NFTs - Unabridged

Do I know what an NFT is? What does it actually signify? Should I even care?



What is an NFT?

Most people know that an NFT stands for a non-fungible token. It is something unique.

But the keyword to note is token.

A token is like a digital receipt or IOU granting the owner specific rights.

If a set of tokens give the owner the same rights - think a $5 note or 1BTC - they are fungible

However, if the tokens grant distinguishable rights, they are non-fungible.


Examples could include

  • Ownership of digital collectibles like Crypto Punks, Art Blocks, etc. (most prevalent use of NFTs)

  • Ability to access specific services (backstage passes to concerts or something as mundane as a haircut)

  • Ownership of physical goods or property

The broad idea is that NFTs are distinguishable and you must track ownership of each separately.

This then brings us to how is the tracking done.

Let’s take the example of ERC-721.

ERC-721 is a non-fungible token standard for smart contracts on the Ehthereum blockchain.


Let’s use the ADEPT framework to try and understand the technical term




Analogy: It’s like an excel table that has a list of items and a corresponding list of names


Diagram:

Example:

You have this excel table that lists the unique identifier, the item description and the owner name. So if I were to query who owns item #2, you can quickly check the table and confirm it’s James.


Plain English:

ERC-721 are smart contracts that allow tracking ownership of NFTs on the Ethereum blockchain


Technical:

ERC-721 smart contracts will return specific combinations of token IDs and wallet addresses confirming the ownership of a particular NFT. They also update the record as and when NFTs are sold or transferred.


Okay so to summarise - an NFT is a token that gives you ownership rights over a distinguishable item/service and the ownership is tracked via smart contract on the blockchain (can be Ethereum or any other)


The beauty of this is the decentralised and trustless tracking of ownership. No single entity or a person needs to track and maintain the records.


As long as you trust the base blockchain you don’t need to worry about the security of your ownership rights.

Also, it is important to understand - NFTs do not grant the owner copyrights.


If you buy an NFT and it is an image of a bunny. Anyone can copy it and save it. Someone may even go and open a burger chain with the bunny as the mascot.


While you have no right to extract royalty from everyone who uses the image, it does make the image more popular and consequently makes the NFT much more valuable.


You may think why does anyone need the original - when they can just right click and save it.

Just consider that anyone can buy an exact copy of a Rolex or a Luis Vuitton but still chooses to buy the original for the true status flex.


Not all NFTs are created equal

Here's what you should consider before getting yourself your first NFT. Point 2 is obviously more applicable to the image-based NFTs which are popular currently


1) What blockchain is the NFT on?


An NFT gives you ownership rights via a smart contract on a blockchain. So obviously you need a trustworthy blockchain!


NFTs on Ethereum are most desirable but also suffer from high gas (transaction) fees.

Currently, all of the valuable NFTs (think CrytoPunks, Bored Ape Yacht Club) are on Ethereum.


2) Where is the NFT media/metadata stored?


Ever wonder why the most popular NFTs are so low resolution?


The thing to understand is that block space on the blockchain is very limited and very expensive.


The smart contract only captures the token ID, item description and the owner wallet address. The item description is also referred to as the NFT metadata.


So the data-heavy images/files are typically stored off-chain. This also poses a point of risk


How the metadata is linked to the underlying NFT can vary widely between platforms, artists and developers.


How the metadata is linked to the underlying NFT can vary widely between platforms, artists and developers.


Checkmynft.com summarises the risks

When the metadata is stored solely on a centralized provider or in an insecure way, such as a URL or on Google Drive, there is a massive risk that the underlying asset will eventually be deleted. In fact, it’s practically inevitable that it will be deleted given that the average website lifespan is just 31 months. In such a case, it’s not a question of if it will be deleted but when. If your metadata is deleted and there is no backup, all you would be left with is the underlying ERC-721 token and a broken link

and offers some useful tips

The most secure ways of saving your metadata include (A) onchain storage on Ethereum (but this is extremely expensive like ~$76,000 USD per GB of storage expensive) or (B) saving your metadata on Arweave which is a protocol built specifically for permanent data storage. Arweave is our preferred method for metadata storage and it is extremely cost effective, for example you’d pay a one time ~$14 USD per GB as of March 21, 2021

Why should you care about NFTs?

Well if you care about property rights - you should care about NFTs.




More and more corporates are now using NFTs as a marketing tool



(Worth revisiting something I mentioned in my last post as well)


Chris Cantino of Color Capital has a great thread on how companies can use NFTs for marketing and community building.



Summary of his views (examples are mine)

  • Companies pivot digital strategy to turn audiences into communities, giving them space to interact: financial and social capital, education and place where they belong.

  • Brands could either partner with existing communities or create their own

  • One example of leveraging the power of existing communities is what Visa did



  • Another path is for brands to tokenize access. Allowing exclusive access to products and content

  • They could also democratise decision making among token holders which moves the needle from “I love this business” to “I am a participant in the business”


Just think about it. In the physical world majority of the items are non-fungible. If the digital world follows a similar pattern - we are only getting started in terms of the potential use cases for NFTs.


What’s more - an amazing Sydney based company called Immutable might be at the forefront of creating the infrastructure on which this NFT revolution takes place.


Read more about Immutable here






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