The growing ecosystem of non-fungible tokens (NFTs)
Mar 10, 2021
This month prestigious auction house Christies sold their first digital art using blockchain NFT (non-fungible tokens) for $69 million, and the NBA saw over $230 in new revenue from its NFT based Top Shots digital collectibles
Many organisations are now exploring the opportunity offered by NFTs. Some are more strategic, such as NBA Top Shots, while others are more opportunistic in nature, for instance, on Friday, 5th of March 2021, Jack Dorsey, CEO of Twitter, launched the sale of the first Tweet posted on the social platform as an NFT (BBC, 2021).
Rapper MF DOOM created a set of augmented reality masks, and minted NFT’s using to represent their ownership. The masks were hosted on augmented reality (AR) platform Illust Space. Unfortunately, and coincidentally, he died on Halloween, the same day that the NFT sale concluded. The collectibles are likely one of his last creative projects. His private keys are now in the possession of his family, and smart contracts will continue to automatically transfer royalties to them from every NFT sale in perpetuity.
Prior to blockchain, the cost of replicating an item in the digital world was almost zero. Think of the copy and paste mechanism that damages the rights of economic use of photos or other works of art on the internet. Blockchain doesn’t prevent this. However, blockchain NFT’s allow ownership of the items to be recorded, shared, published, and very efficiently traded across multiple venues, increasing liquidity. They also allow royalties to continue to be paid out to the original creators regardless of where or how the items are sold.
NFT’s do not prevent duplication of a digital item. However, they do prevent duplication of the ownership rights. Recent NFT sales demonstrate that the ownership rights, in particular for rare digital items, are highly valued. The items, especially those of an artistic nature, become digitally rare as they are not fungible as they uniquely prove ownership of a particular photo or work. Non-fungible tokens are tradable, universal blockchain-based ownership records for specific items. Unlike digital currencies such as Bitcoin, and fungible tokens such as utility tokens, NFTs are not interchangeable with each other.
NFTs represent a particular type of cryptographic token that is technically defined:
- Using a standard; for example Ethereum ERC-721, or
- Natively in the general purpose blockchain platform (e.g. Algorand), or
- Natively in a dedicated NFT blockchain platform (e.g. Flow).
At Applied Blockchain we’ve explored each of these platforms and options in depth, and we’re happy to advise on their suitability for a particular item or market.
The main characteristics of an NFT are the following:
Uniqueness: NFTs contain metadata where various information may be recorded. This information includes properties and reference to the unique digital item, making the ownership link.
Rarity: The value of NFTs comes from their scarcity. The developers of these tokens often limit their distribution to increase rarity.
Authenticity: Blockchain technology enables certification of authenticity of the item.
Indivisibility: NFT’s can be bought, sold and stored in their entirety. It is possible, through other smart contracts to fractionalise ownership, although this introduces more complexity.
Ownership: It is possible for the owner of a unique token to identify themselves, and to transfer ownership to others.
Verifiability: Being anchored in a blockchain, items can be traced back to their original creator, allowing pieces to be authenticated without the need for third-party verification.
As NFTs are located on a blockchain, it is possible to demonstrate and verify the intellectual property rights of the object in question: regardless of the transfer of ownership of the latter, its attribution will always remain in the hands of the creator. The certainty provided by the blockchain also provides proof of authenticity.
Particular attention should be paid to custody of the NFT, which, just like cryptocurrency, may be held by a third party custodian or exchange, or in a wallet held by the owner.
NFT use cases
Having reviewed these characteristics, we now explore the potential applications of NFT’s:
Blockchain NFT’s can be used to address known problems in the art world including: property, corporeality, manipulation, and value.
A recent Netflix documentary “Made You Look” describes an $80m+ fake art fraud at one of New York’s most reputable galleries and dealers.
The ability to combine the identity of a work with the creative path of the same, and to bring this history to the blockchain NFT, allows each creative action and passage of the work to be documented in immutable form, which maintains information and generates provenance that is harder to forge. The structure “tells” the entire story of the work, and it would be very difficult to alter its sequence.
The artwork metadata stored in the NFT must uniquely identify the physical or digital work.
Music, and rare collectibles are just some examples of real objects who’s ownership records are digitized with NFTs. In practice, these NFTs could represent fractions of physical assets, including real estate, cars, wines that can be stored and exchanged as tokens on a blockchain.
NFT’s can also be used to represent physical components and products flowing through a supply chain. This enables provenance checks to be made on a per-item basis. Some benefits of tokenizing these assets are proof of quality control, ethical sourcing and the reduction of counterfeiting, although these do depend on the ability to scan and uniquely identify the physical item.
The possibility of certifying and digitising ownership records of both physical and digital items in a way that they can be openly traded in multiple venues introduces speculation and increased liquidity to previously illiquid markets. Major players are rapidly moving in this direction, seizing the opportunity to capitalize on a broader shift towards tokenisation and digital assets.
Developments in public blockchains, including decentralised exchanges (DEX) and decentralized finance (DeFi) are creating tremendously efficient alternative financial services infrastructure. NFTs are starting to do the same for collectibles and unique items.
Whether you attach value to the speculative activity or not, you cannot ignore the maturing and growing mainstream adoption of the technology.