Everything you need to know about Non-Fungible Tokens (NFTs)

 

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What are Non-Fungible Tokens?

Non-fungible tokens (NFTs) are creating a lot of buzz right now in a number of areas – digital art, gaming, and more.  Most notably, this cryptocurrency phenomenon has caught the attention of the world after Christie’s auction house recently sold a digital-only artwork for $69 million. Instead of anything physical, the purchaser received an NFT. But what are they?

Essentially, NFTs convert things like digital art into one-of-a-kind, verifiable digital assets that hold value as a form of cryptocurrency, and are easy to trade on the blockchain.

These digital assets can be almost anything – sound files, digital art, car titles, property deeds, likenesses, etc.  These unique digital assets cannot be duplicated and are not interchangeable and indivisible. Because of this, they can prove ownership and authenticity, and create scarcity and rarity, making them more valuable and sought after.

“Non-fungible” means that it’s unique and isn’t interchangeable with something else. Think of rare coins or a limited-edition pair of sneakers. If you trade an original piece of art for example, whatever you have traded it for will be completely different since it’s the only original. This is in contrast to “fungible” cryptocurrency like bitcoin, where you can trade for exactly the same thing – a bitcoin is a bitcoin.

NFTs can also be extended to real-world physical assets, enabling the trade of physical possessions – cars, real estate, essentially whatever you can think of – on digital marketplaces.

Why Should You Care About NFTs?

There is often a lot of hype around new crypto technologies, some of it wholly undeserved. But what about NFTs? Are they worthy of the buzz they’re generating? Well, for one thing, NFTs aren’t entirely new. In fact, according to the NFT Report 2020, the market was already worth $250 million in 2020. Furthermore, we’re already seeing uptake by major companies and organizations, from Ubisoft to the NBA to the BBC and more. 

NFT is also being discussed as the future of the creative economy, enabling rarity and scarcity on a medium where everything is easily reproducible. 

Furthermore, we’ve really only scratched the surface when it comes to real world applications of NFTs. The ability to tokenize physical assets opens a number of opportunities across industries, many of which are still nascent. 

We’ll talk about applications and opportunities in more detail below in the section on “Non-Fungible Tokens Use Cases”.

How Do NFTs Work?

NFTs are supported on blockchains like Ethereum and Flow, and can be bought and sold on any Ethereum or Flow based NFT market. Non-fungible tokens have extra identifying information stored in smart contracts and owned by an address. When somebody purchases an NFT, they then own this smart contract. This distinguishing information makes it both distinct from any other NFT and easily verifiable.  This makes the creation and circulation of fake collectibles pointless because each item can be traced back to the original issuer.

Blockchain technology is making this possible. Blockchain uses cryptography to chain blocks into an evolving list of records. Each block is locked by a cryptographic string of characters that uniquely identifies a set of data, to the previous block. These records are stored in a data structure called a Merkle tree. This allows for fast retrieval of past records. This design makes it very difficult to alter transaction data stored in blockchain.

Like all assets, supply and demand are the key market drivers for price. Due to the scarce nature of NFTs and the high demand for them from gamers, collectors and investors, people are often prepared to pay a lot of money for them. In some cases, some NFTs will also automatically pay out royalties to their creators when they’re sold

Non-Fungible Tokens Use Cases

Maximizing earnings for creators

The most common use case for NFTs today is in the digital content realm. NFTs power a new creator economy where creators don’t hand ownership of their content over to the platforms they use to publicise it. Ownership is baked into the content itself. When they sell their content, funds go directly to them. If the new owner then sells the NFT, the original creator can even automatically receive royalties. This is guaranteed every time it’s sold because the creator’s address is part of the token’s metadata.

Boosting gaming potential

NFTs have also garnered a lot of interest from game developers due to their ability to provide records of ownership for in-game items, fuel in-game economies, and bring a host of benefits to the players. In a lot of games players can purchase items to use within a game. NFTs enable those players to recoup the money they spent on that item by selling it to a new player once they are done with the game, and in some cases, even make a profit if that item becomes more desirable.

For game developers – as issuers of the NFT – they could earn a royalty every time an item is resold in the open marketplace. This creates a more mutually-beneficial business model where both players and developers earn from the secondary NFT market.

Physical items

While the tokenization of physical items isn’t quite as developed as the tokenization of digital art for example, there are plenty of projects currently exploring the tokenization of real estate, one-of-a-kind fashion items, and more. Because NFTs are similar to deeds, The possibility of buying a car or home using Ethereum and receiving the deed as an NFT in return is plausible. If this becomes reality, owners will also be able to use NFTs as collateral in decentralized loans. This is particularly helpful for those that aren’t  cash or crypto-rich but own physical items of value.

Fractional ownership

NFT creators can create “shares” for their NFT. This gives investors, and collectors the opportunity to own a portion of an NFT without having to buy the entire NFT. Fractionalised NFTs can be traded on decentralized exchanges (DEXs) and not just NFT marketplaces

In theory, this unlocks a possibility for investors and collectors to own a piece of a Picasso for example, becoming a shareholder in this NFT. Like with other shareholders, having stock in this NFT would provide these investors and collectors the opportunity to have a say in things like revenue sharing.

NFT Marketplaces

NFT marketplaces are where people go to buy and sell NFTs. While there are numerous marketplaces to buy from, the one you choose will depend on what it is you want to buy.  For example, if you want to buy baseball cards you’re best heading to a site like digitaltradingcards, but other marketplaces sell more generalised pieces.

In addition, these marketplaces require the buyer to have a wallet specific to the platform they’re buying on and, in most cases, use cryptocurrencies to pay for their purchases. It is important to note that not all NFT marketplaces buy and sell all types of NFTs, like domain names, art, collectibles, gaming items, and physical assets like real estate. Some may only cater to art while another marketplace focuses on real estate, for example.

Some popular marketplaces include:

Creating and Selling NFTs

InterKnowlogy has worked with blockchain technology and non-fungible tokens for a number of clients, most notably with helping ideate and create custom NFT marketplaces.

While individuals can leverage the NFT marketplaces described above — like OpenSea or Rarible — there are benefits to creating your own, most notably:

 

Better Control Over Design and User Experience

Like with any custom platform, developing your own NFT marketplace allows you to create a user experience that you can customize based on your requirements and better control. This can be valuable for things like personal or commercial brand, protecting likeness, exclusivity, and more. 

 

Retaining profits 

NFT marketplaces act to facilitate trade. As such, they typically take a commission on sales or use a similar method to make money from transactions taking place via their platform. OpenSea, for example, takes 2.5% of each sale.

For individuals, creators, and businesses who are expecting either a high volume or big-ticket sales (or both), creating a custom NFT marketplace could make financial sense as the cost of development would be offset multiple times over by avoiding such fees and commissions. 

 

Qualifying buyers

Creating a custom NFT marketplace can allow you to create additional exclusivity by making the platform invite only or requiring some type of verification, versus being open to the public. This can serve to help qualify buyers prior to any purchases, create more scarcity, and occupy niche markets. As the owner of the marketplace you are able to entirely control the platform, from who can join through to which artists, creators or sellers can use it.

NFTs are bound for growth

Non-Fungible Tokens are really just beginning to live up to their potential, and we expect that given their ability to operate across digital and physical assets, we’ll likely see the market experience explosive growth.

If you have any questions about NFT development or creating your own NFT marketplace. drop us a line below or fill out the form to start a conversation.

curious@interknowlogy.com
760.930.0075 Ext. 3