What is an NFT? – Definition, Meaning, Example NFT Applications and Beyond the Hype
What is NFT and why is there such a big hype? We give you the answers
Learn about the new world of NFTs (non-fungible tokens) and their potential use cases in this in-depth article with explanations beyond the hype.
What are NFTs? A hype? A FOMO game? That is a question that many people are asking lately, and for a good reason, as NFTs are literally across all media, the internet, and events.
Non-fungible tokens (NFTs) are unique cryptographic assets that cannot be replicated (in Theory, we come to that later). This makes them seemingly perfect for various use cases, such as digital collectibles, gaming items, and more. This article will explain 25 different possible use cases for NFTs, what the advantages are and also the disadvantages incl. some obstacles it has to overcome before it will be a mass market product.
Please note – Important Disclaimer: This article specifically only highlights possible use cases for NFTs, which doesn’t mean that there are better (technical) solutions to the same problem. Currently, the added value of crypto technologies, blockchain, or NFTs might be marginal or non-existent in most business or society contexts and might just add extra layers of complexity. There might be better technical alternatives and other more efficient technologies to achieve the same results. The drawbacks and challenges always need assessment on a case-by-case example.
What are NFTs?
NFTs, or non-fungible tokens, are digital assets that can be used to represent a variety of things. They are unique cryptographic tokens that exist and operate on distributed ledger technology (DLT). Unlike traditional cryptocurrencies like Bitcoin and Ethereum, each NFT is completely unique, meaning it cannot be replicated or exchanged for any other asset.
What are digital assets?
Digital assets are digital versions of physical items or virtual items that can exist within a digital environment. They can be anything from simple images and videos to complex software applications, online accounts, and digital tokens such as those used in blockchain-based technologies. These assets come with rights and responsibilities attached to them, either registered by a user or automatically recognized by the technology built around them. In a business context, some of these assets may include website templates, logos, intellectual property, and customer databases. Since many of these assets are accessible online or across multiple devices, it is important for businesses to securely store their digital assets and ensure that they remain only available to the right people. With the right tools in place, organizations can maximize the value of their digital assets while keeping them safe from potential risks.
How do NFTs work? Who owns the NFT?
NFTs, or non-fungible tokens, are digital assets that are secured and validated on the blockchain via smart contracts. Often the Ethereum Blockchain is used as the layer to store and transfer the data. They are a type of cryptographically secure digital asset with a unique identifier and other information embedded as metadata. This should ensure that each NFT is truly one-of-a-kind, making them digitally unique. NFTs are usually associated with digital art and digital goods, where the owner of an NFT holds the right to display artwork online or license it out to others (depending on the contract and NFT content).
It is important to note what you normally don’t own the digital good and there might be some different forms of NFTs but in generall you don’t own the IP, copyright or anything else. Only the right to access the good and revoce it from others. So you get prove that you have a key to the house and can shut the door to the house for others, but the house belongs to someone else.
What you OWN with an NFT
- Right to claim the ownership of the NFT as shown in the Blockchain record
- Right to exclude owthers of accessing the NFT
What you DON’T OWN with an NFT
- IP of the asset (important)
- Real ownership of the digital asset
NFT creation process “Minting” explained
NFT creation is a process of so called “minting” digital assets such as art, music, in-game items and videos on blockchain technology. The main purpose of NFTs is to provide proof of ownership and transferability over digital assets. This process begins by the asset owner supplying a digital representation of the asset (such as an image, video, music or something else) to a NFT marketplace. The marketplace will then generate a unique identifier for the asset and other associated metadata which is recorded into the blockchain using smart contracts. This record of ownership is stored on the blockchain providing evidence of provenance, authorship, price, time of creation, expiration date and other important properties or functionalities.
The process of NFT creation typically takes a few minutes, depending on how complex the asset is (i.e., a piece of art versus an in-game item). Once everything has been verified and approved, the asset can be bought and sold freely by anyone with access to the NFT marketplace. (Examples are OpenSea, Sarible, SuperRare)
The hype around NFTs (2020-2021)
Non-Fungible Tokens (NFTs) have gained a lot of attention during the pandemic years of 2020 and 2021 and became part of a digital culture or phenomenon. NFTs were dealed as the future for anything from artwork to music, to physical items like tickets or even houses! They are theoretically limited, they are market as “rare” and fully traceable within the blockchain.
NFTs allow users to own something “tangible” in the digital world and prove theoretical ownership, making them a hot commodity amongst collectors and creators alike. This has sparked an exciting new market where fans and investors alike compete to purchase exclusive digital artworks or even potentially invest in works from up-and-coming crypto artists. NFTs have become an interesting new way for collectors and artists alike to gain recognition as well as monetary value for their work but also many lost a lot in the recent NFT crash as the hype quickly faded with economic recession.
Potential Benefits of NFTs
Non-fungible tokens offer a unique way to prove ownership of digital assets. Their main selling point always is that they are providing a secure and verifiable way for creators to monetize their work. With cryptographic hashes, users can verify the provenance of digital assets and thereby enjoy greater control over their artwork.
Some of the major proclaimed benefits of NFTs are:
- Providing proof of ownership for digital assets: NFTs provide immutable proof of ownership for digital assets on the blockchain, meaning that buyers can purchase valuable items with security and authenticity.
- Ability to monetize digital assets: NFTs enable businesses, creators and investors to monetize their digital assets, such as artwork, music, and videos, by selling them as tokens on the blockchain.
- Automating asset transfers and royalty payments: NFTs can be automated to transfer assets and royalty payments between parties with ease, ensuring that all payments are securely documented and tracked on the blockchain.
- Enabling cross-chain operation: NFTs can theoretically operate across multiple blockchains with ease, eliminating the need to communicate via a centralized database or platform.
- Securing digital data: NFTs can also be used to securely store digital data, such as medical records or legal documents, on the blockchain in order to ensure its privacy and integrity.
Potential Risks of NFTs
Cryptocurrency has been making waves in recent years, and Non-Fungible Tokens (NFTs) are the latest hype in that space. While this particular type of blockchain technology may offer some advantages, there are a few potential risks to bear in mind. These include the difficulty in verifying authentication and ownership, as well as compatibility issues with other types of software. Additionally, since these tokens are not backed by any physical asset such as gold or a fiat currency, their value can be subject to rapid volatility. On top of all this, the process for trading NFTs may be difficult to understand for those who are new to cryptocurrency since it requires a deeper understanding of computer coding.
- The difficulty in verifying authentication and ownership
- Compatible issues with other types of software
- Volatility of value
- Difficulty in understanding for those who are new to cryptocurrency
- Security risks from malicious actors
- Regulatory risk of governments not recognizing the legality of NFTs
- The high costs associated with minting and trading NFTs
- Token scalability issues where a network can become congested if too many transactions occur at once
- Potential for manipulation of the market (e.g. Wash Trading)
NFT Wash Trading explained – An example for Fraud with NFT trades
Imagine you have 1 million USD worth of Ethereum and you have an NFT worth 1 USD.
Let’s say you create another account where you buy this NFT from yourself with your Ethereum worth 1 Million USD. This creates an NFT worth 1 Million USD (it was sold for 1 Million, right?) and you still have your 1 Million USD in Ethereum, just on another account. This way you literally created 1 Million out of thin air.
19 Potential Use Cases for NFTs
Here is an extensive list of possible use cases for NFTs. While some of these 25 potential use cases can be achieved through simpler methods, NFTs can be one way to protect asset value while also allowing buyers to enjoy greater control over their artwork. Please also be aware that many of the use-cases are based on Distributed Ledger Technologies, and therefore are not unique to NFTs or Blockchain, so this list will mention it but, it’s not NFT unique as NFTs only use DLT technologies as basis.
- Proving ownership of digital assets – This the opportunity to claim the ownership of non-physical assets for artists, companies or collectors. This might help them to still own the original asset but give the usage-rights to specific other persons.
- Monetizing creative content – This is the ability to easily create and sell digital content, such as music and videos, directly to consumers without sending the original content to the user.
- Digital identity management – This is a way of managing your online persona by registering your name, image or other attributes in a decentralized system that makes it easier for you to manage your data across multiple platforms.
- Smart contracts and tokenized assets – This is the ability to create smart contracts and tokens that can be used for a variety of different applications, from trading securities to managing supply chain operations.
- Secure data sharing – This is the process of securely sharing data between two or more parties without compromising its integrity or confidentiality. This is a very unique point of DLT technologies and can also be applied to NFTs.
- Decentralized exchanges – This is the process of exchanging digital assets without using a centralized exchange, allowing users to exchange digital assets directly from peer-to-peer. Decentralized exchanges can also provide added security features such as escrow and arbitration services.
- Trading tickets and other physical items – Trading physical items such as tickets, art, and collectibles over a blockchain or other shared ledger. This allows users to easily buy, sell, and transfer ownership of these assets without requiring a centralized service provider.
- In-game items and rewards – Creating digital assets within a game that can be bought, sold and traded by players. These assets can be used for in-game rewards or for real-world purchases (e.g. Starbucks has piloted it with their loyalty program)
- Secure fundraising options for businesses and organizations – This is the ability to create and manage fundraising campaigns in a secure, transparent manner using blockchain technology. This can include crowdfunding, digital asset investments, and initial coin offerings (ICOs).
- Verifying provenance of digital assets – Verifying the authenticity and ownership of digital assets such as artwork, music or videos. Please note that the verification can only be done based on the information provided – A false certificate will still be verified as “verified”, as the DLT can only verify the existance of an information, if this information is false then the false information will be verified.
- Improving Transaction speed – Secures transactions faster than traditional methods and it would be even possible to have real-time transactions, depending on technologies used.
- Tokenized in-game items – Helps gaming industry by creating a more secure system for in-game transactions and make them publicly tradable. Interoperability is still to be discussed, because there is no real use-case for cross-platform transactions till now.
- Reduces risk with secure online transactions – By utilizing a secure distributed ledger system, transactions are less prone to fraud or tampering as a DLT system can verify the transaction online. But also wrong transactions can not be reversed without intermediary.
- Supply Chain Certificates – By utilizing NFTs as digital transaction medium, it could be possible to trace a product accross different touchpoints (e.g. Shipping, Transport, Reselling), attach new information and verify every step. The collected data can be then attached to the digital twin of the product.
- Loyalty programs – By incentivizing customers with tokens to use in exchange for goods or services. (e.g. Starbucks)
- Fashion – Fashion is also a type of art and by combining physical and digital art it could make the experience better for customers. Also personalized fashion can be then stored as a digital twin in an NFT or other ledger.
- Digital Vehicle Papers – By tracking the past owners, services, accidents, etc. the digital NFT could be a “card” of the vehicle containing all information and tracking all the possible impacts on a vehicle, making buying and selling a lot more transparent.
- Real Estate Verification – Allows real estate developers to securely track all the past owners, ownership verification plus also past transaction values of the property. The transparency can be also something that is not wanted.
- Voting Systems based on NFT – Developing secure voting systems using NFTs is another possibility, if even not really usefull and prone to other challenges.
Beyond the Hype of NFTs
Regardless of the use cases that many want to see or could see in NFTs, many things are still unclear. For example, an artist could create a physical painting, sell a digital version of it as an NFT, and still sell the physical painting. The problem is that simply having a digital NFT does not give you copyright, so you can’t even share the digital art and artists don’t have the right to share or distribute the work.
Even “Metaverse” assets such as NFT land, NFT houses, NFT objects or even real estate in the physical world would be interesting, but there are many regulatory challenges and uncertainties. The best use case would be to create a “digital property registry” for cars, houses or other assets, where a tamper-proof registry of services, properties, taxes, accidents and the like could be a real use case where NFTs could be beneficial.
Whether NFTs become a standard digital element for managing ownership, proof of registration, or for managing digital items will depend on many factors. At this time, it is unclear whether there will be increased support or restrictions on this technology and whether it will be able to evolve after the first hypes in 2021.
Conclusion on NFTs
NFTs and distributed ledger technology have been around for a while, but the recent hype has highlighted some of its potential advantages and lots of talks have been about the potential use cases and applications of these digital collectables. Despite this initial surge in popularity, it appears that the market is beginning to settle down as companies explore only limited implementations (partially based on DLT or Blockchain but not solely, due to the disadvantages) such as loyalty systems or digital car identities. While there may be certain use cases where NFTs can provide unique benefits, they should be evaluated carefully before being adopted due to their significant drawbacks compared to other options.