Next, we are looking at the Beginner Concepts section. Once again, we are using the same format as the Big Picture piece.
Key Idea 1: What are NFTs?
NFTs are unique digital assets that track something unique. Their ownership can be tracked on a blockchain. They can be used to represent digital goods or even claims on physical goods. Almost anything can be an NFT, from music to art to writing. They are digitally scarce which means they are easier to sell, authenticate, collateralise, tokenize and value. They cannot be replicated.
NFTs are empowering the careers of creators, rather than middlemen who connect fans to creators. These middlemen include major big tech companies, like Facebook, Twitter, etc. The essence of web3 is about cutting out the middleman and connecting the creator and supporter directly. It is about attaching each user’s data and money directly to their identity, creating a public record of their ownership and allowing them to profit from their ownership, anywhere on the web. NFTs play an important role in enabling web3.
Key Idea 2: How Crypto enables NFTs
Cryptography and blockchain enable both fungible and non-fungible tokens. Fungibility is the ability to replace the item with an identical item. In essence, it is how unique the asset is or how interchangeable it is.
Blockchains have certain characteristics that enable NFTs. Firstly, as these tokens are built on blockchains, developers can build reusable and common standards relevant to all NFTs. These standards have basic primitives such as ownership, transfer and simple access. Due to these common standards, NFTs have interoperability as well. This means that they can move easily across multiple ecosystems, such as different contexts, uses, platforms. You can plug NFTs into decentralized systems and trade them instantaneously with anyone in the world. The interoperability of NFTs also enables tradability as NFTs can be taken from their original environment and put on to open marketplaces where they can be sold. For example, in-game items can be sold on external, open marketplaces outside the game and later be put back into the game for use. It is a transition from a closed economy to an open economy. As NFTs can be sold on marketplaces, this gives them liquidity as the asset can be sold to a wider pool of buyers. They are also immutable and provably scarce, as their properties cannot be altered and a hard cap can be placed on the supply. Scarcity is enforced by code and distributed consensus. Finally, NFTs are also programmable as complex mechanisms can be baked into the NFT itself.
Crypto and blockchain also enable the ownership aspect of NFTs. As the file is uploaded to the blockchain, the file can be owned. In addition, you can track ownership and provenance yourself, without relying on 3rd parties. Currently, we depend on 3rd parties to track ownership of digital files and they take fees for this service while holding the power to ban people from the service as well. With crypto, the ownership history is for all to see on the decentralized ledger, and it is there forever and cannot be altered. There are large impacts of being able to track ownership history accurately. For example, ownership history can be a status symbol to demonstrate that you are an early adopter in the space. NFTs enable the ownership economy in which it is possible to send ownership value to anyone over the internet. An impact of this is that it helps communities align their purpose with the creator — startups, artists, businesses, etc.
Crypto also enables permissionless innovation. As most details are open, the NFT’s data is just an API call away, making it easier for them to surface the information. This enables developers to build new experiences around existing consumption methods, without having to ask permission from the major platforms. Developers can build on existing platforms, as they are open-source and permissionless, to produce new spaces for the digital property, thereby compounding NFT utility.
Key Idea 3: Uses of NFTs
NFTs have various uses. The foundational elements include ‘Minting’ which refers to putting the digital file on the blockchain by interacting with smart contracts, ‘Wallets’ which refer basically to your public key, with which all your items on the blockchain is associated, and your private key, which unlocks the transfer of assets.
The use cases range from art, to prove ownership and authenticity, to games, for the trading of in-game items, to communities, in terms of social tokens. NFTs help make fractional ownership of art more accessible. The art could be both physical, with which the NFT would represent a claim on the artwork, and digital. The NFT can also be programmed such that the original owner gets a % cut of all secondary sales of the work. It can further be programmed to dynamically update certain features based on on-chain data. The art can be displayed in physical settings using NFT frames and can be displayed in virtual worlds and online collections as well. For games, decentralised exchanges can reduce transaction fees for in-game items and greatly increase the trading and liquidity of these items. Furthermore, it can increase the interest in the game as well as gameplay itself. However, it could have the undesirable impact of people paying to win or being completely focused on extracting value from the game, rather than playing.
Social tokens refer to a broad category of tokens issued by communities and individuals, such as creators, influencers and the community around them. They enable fans to have greater ownership of the community and space they are building and allow creators to directly interact with their fans. These tokens can represent a variety of things, ranging from a person’s time to specialised access and even collective ownership of the community. These tokens enable early fans to share in the economic upside of the community’s growth alongside the creator and give financial incentives for them to spread the word about the creator. In addition, it gives fans the ability to financially support creators and potentially gain specialised access to a creator’s work. Social Tokens are Fungible, which means they are not NFTs — they are often lumped together because they both enable the creator economy, but they are definitely different.
Next, we look at the Technical Aspects of NFTs…
