What are NFTs and How Do They Work?
NFT is short for Non-Fungible Token. It represents a unique item like a deed or title, albeit, digitally. You can make copies of them but there is only one original and that makes it valuable. An original Mona Lisa painting can fetch close to $1 billion today which is more than the net worth of few islands!! It may seem illogical but that’s down to free market forces like supply and demand.
NFTs can represent any type of physical or digital ownership. Each NFT has a unique ID and metadata. All relevant information of an item is stored on a distributed public ledger like blockchain for instance. The process of creating an NFT is called minting or tokenization for authenticity. Minting process over time has become very easy that you and I can do so in a few minutes today. Once ‘minted’, NFTs can be traded through cryptocurrency marketplaces or exchanges. Often such marketplaces exist within online metaverses which is a digital version of our real world that includes games, lands, shopping complexes etc.
No Curator or Art Facilitator Fee
You do not need an intermediary to curate and monetize your creation. You can simply upload a digital version of your creation and mint it on these marketplaces where people throng. Also the creator can earn lifetime royalty every time their creation changes hands. Such features make NFTs more liquid than, say, a traditional collectible or art.
What makes this more interesting is that a digital version once created can be duplicated. Yes! But as mentioned in the above paragraph, once you mint your creation, it will have a unique ID/address and metadata on the blockchain that is immutable. And information in typical blockchain is open and transparent to anyone. So if someone is looking to duplicate an original content with a fresh minting (which will become technically harder over time), a ‘new’ record will be created on blockchain with a new address and metadata. In a nutshell, it will remain a duplicate on top of litigation troubles.
Various features of NFTs like non-fungibility, tokenization, interoperability, transfer of ownership are made possible by NFT standards. The most common NFT standard is ERC 721. Each ERC 721 token has a 256 string key/ID and metadata which makes it a unique pair that there is almost no possibility to register the same pair again. It is even more complex than a unique private/public key pair created when you buy and own a cryptocurrency.
Top 10 NFT Use cases
1. NFTs for Causes
A handful of problems in today’s society are left unattended by mighty entrepreneurship which are mostly a private venture. So they need to look for themselves before having any altruistic intentions. NFTs are gradually appearing as the preferred mode to gather a community and raise funds for noble causes. NFTs for causes is an alternative to donations because it introduces transparency and humility like never before.
- A Forbes article explains how some NFTs create social value.
- Digital Charity Art features NFT projects for charity, including ocean conservation
Think about all those stamp collections in your childhood. Many of us make it a point to keep collecting rare items passionately but some turn them into a real time investment. I mean if there is a market for it, why not? Experienced and risk taking investors keep an eye on valuable collectibles so they can flip for profit at the right time. I am not going to exaggerate and tell you there are billions sitting on these marketplaces and showing off their collectibles. But there are quite a bit of them online as you can imagine. Whether or not it is liquid enough is in our hands considering this is a very young industry. Check how Marvel is leveraging the NFT industry.
3. Private Club Membership
People with NFTs get exclusive access to various clubs that have limited membership. Not too different from our Rotary and Lion clubs! Some clubs work for a cause while others cater to fashion, movies among other industries. Such clubs often incorporate well articulated financial plans or tokenomics like reserving a certain % of their NFT revenue for a social cause, NFT holders, development work like scaling up the club to a metaverse etc. One of the ideas is to benefit from NFT price appreciation if and when the club takes off creating more demand. NFT holders (or club members) also get access to multiple airdrops, which is usually a free distribution of new tokens.
- Bored Ape Yacht club is one of the most successful NFT clubs.
4. PFP or Profile Picture
People are spending most of their time online ever since the start of the pandemic. Yes, shopping for fancy profile pictures is giving a competition to shopping for fancy apparel wear!! And do you see some of the animated images below that has hats or eyewear? As you can imagine, there are creators focusing on creating an animated image(s). But they are also creators who focus on creating in-game merch that could be traded with the former.
5. Pseudonymous Identity
Some NFT holders have a sizable following on social media based on their NFT profile pictures to start with. No one knows who they are in reality and well, not many care anyhow. This is not different from a book author writing under a pseudonymous identity for reasons ranging from privacy to societal bias. As long as you have created a loyal following and a deep relationship with your audience, your success more often starts there regardless of whether you are anonymous or a well known celebrity. Having a pseudonymous identity can be actually productive when you can really focus on the work at hand instead of your appearance or ethnicity in a rude digital world, to put it mildly!
6. Brand Growth Strategy
Brands are always looking out to build deep-rooted relationships with a savvy NFT customer base. Investing in NFT projects is also (i) An apparent hedge against the movement in consumption from physical to digital world, especially for fashion and luxury brands (ii) Free and direct customer acquisition without paying media iii) The community can then take over to help expand the growth.
7. Investing in Deserving Creators
Some are buying NFTs to encourage and promote artists of their choice. This looks really scalable!
8. Fractional Ownership of Physical/Digital Assets
We are now moving to something similar to equity investments. You can now claim fractional ownership in real estate, equipment, movie-making, albums, farms, forests, games and even community owned companies like DAO.
Take a look at some of the projects here:
9. Proof of Attendance Protocol (POAP)
POAPs are akin to participation certificates or badges. POAPs are now looked at as a good tool to govern distribution of airdrops in the future. Some can serve as a resume material to prove one’s skill or commitment to a cause.
10. In-game utilities
Some of the benefits of digital assets and innovations are well documented like fractional ownership and in-game utilities. Hence we are listing them in the bottom fold. That said, play-to-earn games (P2E) like Axie infinity have been a huge success so far. The NFT marketplace feature several competitions to play and progress in a game or cash out the NFTs in multiple fiat currencies including USD. Each marketplace trade, though, entails a 5% fee that goes to the community treasury.
Typical monetization methods today
- Founders/content creators/developers monetize with a percentage of the initial sales and royalties from the secondary sales(when buyers exchange hands)
- Collectors monetize through access to utilities built by the project, airdrops of crypto tokens in some cases, airdrops of derivative NFTs and through sales if the NFT value appreciates
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Disclaimers : This opinion piece was originally published by the author on medium.com which is edited and re-published here. Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum foundation.
About the Author(s) :
Shuwam Rana is a Technical Analyst, Digital marketer and SEO expert with a passion to help businesses grow. He also has an engineering background. You can follow him on Twitter
Harsha Karanth has been in the energy and e-commerce industries before he came across web 3.0. He is enthusiastic about building impact projects on web 3, particularly in the sectors of environment, animal care and education. You can follow him on Twitter