It’s fun to talk about nonfungible tokens, or NFTs, because they are the perfect example of how the impact of blockchain technology in people’s lives goes way beyond the financial market. As we could see in hundreds of headlines in the past few months, they have gripped the world’s attention because they are a new manner of interacting with culture, music, sports and the media.
This article will clarify what NFTs are, how they work, how the NFT boom started, and why blockchain technology has made it possible for NFTs to create a new economy.
Why is there such excitement around NFTs?
NFTs are such an exciting and fun subject to talk about because almost everyone likes music, arts, games and the internet. The feeds of every social media platform are full of people who, having shown no prior interest in crypto assets or decentralized finance, eagerly talk about nonfungible tokens. In the first half of 2021, we saw a lot of celebrities and memes endorsing NFTs.
Jack Dorsey, Twitter’s CEO, sold his first tweet as an NFT for the incredible amount of over $2.9 million this past March. Edward Snowden’s NFT, a portrait of Snowden himself, was sold for about $5.4 million, or 2,224 Ether (ETH).
The NFT of the Zoë Roth meme, better known as “Disaster Girl” due to the 2005 (and beyond) meme of her malicious smile looking at the camera while a house is on fire in the background, was sold as an NFT for 180 ETH, equivalent to almost $500,000.
Furthermore, companies from the traditional market have decided to surf the NFT wave. For example, in Brazil, the first collection in NFT of Havaianas was auctioned off last month.
NFT transaction volume has multiplied by more than 25 since December 2020, as NFTs are in people’s daily routines and lives. It could be one of your favorite songs, a cartoon of your favorite superhero or a tool in a game that your children wish to acquire. In the following chart, we can clearly see the increase of NFT transactions in the last six months, as well as business volume since the end of the third quarter before the recent pop.
What are NFTs? How do they work?
We can conceptualize an NFT as a piece of software code that verifies the property of a nonfungible digital asset, or the digital representation of the physical nonfungible asset in a digital medium. For those who prefer a more technical view:
“An NFT is a pattern of smart contracts that provides a standardized way of verifying who owns an NFT, and a standardized way of ‘moving’ nonfungible digital assets.”
In this case, any nonfungible asset may be the object of an NFT, be it domain names, tickets for an event, digital coins in games, and even identifiers in social networks like Twitter or Facebook. All those nonfungible digital assets could be NFTs.
An NFT has a data structure (token) that links metadata files that may be fixed in an image or file. That token is carried and modified to accommodate the requirements of blockchain networks such as Ethereum, Kusama and Flow, among others. The art file is uploaded in a blockchain network that creates a metadata file in the data structure of the token.
As a content creator, such as the digital artist Beeple or the rock band Kings of Leon, you upload your art file to a platform that takes your file’s metadata and passes it through the whole back-end process of a product, otherwise known as your NFT.
Your NFT then gains a cryptographic hash (a key) — a tamper-proof register with the date and time stamp carried on the blockchain network. Following the valuable data and seeing that it had not been modified at a later date is essential for any artists out there.
Loading your art on-chain may give you a better perspective of when the metadata of the art file was tokenized. Since the data of the piece of art is uploaded, nobody can retrieve it or delete it, and the chance of your artwork disappearing is practically nonexistent if your NFT is registered on a blockchain.
How has blockchain technology amplified the possibilities of NFTs?
Up until 2008, traditional NFTs did not have a unified representation in the digital world. As a result, they were not standardized, and the NFT markets closed and were limited to the platforms that issued and created a determinate NFT.
The first NFTs in blockchains started with the advent of colored coins on Bitcoin’s blockchain. Although originally designed to enable Bitcoin (BTC) transactions, their script language stores small amounts of metadata on the blockchain, which can be used to represent asset management instructions.
On the other hand, the first NFT experiment based on the Ethereum blockchain was CryptoPunks built by Larva Labs, which consisted of 10,000 collectible, “unique” punks. The fact that the punks “live” on the Ethereum network made them interoperable with digital markets and wallets.
NFTs reached the mainstream on the Ethereum blockchain in 2017 with CryptoKitties, allowing users to create digital cats and reproduce them with varying pedigrees. This was a pioneer project for creating a sophisticated system of incentives, determining that NFTs could be used as a promotional tool. This led to the fostered interest of auction contracts, which lately have become one of the primary mechanisms for pricing and buying NFTs.
The exciting part about applying blockchain technology to NFTs is that it has considerably amplified their advantages and possibilities. It has brought forth the standardization of digital, nonfungible asset representation through the ERC-721 standard. Similar to the ERC-115 and the ERC-998 standards, ERC-721 is a pattern of smart contracts on the Ethereum blockchain that brings a standardized way of verifying who owns an NFT, and a standardized way of “moving” nonfungible digital assets.
It’s worth mentioning that although Ethereum is where most of the action currently happens, there are several NFT patterns emerging on other blockchains. For example, dGoods created by Mythical Games focuses on implementing a cross-chain standard using the EOS blockchain. Also, TRON’s first NFT standard, TRC-721, was officially announced in late December 2020. The introduction of this standard is expected to help the Chinese-centric blockchain utilize various distributed ledger technology-based apps and keep up with the pace of Ethereum’s growing NFT sector.
Since then, an NFT registered on a blockchain has truly become a “unique” asset that cannot be faked, tampered with or spoofed.
What are the main benefits blockchains bring to NFTs?
As explained above, the first benefit of NFTs backed by blockchain technology is standardization. Besides the standardization of the primary attributes of NFTs — such as property, transfer and access control — blockchain technology allows NFTs to incorporate additional features, like specifications on how to acquire an NFT, for example. Other benefits include interoperability, marketability, liquidity, immutability, proven scarcity and programmability. We will explain each one by one.
The NFT patterns make interoperability feasible so that the NFTs can move more easily among several ecosystems. In a new project, nonfungible tokens may be visualized immediately in dozens of different wallet providers, negotiable in several markets and with the ability to be acquired in several virtual worlds. That interoperability is only possible because of the open patterns allowed by blockchain technology that provide a clear, consistent, reliable application programming interface, and with the authorization to read and record data.
Interoperability, in turn, has amplified the marketability of NFTs by enabling free trade in open markets. NFTs based on blockchains allow users to move their nonfungible assets outside of their original environments. They also have the advantage of sophisticated negotiation resources, such as auctions and bids, as well as the ability to transact in any currency, from cryptocurrencies like Bitcoin and Ether to stablecoins and specific digital currencies from a determined application.
The instant marketability of NFTs based on blockchains brings greater liquidity to markets that can serve a greater variety of public, enabling significant exposure of nonfungible assets to a broader group of buyers.
The fifth and sixth advantages of the use of blockchain technology in NFTs are immutability and proven scarcity. This is because the smart contracts allow developers to set severe limits on an NFT’s supply and impose long-lasting properties that cannot be modified after a token has been issued. Therefore, one can guarantee that the specific properties of an NFT will not change with time, as they are codified in the blockchain. This is especially interesting for the physical art market that depends on the proven scarcity of an original piece.
An interesting trajectory in this new NFT world based on blockchain appeared because of recent trends and new markets, such as programmable art — which allows collectors to interfere in the original design of the art piece.
In the market of NFT-represented art, immutability and scarcity are essential. In the digital art market, the advantage of programmability could be something to consider. We can find examples of programmability at Async Art, a platform to negotiate and create NFTs that enables the owners to change their images whenever they wish. Another example of the programmability feature is the ability for a song to change its composition. That means that the music may sound different each time you listen to it. These two examples are possible by dividing a piece into separate layers called stems. Each stem has several variants for its new owner to choose from. That way, a single track of Async Music could contain many exclusive combinations of sounds.
Many people have yet to understand the dimension of the NFT boom and how blockchain is revolutionizing the way we consume the arts. Perhaps the subject deserves a more thorough conversation.
However, the hole-in-one of NFTs is the programmability of smart contracts on the blockchain, which always guarantees a reward to the content creator whenever their work is negotiated.
Suppose a determined content (music, art, domain name, photograph of a goal from Pelé, etc.) is transacted hundreds of times. In that case, the content creator is going to receive a commission.
This could completely change the dynamics of copyright and intellectual property because if a “division of income” is programmed into the NTF’s smart contract’s code, the content creators will no longer need to worry about the legal property of their artwork.
Indeed, nonfungible tokens and blockchain technology markets still need to embark on a long journey to solve scalability, marketing infrastructure and the applicable jurisdiction in NFTs with decentralized storage. Nevertheless, we shall not lose sight of the possibility to codify the rights of the determined digital asset behind the transaction of an NFT. This enables the appearance of new businesses and new markets governed not only by institutions or traditional validators of trust but by those who create the content appreciated in the social and productive hubs.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Tatiana Revoredo is a founding member of the Oxford Blockchain Foundation and is a strategist in blockchain at Said Business School at the University of Oxford. Additionally, she is an expert in blockchain business applications at the Massachusetts Institute of Technology and is the chief strategy officer of The Global Strategy. Tatiana has been invited by the European Parliament to the Intercontinental Blockchain Conference and was invited by the Brazilian parliament to the public hearing on Bill 2303/2015. She is the author of two books: Blockchain: Tudo O Que Você Precisa Saber and Cryptocurrencies in the International Scenario: What Is the Position of Central Banks, Governments and Authorities About Cryptocurrencies?