LeoGlossary: Non-Fungible Token (NFT)

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A special type of cryptocurrency that has the data stored on a blockchain.

NFTs are unique since they cannot be replaced with something else. Each NFT is tied to a different set of data. This contrasts with Bitcoin where each coin is essentially the same.

If you swap a Litecoin for another one, you cannot tell the difference. They are fungible. However, if one trades an NFT (a Splinterlands card, for example) for another one, the original cardholder has something completely different.

NFTs can be used to represent both digital as well as physical goods. The music and art world are some of the first adopters of this technology. There are also high-end manufacturers creating an NFT for each item to fight counterfeiting.

Non-Fungible Tokens originally created using smart contracts. This technology started on Ethereum and was quickly adopted by the other EVMs and they forked out. Each contract contains the instructions pertaining to the code of how to handle the data.

Bitcoin Gets Into The Game

The best known blockchain network started to get into the NFT game in early 2023. Since its inception, Bitcoin had the ability. It was made more accessible with the release of the Taproot upgrade. Using the Ordinal protocol, the ability to create inscriptions became plausible. This means that digital artifacts (NFTs) are placed on-chain. This can be images, text, or HTML.

Since Litecoin was a fork of Bitcoin, in February 2020, the Oridinal protocol was forked and integrated into that network. Like the original chain, inscriptions started to appear on there also.

Ownership

One of the biggest benefits to non-fungible tokens is the fact they are transforming ownership. Traditionally, ownership if assets, regardless of what it is, was recorded on paper. This is true for real estate, vehicles, and memorabilia. Somewhere there was a recording of the ownership and it was in this manner that an ownership chain was formed.

The institutions that recorded the information were usually government entities. The process was centralized, thus establishing trust. Decentralized blockchains created a host of possibilities.

One of the challenges with the existing system is that corruption is common throughout many parts of the world. There are many instances where families had land stolen from then, houses or farms in the family for generations, simply because a government agent showed up with someone who claimed to be the owner. Since many nations still have little to no record keeping, the one with the gun won.

The tokenization of assets on a blockchain could be done as an alternative form of record keeping. The token would denote ownership, hence whatever wallet housed it, that is the owner. Upon sale or transfer of the asset, the NFT is moved also. When posted to a permissionless blockchain, a history (i.e. trail) of ownership can be followed. The block producers and validators are the ones responsible for maintaining the ledger on behalf of the network.

Obviously, this can represent both digital and physical assets.

The immutability that comes from a decentralized blockchain is vital in this process. Since all data is permanent, and cannot be changed, the records can be trusted. While new versions can be written, the original data is still in that block. Therefore, one can always go back to see the ownership tree.

Use Cases

The use cases for NFTs are truly only limited by the imagination of people. Innovation is going to take over and alter many industries.

To start, we can see how ownership is important for:

• collectibles like autographed memorabilia
• trading cards
• paintings
• statues

NFTs also hold great promise for authenticity and to counteract the effects of counterfeiting. Brands names are continually battling illegal "knock-offs" of their products. These are often passed off as being authentic. Here is where the ownership chain enters.

Another area is with regard to rare gems or natural resources. Not only is authenticity an issue but since many are mined in areas where child labor/slavery exists, companies want to ensure they are not aiding in this practice. Hence, NFTs can be used to validate the original of different materials.

Gaming is another industry that could be transformed. Not only are gamers accustomed to dealing with in-game assets and currencies, they can be enhanced by the idea of ownership of an asset outside the game. Wallets tied to blockchains means the asset is not dependent upon the game itself. If the NFT is tied to something in the game, then that can be traded on external markets.

The income rights one is entitled to could be altered by NFTs. Music is a prime example where artists and other participants in the recording of a song or album are due payments. Often people are shortchanged by the major labels simply because they are at the mercy of those entities.

With NFTs, the royalty rights are established in the smart contract. Each time the item is sold (or downloaded), the money received is distributed based upon what is established in the contract.

Ultimately, an industry such as tickets for concerts and sporting events could be transformed. Each ticket could be a NFT and, when purchased, the NFT is sent to the individual. This could be an automated process cutting out agencies such as Ticketmaster.

History

In 2017, Dappler Labs created a NFT on Ethereum called CryptoKitties. This was the first digitally verifiable and transferable non-fungible tokens. In this collectible game, characters with randomly assigned attributes that make each CryptoKitty more or less rare. Using the native digital signature scheme on the blockchain, it is easy to verify the authenticity of each CryptoKitty, its unique attributes, and its owner. Thus, each CrypotKitty was unique and became a digital collectible.

One of the challenges with this game was that it became so popular it hindered the blockchain. Due to limited scaling at the time, mostly due to being a Proof-of-Work (PoW) network, the transactions back up as they could not be processed rapidly enough.

Splinterlands entered the Play2Earn gaming world in 2018. This one learned the lesson of CryptoKitties and was built on Steem (it eventually moved to Hive after the hard fork due to the Justin Sun takeover). This blockchain is able to scale since it is Delegate Proof-of-Stake with 3 second block times.

Like most aspects of cryptocurrency, the fact that NFTs garnered attention while being monetized meant that a bubble was likely to result. This took place in 2020 and heading into 2021. The prices of some NFTs skyrocketed with celebrities getting involved, spending huge sums on digital assets.

Like the Dotcom Bubble and Tulip Mania before it, the NFT bubble was destined to pop and that is exactly what happened in 2022. As the market turned, prices crashed and people lost large sums of wealth. This brought of the FUD as critics denounced the absurdity of it all.

Aftermath

Like all post-bubble periods, the industry is left to pick up the pieces. The insanity is removed from the equation meaning that projects not based upon speculation are starting to take hold. With so many potential use cases, serious attention is being given to this realm. A lot of infrastructure is being built to provide services that can support the idea of NFTs.

In January 2023, Amazon announced that it would be building a digital asset enterprise system, including a store where people could buy and sell NFTs.

This shows the thinking that is going into the potential of NFTs. We can expect more mainstream entities to enter this market in coming years.

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