Non-Fungible Tokens or NFTs have been the hot topic of the last few months. From $69M digital art to a 70% crash in NFT value in just a few weeks we wanted to take a look behind the scenes as to what NFTs are and what the future hold for them and ownership of digital assets.
First things first, what is a Non-Fungible Token? An NFT is a unit of data that is assigned a unique identifier, this is what they refer to when they say “minting” and NFT, which is a part of a blockchain, therefore, making the digital asset unique and “non-fungible”. For the non-techies out there, it's the idea that the data that makes up a digital thing can be given a unique ID as part of a distributed ledger so that the owner and value of that digital asset is part of the public ledger. Similar to bitcoin and other cryptocurrencies, NFT ownership is public knowledge as is the transfer of NFTs as that transfer is added to the blockchain each time it trades hands so that the ownership of the NFT is always a part of the ledger.
So what’s the big deal? Why would anyone pay $69M for a JPG?!?! At least that is what the mainstream media talks about because those headlines generate attention. We want to focus on the future and the application that NFTs can have moving forward. First and foremost, Augmented Reality. AR is coming, Apple, Niantic and several others have said that they will be launching AR glasses in the next few years. So what do AR glasses have to do with NFTs? Think about what AR is going to do for us, bridging the physical world with our digital world. So think of that digital art, now imagine that real artists sell that art to a limited number of individuals as an NFT, say 100 copies. Those 100 people can place that piece of art in their home where it is only visible when you view it through your AR glasses. You can invite friends over and they can view it through their AR lenses on your wall. I know what you are going to say, but can’t anyone just view the file online where the art was auctioned, etc.? Well, I can view the Mona Lisa online, everyone can, all 6 point whatever billion people on this planet can view a picture of the Mona Lisa online, doesn’t change the fact that there is just one Mona Lisa. Digital art is no different, the on-chain NFT helps secure this one-of-one value.
Next is the ability to place real-world data on the blockchain. This is already happening with several smart contract blockchains such as VeChain, Cardano, and Chainlink. Chainlink is the technology that we are most familiar with so we will speak to that, the idea of Chainlink is to connect real-world data to the blockchain, essentially using it to enable smart contracts that can be kicked off the conditions being met in real-world data. Think of insurance companies selling NFT policies tied to disaster events, the NFT is tied to real-world weather data so that if that event happens, the data becomes part of the chain, triggers the conditions of the policy which then releases the money from the policy to pay for damages. How about a musical artist? What if the master recording of a new song or album is minted and auctioned off? Could the holder of the NFT then be entitled to a revenue share from royalties when the song is played or streamed in perpetuity? Could retail investors such as you and I use that initial NFT to help “seed” the artist's work if we are fans and want to support and potentially benefit from their creations? It’s an interesting concept.
What about verifying the authenticity of real-world physical items? Let’s look at the fine liquor industry where fraud is rampant and the value of specialty liquors is tied to the market's demand for them. Could an NFT that is minted and attached to each bottle from its release be the security token that is used to verify not only the authenticity of the bottle but also to use the blockchain to enable the consumer market to determine the price. If you are a collector or investor who holds one of these bottles, you will know the exact value at any time given the going market rate is for that bottle in the event you want to sell it to another party.
Another interesting application is the connection of digital assets with physical goods to unlock new experiences and/or other digital assets. Think about a limited drop of apparel items, that when scanned and purchased in conjunction with a digital collectible unlocks an experience for the user? The resulting experience or item can only be unlocked by the combination of giving creators and brands the ability to drive new experiences tied to these assets. Think about a musical artist. Instead of selling tickets to a show, could you sell a limited edition shirt and an NFT that gains you access to the show? Imagine the marketing opportunity when those shirts are worn beyond the concert versus an e-ticket which you will ultimately delete after the show.
We could keep going with exciting applications of NFTs that we have seen discussed and no doubt are being explored. The point is that there is an amazing wave of innovation to come where we can now more concretely link the physical world with the digital one and that will create a new avenue and opportunity for creators and brands to build unique and engaging experiences for consumers and with that comes tremendous opportunity for entrepreneurs to create the next generation of tools and tech to serve it all.