NFTs, which stands for Non-Fungible Tokens, have seen explosive growth in recent years for their involvement in the exchange of expensive digital items. However, it is important to note that NFTs are not a currency. Instead, they are tokens that can represent any virtual good and prove their uniqueness and authenticity. Therefore, these tokens facilitate the buying and selling of virtual assets such as digital paintings, songs, or even animated GIFs. For instance, buying an NFT digital painting means that a buyer is buying a token that is tied to the digital painting, not the painting itself. NFTs possess the ability to provide indisputable ownership and act as a proof of authenticity for virtual goods, thus making them very valuable as they play an important role in securitizing future online transactions and preventing fraud. Ultimately, the existence of NFTs has significant implications on our journey into a truly secure and futuristic society.
NFT 101: Intro to Non-Fungible Tokens
NFTs, which stands for Non-Fungible Tokens , have been making headlines all over the world for their role in the sale of various expensive digital assets. From an animated cat GIF that sold for $561,000, the final bidding price of Jack Dorsey’s first Twitter tweet for almost $3 million , to a $69 million collage of digital drawings . With many more other digital art creations being sold as NFTs on popular platforms such as OpenSea.io, NFTs are clearly taking the world by storm and simply cannot be ignored. But what makes them so popular? More importantly, why are they capable of being so valuable?
Figure 1. Examples of NFTs
To understand these tokens, we must first explore the term “non-fungible”. This term describes things that are unique and cannot be exchanged for an equivalent, like a custom-made wedding ring, limited edition trading card, or art pieces. . For instance, ten $1 bills and one single $10 bill are completely equivalent and interchangeable, hence the dollar is fungible.
Non-Fungible Tokens are code stored on a blockchain – a digital ledger, which can prove and verify the number of tokens. These NFTs are able to imprint the blockchain with a unique signature to represent the ownership of a digital asset . Some analogous actions would be ascribing autographs on collectibles, or Pablo Picasso placing a signature on his work. This means that not only do NFTs authenticate ownership of a digital asset, they also ensure each token is unique as only one official owner exists at a time. This ownership is then secured by the distributed ledger technology offered by blockchains such as Ethereum, making sure no one can duplicate or modify the record of ownership . Put simply, NFTs are easily transferable and they offer indisputable ownership for all forms of virtual goods as well as serving as a certificate of authenticity.
Smart Contracts and Benefits
When someone buys an NFT, the metadata of the NFT, such as token ID number, date of creation, and transaction price, all belong to that buyer. The token’s ownership and resale is then governed by something known as smart contracts.
Smart contracts are agreements with the terms converted into computer codes, which are then stored and automatically executed on a blockchain-based platform, such as Ethereum. This code is replicated across multiple nodes of a blockchain, allowing the contract to benefit from the security, permanence and immutability that a blockchain offers . For example, a smart contract could be programmed to move $100 worth of funds from one person’s account to another’s when certain predefined terms of the contract have been fulfilled. Otherwise, if the terms have not been met, the code will not execute any steps, and the funds stay where they are. This shows how a smart contract can facilitate, verify, and enforce the terms of an agreement in a transaction, without any human involvement or third party governance . Now, with smart contracts embedded within NFTs, each token will be able to guarantee ownership of virtual assets, prove their authenticity, and ensure the enforcement of whatever contractual obligations and terms that the creator, buyer, or seller of the token define.
Aftermarket of Digital Personal Property
Many have seen news of people selling rare coins, stamps, and other limited or special edition items for astronomical prices. One such item, a Pikachu Trading card from the popular animation Pokémon, sold for $224,250. All of these rare and unique items derive their value from scarcity . In the case of the card, only 39 cards were created in the late 1990s, with very few copies surviving today . This makes them somewhat one-of-a-kind to interested buyers, and they are willing to make offers that they believe would justify the value of owning such a unique asset.
The Internet presents a very different story because few digital assets online are truly owned by their owners, considering that most online resources are accessible by anyone with an internet connection with no way to stop users from saving and copying the content for personal use. Imagine looking up a picture of the same limited edition, 6-figure Pikachu card on a browser; anyone can easily screenshot or save the .jpg image into their devices at zero cost. Hence, this picture that anyone, anywhere can access at any given time makes it worth nothing in the digital world.
However, if an original copy of the card was to be sold as an NFT virtually, then no matter who saves a picture of the card on their device, the picture still belongs to the person who bought the token because the NFT contains the unique metadata of the card and is securely stored on a digital ledger. A simple example of this scenario is going to an art gallery in which anyone can take pictures of the displayed art, but clearly none of them owns the actual art, until it is taken off the wall and sold to a buyer. And with NFTs, this system is able to exist online.
Since NFTs can brand virtual goods as unique and provide proof of ownership, second-hand and resale markets for virtual assets can exist and thrive. Just as a physical car possesses second-hand value, buyers of virtual assets are now able to place a resale value on their digital assets, some of which may even increase in value just like the limited-edition Pokémon cards .
From there, revenue sharing, royalties and licensing schemes can also be implemented with NFTs. Not only would this benefit the creators of digital goods like software, as they receive a share of future sales, subsequent owners can also benefit due to these software tokens possessing resale value and being viewed as assets. This way, users wouldn’t have to pay for subscriptions in fixed time intervals. Imagine, instead of paying for an annual subscription to a particular software service, users can simply buy an NFT to use the software, which they can sell right after they no longer need the software’s service. Then, in each subsequent sale, the original developers of the software will still receive a share of revenue. Another example would be a user buying a song from an artist by purchasing an NFT linked to that song, thus giving the user access to streaming services for it . But it doesn’t end there — should the user choose to sell the song in the open market, the original artist of the song can still receive a percentage of any subsequent sales. Hence, this allows creators to potentially gain a greater share of revenue than traditional royalties and provides subsequent owners the choice to re-sell digital goods for gains.
Alice in Decentraland
Decentraland is an online multiplayer game, where players can control and move their personalized avatars around the 3D virtual space and interact with other players. Had Alice fallen into Decentraland through the rabbit hole instead of Wonderland, she would find herself immersed in a futuristic, digital realm that mirrors the real-world, capitalist society we live in.
Within this gamified world, there exists an NFT marketplace called the MetaZone, in which various digital goods are bought and sold as NFTs. These items can be, quite literally, anything one can virtually come up with. From virtual trees and pets to virtual sports cars and doorman, the only limit is the NFT creator’s imagination, and the buyer’s wallet. Among these various shoppable NFTs in the store, virtual real estate seems to be a hot market. Since these plots of digital in-game land are NFTs, its nature of being unique and embedded with a proof of ownership makes it an attractive investment to crypto investors as it mirrors the qualities of owning real, physical property. As this garnered more and more attention from people all over the world, people snatched up virtual real estate in hopes of profiting from a rise in value. The dramatic rise in demand for virtual land has caused a spike in their prices, with the most expensive transaction recorded being 8 plots of in-game lands that sold for $1.5 million .
Into the Future
With the Covid-19 pandemic acting as a catalyst to accelerate the digitization of the world, NFTs and their use of blockchain and smart contracts will play a crucial role in building a safer digital environment. As these tokens become more widely adopted by netizens across the globe, there will certainly be new standards in creating more secure NFTs to utilize their full potential. From peer to peer lending that automatically transfers funds to the lender, to a thriving digital market for all sorts of virtual assets, not only will these transactions be more secure than ever, they will also lay the foundation for rebuilding trust among individuals. In a world with plenty of fraud, piracy, defaults and other deviant behaviors that abuse trust, NFTs could take on the role of protector and enforcer of ethical business conduct. Eventually, NFTs may even be used for the ownership of tangible items in the real world, such as a home or a car .
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