockchain, ERC-20 tokens are issued on the Ethereum network.
- ERC-721: The ERC-721 is another non-fungible token standard created for the Ethereum network under the standards of its smart contracts. Unlike the ERC 20 tokens, its appeal lies in how its peculiarity enhances its collectability. It was developed by CryptoKitties.
- ERC-1155: The ERC-1155 is promoted by the Enjin team and brings the idea of semi-fungibility to the development of NFT world.
Non-fungible tokens can be used by decentralized applications (DApps) to enable the creation and ownership of unique digital items, collectibles, and tokenized versions of real-world or digital assets. These can be traded on open marketplaces that connect buyers with sellers, such as OpenSea, Rarible, SuperRare, or Foundation.
1.3. MAIN USES
Non-fungible tokens can be used in any area where application is unique and provable ownership is needed. The most common are:
- Collectible goods. They are projects in which the objective is to collect game assets, such as the famous Cryptokitties, which consists of obtaining cats with atypical physical traits to resell them later. The NBA also markets them as “digital trading cards” for collectors.
- Games. They provide ownership records for in-game items, bring some sort of benefit to players, or fuel the game’s economy. Unlike other games where items can be bought, if it is a non-fungible token it can be sold at the end of the game, even at a profit.
- Art. By linking a work to a blockchain, artists make their works unique. As in the past with “analog” art, its value varies depending on the artist’s reputation, its rarity or its appreciation by the public. Non-fungible tokens can be applied to different formats: Gifs, videos or music.
2. HISTORY OF NON-FUNGIBLE TOKENS
Those cute kitties. The first time certifiable and authenticated digital ownership was possible was in 2017, when CryptoKitties was launched as a game based on the Ethereum blockchain that allows you to buy, sell and breed digital cats. Their price rose because they use non-fungible tokens (NFTs), which allow you to prove your ownership. Come on, it’s yours and no one else’s.
The paradigm shift. Non-fungible tokens allow for a chip change in both digital artist and collectors:
- The customer can buy a digital work of art and know that he owns the real work.
- The artist can sell and track their piece using blockchain technology.
New digital markets. The first markets appear to connect digital artists with buyers: SuperRare , Foundation or Nifty Gateway .
The boom of the year 2021. If 2020 saw just under 100 million in NFT valuation, while 2021 jumped to 23 billion.
The future . The Activ ate – WSJ 2022 Technology and Media Outlook report forecasts that “As consumer time shifts to digital experiences and interest in the metaverse grows, every technology and media company will need an NFT strategy. ”. This is why big brands and tech companies are entering the space and will expand their NFT strategies.