What is an NFT? Why could this be a killer use case of Blockchain?

Does it seem like every venture capitalist is wondering about NFTs these days？ Today, an NFT from Beeple sold for $69m! Did we just see a music album by DJ Justin Blau get tokenized as an NFT and sold for $12m on Origin DShop, all on the blockchain？ Lebron James and other NBA players highlights producing over $230m in sales？

Read about what is an NFT and why this could be a killer use case of Blockchain below!

• NFTs, or non-fungible tokens, are a type of cryptographic tool that can be used to tokenize unique digital items. NFTs are non-fungible, meaning that they cannot be replaced with an identical item, and are provably scarce, which gives them inherent value.

• In the physical world, individuals exchange things like art and collectibles through physical marketplaces, brokers, and more. The concept of “digital ownership” is significantly fuzzier than “physical ownership,” and thus the digital world lacks a comparable infrastructure for exchange.

• NFTs are a powerful approach for how individuals can “own” items, like digital art, on the Internet in a verifiable way and exchange them for value. By also standardizing what it means to be a “digital item,” NFTs also enable the exchange of digital creations on public blockchains, avoiding the inefficiencies and bloat of previous digital marketplaces.

• Ethereum offers multiple token standards for NFTs that have led to an explosion of NFT-based projects on the platform; the popularity of Ethereum has led to a natural influx of interest into these digital marketplaces. Other blockchains, like FLOW, Polkadot, and TRON, also power NFT projects, and offer performance improvements over Ethereum, like lower transaction fees and better developer experiences.

• The flagship use case for NFTs is digital art and collectibles. Creators can tokenize and sign digital art, and then sell them as NFTs on various digital marketplaces. Digital art collectors can purchase and exchange these works on marketplaces like OpenSea, SuperRare, Rarible, and more, cultivating an active digital art community within crypto. OpenSea, the largest NFT marketplace by volume, transacted nearly $90M in the last month alone. NBA Top Shot, a marketplace for NBA-licensed digital collectibles, recently reached over $280M in total sales in just a few months.

• NFTs have also made a sizable impact in the gaming world, where they are used to denominate in-game assets and purchases. Games like CryptoKitties and Gods Unchained allow players to trade assets like animated characters and playing cards on in-game marketplaces for fiat and crypto. Virtual worlds like Sandbox enable users to create their own virtual worlds, with custom games and assets that can be traded as well.

• 2020 saw immense innovation in the NFT space, ranging from fully decentralized marketplaces like Rarible to fractional NFT ownership from projects like NIFTEX. Total NFT transaction volume also tripled in NFT, and the technology accrued significant mainstream attention thanks to rising interest in crypto broadly and prominent figures like Twitter CEO Jack Dorsey and DC Comics artist José Delbo selling NFT creations.

• 2021 will see continued growth in the NFT space, thanks to ever-growing mainstream interest in crypto, better developer platforms and NFT tooling, and thriving digital creator communities. Already in February 2021 alone, NFT transactions reached $340 million, more than the entirety of transaction volume for 2020. Developers continue to realize the value of NFTs as a provably scarce, unique asset and discover more use cases from timeshares and fractional property ownership to independent music distribution. With the growing importance of our digital identity (and consequently, digital ownership), NFTs will change the way that we conceive and exchange value on the Internet.

A Million Dollar Tweet

Twitter founder and CEO Jack Dorsey recently made headlines for hosting a public auction to sell the first tweet he ever posted to the platform. The tweet, which is being sold as a non-fungible token (NFT), is stamped with a digital certificate, signed by Dorsey that guarantees its authenticity and has reached a highest bid price of 2.5 million USD at time of writing.

Dorsey, a long-time proponent of the blockchain and cryptocurrency technologies, has drawn much attention to the idea of commoditizing digital experiences in ways that reward creators and enable individual ownership. His million-dollar auction is just one of thousands being hosted on digital marketplaces that are platforming the next generation of digital art, collectibles, and more.

What are NFTs？

Dorsey‘s tweet represents a formative, valuable part of Twitter history, much like how archeological artifacts in museums might represent important, valuable parts of a historic society’s way of life. These items, whether physical or digital, have value.However, physical items, like artifacts and paintings, have established protocols for how theyre exchanged, such as auctions, brokers, and more. Digital items, like computerized art or Internet mementos, lack a comparable infrastructure for trading and selling items.

Thats where NFTs come in. NFTs, or non-fungible tokens, are a type of cryptographic tool used to tokenize digital items (like art) to be traded on the blockchain. The token is “non-fungible,” which means that it cannot be replaced with an identical asset. Some financial assets, like fiat cash and Bitcoin, are fungible, because 1 dollar or 1 Bitcoin can always be replaced with 1 identical dollar or Bitcoin. Items like art, which have a unique value generated by the creator, are not fungible because there are no identical items that can replace them. When a user buys an NFT for a digital art piece, they can be completely confident that the item they are purchasing was created and signed by the original artist and is not a copy or fraud. Another user might be able to screenshot the piece and try to sell the art, but such a situation would be akin to selling an iPhone photo of the Mona Lisa. In essence, an NFT represents an “ownership” right to some kind of digital property.

Digital marketplaces for non-fungible assets (like domain name sellers, in-game stores, art, etc.) have existed for a long time, but most digital items lack an efficient means of exchange. Moving assets from one user to another often requires the use of third-party services, an escrow account, slow payment rails, and complex means of transfer. This inherent friction has significantly limited the potential of marketplaces for digital items, since everyday users struggle to exchange their goods.

NFTs standardize digital items in tokens that can be exchanged on various public blockchains like Ethereum, bring liquidity and cash flow from DeFi into marketplaces for digital items, and provide strong cryptographic guarantees around ownership, censorship, and fraud & plagiarism. This makes it easier than ever for everyday users to participate in marketplaces for digital items and “own” pieces of the Internet, without having the endure the friction and fraud risks of former approaches.

The NFT Landscape

Most cryptocurrencies on Ethereum are a type of ERC-20 token, which is an Ethereum standard for fungible assets like currencies. NFTs on Ethereum are either ERC-721 tokens or ERC-1155 tokens, which is an Ethereum standard for non-fungible assets. ERC-721 was the original Ethereum standard for NFTs and is used by prominent projects like CryptoKitties. ERC-1115 tokens allow NFTs to be “semi-fungible”, where users can own various quantities of digital items (like in-game purchases), where the digital item is not as replaceable as something like Bitcoin or USDC. Ethereum also offers a standard called ERC-998, which allows the token to have fungible and non-fungible components simultaneously.

Ethereum token standards. ERC20 maps addresses (users/accounts) to quantities of fungible assets, ERC721 maps non-fungible assets to the address of their owner, and ERC1155 maps types of non-fungible assets to their owners and quantities. (OpenSea Blog)

NFTs are hosted on other blockchains as well, including FLOW and Polkadot, which has enabled digital creators to access lower transaction (gas) fees, use-case-specific developer tools, and the superset of liquidity in DeFi across different chains.

The flagship use case for NFTs is digital art and collectibles. NFTs provide a powerful tool for digital creators to uniquely sign their creations, trade them efficiently, and earn rewards from the appreciating value of their creations. Since the tokens are non-fungible, they also prevent against fraud and plagiarism, since all the authenticity of all transactions can be cryptographically verified. Marketplaces for NFTs, including Nifty Gateway, SuperRare, OpenSea, and Rarible, enable digital artists to list their creations and digital art collectors to trade and render their collections, fostering immense growth in the digital art community. OpenSea, which is the largest NFT marketplace by volume, has transacted nearly 90 million USD in volume in the past month and has over 22,000 users. Many of these marketplaces have also integrated tools that help artists mint their NFTs without having to write a smart contract, making it easier to onboard those that may not be as familiar with crypto infrastructure.

Digital art listed for sale on OpenSea (OpenSea)

NFTs have also made a big splash in the gaming world, where they are used to tokenize in-game purchases and assets. Players actually “own” items in virtual worlds and can even trade them with other players, often in exchange for fiat or crypto. CryptoKitties, one of the earliest NFT projects responsible for bringing attention to tokenized collectibles, is a game that lets users breed and collect unique animated kittens. The project has garnered widespread attention, and even had one animated kitten sell for $170,000. Many have also built “layer two” games on top of CryptoKitties, where third-party developers can modify the gameplay by interacting with CryptoKitties‘ smart contracts and introduce different in-game assets and storylines. Gods Unchained is another card-based game where users can buy and sell card packs from each other on the game’s decentralized marketplace. The average price of a card in the game has reached close to $20, and the game has reached a total market cap of 10 million USD. Sandbox is launching a virtual world where participants can create their own games and monetize in-game assets and experiences; theyve signed licenses with characters like the Care Bears, the Smurfs, and Shaun the Sheep. Popular game studios like Atari have also begun exploring NFTs to build games where players can monetize their gameplay with each other.

Scenes from CryptoVoxel a digital world where users “own” digital territory through NFTs

The applications extend far beyond digital art, collectibles, and games as well. NFTs can be used to tokenize, and thus exchange, any unique item on the Internet.

NFTs in 2020

Booming interest in NFTs stems from immense innovation in the space in 2020. In the first half of the year, Rarible launched the first fully decentralized marketplace for NFT assets, with its own governance token RARI. Prior NFT marketplaces were all centralized, meaning a central party governed the marketplace rules and operations. Decentralized marketplaces can potentially encourage more cash flow and engagement by decentralizing governance. RARI, which launched at $0.63 in July, has reached a price of $35.62 and market cap of roughly $30M at time of writing, demonstrating growing interest in the decentralized approach.

Other projects, like NIFTEX, engineered approaches to “cut up” singular NFTs into large quantities of fungible tokens, which could then be traded on popular DeFi exchanges like Uniswap. Tools like these allow users to access liquidity from NFTs that they may not have been able to have otherwise, and even suggest a future where financial contracts can be collateralized by “digital property ownership.”

NFTs also received unprecedented mainstream attention in 2020. Several high-profile artists also hopped on the NFT train this year, including José Delbo of DC Comics Wonder Woman and crypto artist Trevor Jones; many prominent pieces sold at sizable prices (often over $100K), reflecting the value that digital collectors see in NFTs. NBA Top Shot, a marketplace for NBA-licensed digital collectibles on the FLOW blockchain, passed more than $228 million in sales from more than 67,000 users. Overall, the total value of transactions with NFTs tripled to nearly $250 million in 2020.

NFT transaction volumes in the past year (Non-Fungible)

NFTs in 2021 and Beyond

The convergence of several factors makes 2021 a particularly exciting time for NFTs. Platforms like FLOW are making it easier than ever for everyday developers to build digital worlds with their own NFTs. Others, like SuperRare, are investing significant time in engaging with the digital art community and facilitating better onboarding and understanding of the technology underpinning NFTs. These approaches help extend the value of NFTs to the broader art and tech communities, enabling a new generation of digital marketplaces. Rising institutional and retail interest in cryptocurrencies and DeFi will continue to bring liquidity to different blockchains, fostering cash flow in NFT marketplaces, and uncovering newer financial uses for NFTs within the broader sphere of DeFi. More user-friendly fiat on-ramps and wallets also help bring more people into the world of NFTs, facilitating even more exchanges. Growing digital creative communities, expanded interest in crypto, and better developer platforms and user experiences for NFTs will all contribute to spaces continued growth throughout the year. In February 2021 alone, NFT transactions topped $340 million overall, outdoing the entirety of 2020.

The crypto community continues to explore more use cases for NFTs as well, including independent music distribution, timeshares and fractional property ownership, ownership of territory in virtual worlds (check our CryptoVoxels) and much much more. Developers are realizing the value of NFTs as a fundamentally scarce, unique digital asset that provides a concrete idea of what it means to “own” something on the Internet. As more and more of our daily lives transition to the digital world, NFTs will be a powerful and important approach to exchanging value on the Internet like never before.