Hope you all had a great holiday season and New Years. Breaking from the norm a bit here sending a first half of the week post but hey, its fun to break from routine from time to time.
Today I want to talk about what has arguably been one of the hottest trends in blockchain/crypto/web3 over the last 12 months…NFTs.
NFT stands for non-fungible tokens, meaning that they are a token on a blockchain that is 1 of 1 and is often associated with a single digital or physical asset. So far the majority of NFT use cases have revolved around art, collectibles and other assets that are viewed as more scarce or as a collectible. One thing that both myself and my team have been discussing with some of our clients is the use of NFTs to track and also create another valuable asset, data.
Data has arguably been the most valuable asset of the last two decades as numerous startups turned massive public corporations have built large scale businesses mostly revolving around data. Think Google or Facebook, data assets account for large portions of their value and even smaller challengers such as Palantir and others have scaled up big businesses around data.
So how might NFTs evolve in 2022 and beyond? Our team has a hunch that turning them into data tracking and producing assets might be an interesting trend to look out for. But what do I mean by this?
First we need to look at fundamentally how an NFT behaves within a blockchain. An NFT is a token that lives on a blockchain much like how a bitcoin (which is an example of a fungible token) lives within the bitcoin network. Users are able to send and receive that token which creates a new ledger entry in the network as to who the sender is and who the receiver is. That token (be it an NFT or bitcoin) then lands in the receivers wallet until they then send it somewhere else.
This creates the first interesting characteristic that lends itself to strong data-driven systems, traceability. One of the biggest issues with data in companies with a traditional tech stack is that it is siloed making it hard to track when information from one system is used by the same user who just used information from another system.
Some of our clients have expressed the same frustration, the assets that are required for them to interact with their customers and run their business are all siloed in separate systems and the data from customers going from one to another is near impossible to track without paying massive amounts of money to have the data cleaned up.
We have started scoping a few pilots with a handful of them where our system would take this assets and load them into a CMS that would then tokenize them, simply put, create a unique NFT for each asset and then deploy those NFTs to their consumers in the front end where they would be interacting with them how they always have. The user experience remains unchanged.
But in the background what starts to happen is pretty interesting. As users interact with these assets, they are transferred from the companies wallet which holds them in reserve to the users wallet where they can interact and that interaction can actually kick-off smart contracts that read/write from the companies main system so they can deliver whatever product or service it is that these users are accessing.
Now some of the smart contract capabilities are still limited today which ultimately does limit this approach in the short term. We can get into more details on smart contracts in a future post but we have become particularly fond of using Algorand as our blockchain of choice as their NFTs (they call them ASAs or Algorand Standard Assets) are actually programmable themselves within the L1 token. This greatly reduces complexity and overhead allowing us to be more creative with our clients while maintaining high throughput in the system. It also doesn’t hurt that their smart contracts are programmable in python which almost any full stack engineer will already be familiar with.
But as smart contract capabilities increase, we will start to see more complex contracts and operations added to these assets and as users engage what happens is really amazing. On the backend, the company will start to see a string of “transactions” or tokens moving between their wallets and users wallets. These transactions can then be turned into engagement and interaction data based on what assets the user is engaging in with and what smart contract capabilities they activated.
Now there are definitely some limiting factors here. The first one obviously being cost. Some of the earlier blockchain layer 1s have struggled with high transaction (often referred to as gas fees) which would get quite expensive for a company tokenizing an entire ecosystem and having tokens being transacted as high velocity. Now some of this is starting to be addressed with the new generation of layer 1s like Algorand, Solana, Hedera, and Avalanche. These projects are focusing on keeping transactions cheap, often replacing variable fees with fixed fees making it easier to project and manage cost as a company grows.
The other factor, which we described above, is the limited ability of smart contracts today. The issue with smart contracts is like any code, the longer and more complicated they get, the longer it can take the system to read and activate them which can bog down the network. There is also a security trade-off but we can again get into that in another post. Smart contracting capabilities are getting better by the day but can still be limited today.
All-in-all I’m excited to keep exploring this concept with our clients and our team as we move into 2022. NFT technology has certainly made some big splashes in 2021 but it feels like it has only begun to scratch the surface. One big thing here is that the shift goes from having the NFT be a consumer facing item that you and I buy, hold and sell, to a behind the scenes asset that is part of our normal interaction with software and goods. Would love to hear people's thoughts on this, feel free to hit that replay button and share. More and more folks are doing that with these posts and I love hearing what you all think. Talk soon!