Non-fungible Tokens — by Alessandro Civati

Non-fungible tokens (NFT) are digital assets that include a wide range of unique tangible and intangible items such as virtual real estate, sports cards, and digital sneakers.

One significant advantage of owning a digital collectible over a physical collectible such as a rare minted coin is that the NFTs contain distinguishing information to make it unique and verifiable. That makes it impossible to create and circulate fake collectibles since each asset can be traced back to the original issuer.

An NFT cannot be directly exchanged for another NFT since they cannot be identical even when existing in the same platform, game, or collection. The feature distinguishes them from regular cryptocurrencies. They have been compared to festival tickets that bear the event’s name, the purchaser’s name, date of the event, and venue. It is not possible to exchange a ticket for one festival with a ticket for another festival.

A considerable number of NFTs were built using Ethereum token standards ERC-721 and ERC-1155. These standards represent blueprints created by Ethereum to facilitate the deployment of NFTs and compatibility with the broader ecosystem, including exchanges and wallet services. NFTs are stored in digital wallets as collector’s items, and their use is being adopted beyond arts and sports into virtual gaming and real estate.

The following are other notable features of NFTs:

  • Non-interoperable: NFTs cannot be used across the board to replace or in exchange for another NFT. For example, a CryptoPunk cannot be used in the CryptoKitties game and vice versa. The same applied to collectibles and trading cards that cannot be used interchangeably across platforms.
  • Indivisible: NFTs cannot be divided into smaller units as it happens with Bitcoin that can be divided into smaller denominations called satoshis. An NFT will only exist as a whole item. You cannot own part of an NFT.
  • Indestructible: Non-fungible tokens cannot be destroyed, replicated, or destroyed since all data is stored on the blockchain via smart contracts. The ownership of NFTs is immutable, meaning that gamers and collectors are the proper owners of their NFTs and not the companies that created them. The ownership of NFTs is entirely different and cannot be compared to buying music from iTunes, where you do not own whatever you are buying as a user. In these scenarios, you are only purchasing the license to listen to the music and not holding it.
  • Verifiable: One of the significant benefits of blockchains is the storing of historical ownership data. Therefore, the ownership of a digital artwork can be traced back to the original creator, which helps in authenticating art pieces without the need for verification by third parties.

NFTs are increasingly becoming highly popular with companies and crypto users because they have revolutionized the gaming and collectible spaces. With the widespread adoption of blockchain technology, we have more and more investment in NFTs, with gamers and collectors happy to become immutable owners of in-game items and other unique assets.

The opportunity to make money from these digital assets is very attractive. Individuals can directly sell their digital assets, which they accumulate as they play games in the secondary market, including avatars, costumes, and in-game currency. Artists have been happy to sell their artwork in digital form without using galleries and auction houses. The ability to directly sell to a global audience means they can retain a significant portion of their profits, resulting in settling agent commissions and other administrative fees. A substantial benefit of the digital assets is that royalties can be directly programmed in the digital artwork, ensuring that the original creator continues to receive a percentage of sales whenever the piece is sold to a new owner. Some players in the space have been able to develop structures and monetize. Examples of the systems have been virtual casinos and theme parks such as Decentraland and The Sandbox.

The value in digital assets follows the rules of supply and demand, just like in other markets. The scarcity of NFTs coupled with the high demand from investors, gamers, and collectors means that people are ready to pay high prices for them. Many NFTs have made lots of money for their owners, such as an investor parting with $220,000 to buy a segment of digital Monaco racing track in the F1 Delta time game. Through the NFT receives 5% dividends from all races that take place on it.

Digital collectibles, especially art and sports memorabilia, are attracting hundreds of thousands of dollars. NFTs have inspired a crypto art movement as we witness more people join the craze. For example, NBA Top Shot, a platform by Dapper Labs in collaboration with the basketball league, has attracted huge sales driven by celebrities and sports fans. The increased interest in the tokens comes as bitcoin and other cryptocurrencies have experienced big rallies.

Non-fungible tokens are expected to transform fortunes for content creators. They will allow creators to own property rights for their creations and profit them in many different ways. Musicians have struggled to earn a living from their work in the digital age, and NFTs can help prove ownership of work and create an additional revenue stream from their work. Crypto art has been the most robust growing section of the digital collectible market. More people look for digital native asset classes outside of the established asset markets. The NFT market is maturing nicely and attracting people who have amassed wealth and reputation looking to invest in purely virtual assets. Well-established digital artists such as Beeple have recently sold their NFT-based art pieces through famed auction houses such as Christie’s.

NFTs are here to stay despite the surge in prices being likened to the speculative crypto-mania surrounding cryptocurrencies. NFTs are strongly backed as the route to the formalization of digital ownership and extending ownership beyond the life of any game, company, or platform. Many sports franchises and governing bodies, and the entertainment industry have shown strong interest in developing NFTs for their ardent fans. The NBA Top Shot already boasts more than 100,000 active collectors and more than $215 million in sales.

In this way, NFT are another disruptive innovation linked to Blockchain Technology. The world is changing faster, and the regulators should not be only lawyers or politicians but technicians too. We are already inside the new digital-world, and before corruption and crisis arrive, clear rules must be applied to the international system. Like every opportunity, risks are outside the door.

Author: Alessandro Civati

Email: author.ac@bitstone.net

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