NFTs have a lot of hype and are a very polarizing topic. In this article I will explain why NFTs will change the world. Note: I have never purchased any NFTs, so I am not shilling any bags.
An NFT (non-fungible token) is just a non-fungible digital asset, secured by a decentralized ledger, ie. the blockchain.
- Non-fungible = each asset is unique (unlike a token where each token is the same)
- Decentralized = Ownership is secured by the blockchain. So long as the blockchain is secured, no one can take your NFT away from you (unlike if ownership were allocated by a centralized entity)
- Generally tradeable (unless defined not to be by the contract)
- Can have features programmed into the NFT like a percentage of future sales going back to the original creator (or someone else) as royalties
An NFT can represent anything:
- ownership of a limited edition piece of art (jpg, video, music)
- asset in a videogame (eg. weapon, clothing). Because the blockchain is public, assets could be reused across videogames
- membership in an organization like a DAO (normally done with tokens, but can be done through NFTs) or private communities (eg. Discord servers)
- Ownership in a crowdfunding campaign that entitles one to future royalties (eg. film) or perks (eg. this Youtube channel)
- a reward for donating (Ukraine has teased this)
- a reward (eg. in a videogame)
- a domain name on ethereum (ENS)
- ownership with real-world privileges (eg. access to a restaurant, Bored Ape Yacht Club yacht parties)
- Real estate (virtual land is sold as NFTs on Decentraland and Sandbox, but in the future NFTs could represent real plots of land)
- tickets to an event (eg. concerts, conferences)
- liquidity position on an AMM (Uniswap does this)
NFTs can represent anything. The advantage of NFTs vs. centrally owned digital assets are:
- Decentralized ownership secured by blockchain (ie. no centralized entity can take away your assets or “rug pull” you)
- Programmable features like royalties on subsequent reselling
NFTs totally transform and “lubricate” digital patronage and crowdfunding by transforming donors into buyers and investors with real ownership. Now instead of just donating to some KickStarter, GoFundMe, or Patreon out of the goodness of your heart, you can bypass the big tech platform middleman (who charge fees and shut anyone down) and purchase/invest in NFTs. Your ownership is secured by the blockchain, and if the project does very well you may be able to sell your NFT at a large profit in the future. NFTs are a massive boon to creators, artists, and anyone trying to raise money for anything.
Ok so what about these NFTs going for millions of dollars? There’s no question we’re in a massive NFT bubble now, and there’s a good chance 90+% of NFTs will become worthless, especially the mostly copy-cat NFTs that are just glorified ponzis with no real communities. That being said, I’m confident that in the long-term the OG NFT projects will retain their value and continue to increase so long as their communities remain (though I’ve never personally purchased an NFT). The prices for many NFTs are ridiculous, but so is a Picasso selling for $179m. It’s feasible that today, memes like Pepe the Frog and Wojak could possibly have more cultural clout and influence than Picasso, which could reflect in the values of their respective NFTs (I’m not aware of the existence of any such NFTs, just making a point). The advantage of NFTs is the removal of the middleman (eg. art dealers, auction houses) and the potential for greater liquidity.
Ok that all sounds great, but aren’t these NFTs going for millions kind of like one giant ponzi? Yes, but so is the high end art market, luxury fashion, jewelry, overpriced real estate, Fortnite skins, etc. At the end of the day it’s all opt-in. Nobody is forced to buy an NFT, just like nobody has to buy a Van Gogh painting or Louis Vuitton bag. Value is in the eye of the beholder, and all it takes is for one person to be willing to pay $1m for that something to be worth $1m on the market. NFTs in this sense are nothing new other than the assets being purely digital and with ownership secured by the blockchain.
Downsides of NFTs in their current state
- Too much overreliance on centralized services (eg. OpenSea) – Metamask for example uses OpenSea’s API to display NFTs. So if an NFT isn’t whitelisted by OpenSea, it won’t show up in Metamask.
- NFTs pointing to URLs on centralized services. Because storage on the blockchain is so expensive, NFTs of art don’t store the image itself, but a URL containing the art, which is obviously a problem if the server hosting the URL is centralized. Ideally URLs should be on decentralized file stores like IPFS, or at least contain a hash of the file contents.
- Too many scams – The benefit of the blockchain is that it enables one to verify the authenticity of NFTs, but of course that doesn’t stop scammers trying to steal other peoples’ work.
- High gas fees – solved by layer 2s (eg. Polygon, ImmutableX) and alt layer 1s (eg. Solana)
- Multiple blockchains. Although ethereum is the most dominant blockchain, there are others like Solana. Which blockchain is the source of truth?
- No copyrights. It’s important to note that owning an NFT doesn’t give you any legal copyright protections.
- False transactions – I’d imagine the percentage of fake transactions in the NFT space to artificially inflate prices is very high. By this I mean – release an NFT collection, buy your own NFTs with a bunch of different wallet addresses you control to inflate the prices and make your NFT seem popular, and then dump them on other naive collectors.
NFTs enable an enormous paradigm shift that transform donors into collectors and investors. NFTs are a massive boon to creators and anyone raising funds due to being able to sell NFTs and/or reward donors with NFTs, which will massively facilitate fundraising. In the future, NFTs or digital asset ownership secured by the blockchain will not only be a massive market, but will underpin much if not most asset ownership, including that of many real world assets.