๐ŸŒˆ๐Ÿ‘NFTs (Non-FungibleTokens)

๐ŸŒˆ๐Ÿ‘NFTs (Non-FungibleTokens)

...What are they good for?

Jeremy Dombrowski's photo
Jeremy Dombrowski
ยทFeb 4, 2022ยท

14 min read

Table of contents

  • NFTs have arrived.
  • Smart Contracts
  • Rewards
  • Fungible tokens
  • Blockchain Gaming
  • Novel Financial Instruments
  • Woah to the Non-Believer

In 1969 Norman Whitfield and Barrett Strong asked a generation, "War; what is it good for?" But unlike their ultimate conclusion reflecting the valueless nature of conflict, today when we might ask, "NFT; What is it good for?" one would be remiss to dismiss them as simply a newfangled neogenerational fad like Cabbage Patch Kids, yo-yos, Pogs, or Tickle me Elmo.

My initial encounter with NFTs ( Non-fungible tokens) was likely similar to most, through the medium of NFT art. Large NFT art markets allow one to purchase and exchange unique tokens which represent the ownership of a particular digital asset. These tokens are ascribed value because of their cryptographically derived digital scarcity and through the capitalist magic of the invisible hand [wave].

Screenshot 2021-08-29 194904.png

Through a process reaching consensus among a distributed network of nodes, an owner is assigned at the moment of creation, and modified though transactions; when a transaction is processed, the owner's wallet address is etched onto the blockchain and the holder of that wallet, the one who is able to produce the corresponding private key, is said to have ownership of an asset specified in the metadata of NFT smart contracts.

Screen Shot 2021-08-29 at 19.46.41.png

NFTs have arrived.

The instantly rich, the cryptoenthusiasts, the curious, and those who don't necessarily get it but don't want to miss the boat are all scooping these up as fast as artists can mint them onto the blockchain of their choosing; most commonly Ethereum, the first major cryptocurrency to implement smart contracts. More recently, Polygon is another option for creators as it allows one to create NFTs with far less upfront costs, "gas."

Since I first began this article (it was a rescue from the archives), plenty of new blockchain platforms have arisen and they are more than simple copycat; they are offering unique and desperately needed features for artists and content creators.

While there are many types of NFTs, fungible and non-fungible, I want to specifically focus on what I see as the potential for the latter; that is, NFTs that are not interchangeable with each other, as each possesses unique qualities and characteristics. There are a few reasons for this.

First, the inherent value proposition of NFTs is that they can represent anything that has value. Unlike a digital file that can be duplicated infinitely, once an user creates (mints) an NFT, it is uniquely one-of-a-kind. It is this very cryptographic digital scarcity that allows it to be assigned value. Most people still think of NFTs strictly in reference to the art world. However, NFTs can and soon will represent all kinds of assets, both digital and sooner than you probably think, they will represent physical asset ownership as well.

"Why?" you might ask. Why do I need to buy an NFT with my morning coffee; the system we have currently seems to work just fine. While that may be true, it's important to remember that the current system is based on centralized trust. We trust that the entity we are buying our coffee from has actually roasted the beans and not just put a picture of a roasted bean on the bag. We trust that the money in our wallet is actually worth something and that when we hand it over to the coffee shop, they will give us coffee in return.

NFTs remove the need for centralized trust by implementing a trustless system in which ownership is verified and secure by the immutable properties of blockchain technology. In other words, once an asset is "owned" by an individual, it can never be taken away and is always verifiable. This is the key to the security and potential for mass adoption of the NFT.

Let me give you an example:

I purchase a digital asset, let's say a piece of art, from an artist on a blockchain platform. The artist has verified that the art is unique and has a corresponding certificate of authenticity stored on the blockchain. I now own that asset and no one can take it away from me. I can transfer it, sell it, or do whatever I want with it as long as I have the private key that corresponds to the wallet address that holds the asset.

What about physical assets? Think about this simple example and the benefits it offers:

I purchase a new iPhone from the Apple store. I go to the checkout and hand the cashier my money. They hand me back my new iPhone. In this system, trust is centralized. I trust that the cashier has actually given me a new iPhone and not a used one, or a fake one for that matter.

Now imagine the same scenario with NFTs. I go to the Apple store, but this time I purchase a new iPhone with an NFT. The Apple store has verified that the iPhone is new and has a corresponding certificate of authenticity stored on the blockchain. I now own that asset and no one can take it away from me. I can transfer it, sell it, or do whatever I want with it as long as I have the private key that corresponds to the wallet address that holds the asset. Not only that, I have on the blockchain an immutable (that is, something which cannot be altered) record of the fact that I own the new iPhone.

This offers several advantages beyond simply that record of ownership; social proof. Social proof is a psychological phenomena that refers to our tendency to look to the actions of others to guide our own behavior. In the digital world, this is often demonstrated when we see that our friends have "liked" a piece of content on social media. It is the reason why influencer marketing is so successful. NFTs offer a way for brands to create this social proof on the blockchain by securely and transparently verifying the authenticity of products and assets.

As blockchain technology matures, several services which make NFTs and even coins essentially multichain, interoperable. This means that different blockchains can talk to each other and that coins and assets can move freely between them. This opens up a world of possibilities for NFTs and essentially creates a global digital asset market in which anything with value can be traded.

What does this mean for content creators?

It means that creators can monetize their work in a new and secure way. Content creators can "mint" their work into NFTs and sell them on blockchain marketplaces. This offers a more secure and transparent way for them to monetize their work and to receive payments for their work. It also offers a way for them to build social proof for their work.

Smart Contracts

Suppose I want to do even more with the NFT I'm minting and attempting to sell. I might create a smart contract that pays me not just for the initial sale, but will give me a significant cut of each subsequent sale. If you've been following the new and seen some of the rediculous prices that some NFTs sell for, you might imagine that these artists are continually collecting passive income from their work.

This is where things start to get fascinating.

Not only do NFTs offer a new and secure way for content creators to monetize their work, they offer a way for them to incentivize these purchases in the first place; through the use of rewards.

Rewards

Rewards are a way for content creators to incentivize the purchase of their work. Rewards can be in the form of anything, but common rewards include unique digital assets, exclusive access to content, or even a portion of the profits from the sale of the NFT. Rewards also offer a way for content creators to create a sense of community around their work.

There are several Algotrading bots and NFT Image Generators that sell a number of NFTs, allowing only a limited number of people able and willing to pay for access to these bots and tools. An algotrader would have a relatively high yield, making it a desirable investment tool. To make a profit from their creations, generative artists might use the machine learning powered image generators to produce NFTs; either as original works or perhaps as a part of their own artwork. These generators might produce completely original works, or, perhaps more recently, with the advent of conditional GANS, as a part of their own works of art. These tools might be used on individual pieces or on large collections of NFT artwork.

I expect image generators to become increasingly popular, democratizing the creation of high quality images. As it stands currently, researchers often choose to neglect to publish models that they've trained to be most robust as part of their research. This is especially true for the generation of humans and human figures. This is where NFT-focused Machine Learning developers might train more robust models and, since training can be quite expensive, be required to sell access to these models.

Fungible tokens

Fungible tokens are interchangeable with each other and are created similarly with smart contracts that define how they work. They are liquid assets, the ones you commonly trade at cryptocurrency exchanges. They are created by users depositing a specified amount of cryptocurrencies into a smart contract, which in turn generates a specific amount of fungible tokens. These fungible tokens are interchangeable with each other and are created similarly to NFTs. By creating, for example, a yield bearing NFT, you could create a fungible token that pays a dividend to its holders. This would incentivize holders to hold on to the token and demand would be created for the token in a variety of ways in order to give them value (importantly, making them a utility tokens rather than a security token, which are much more highly regulated.

A few ways to give these sorts of tokens value is by making them have a specific use case or are required for a particular activity; this will incentivize potential buyers. Yield farming is a great way to create demand for a fungible token. For example, a game that requires players to use a certain amount of tokens to play can create demand for the token. If the game is popular, the demand for the tokens will be high, and as a result, the value of the tokens will also be high. Another way to make these have value is to require that one holds an amount of these tokens in order to perform some sort of desirable function, such as accessing tools or portions of the site which would make them elite users.

Blockchain Gaming

Blockchain-based games are a great way to illustrate the concepts behind decentralized applications. In games, players can earn rewards for their achievements that can be used in other games, or even in the real world. These rewards can take a variety of forms, including unique digital assets, exclusive access to content, or even a portion of the profits from the sale of the NFT.

One of the most popular blockchain-based games is CryptoKitties. In CryptoKitties, players purchase digital cats, or kitties, with ether. The kitties are then stored on the Ethereum blockchain. Players can breed their kitties to create new ones, and can sell them for ether. The game has proven to be so popular that, in December 2017, a single kitty was sold for over $100,000.

CryptoKitties illustrates the potential for blockchain-based games to create a new type of economy. In the game, players can use the rewards they earn to purchase new kitties, or they can sell them for ether. This creates a demand for the tokens and drives up the value of the tokens. As the value of the tokens increases, the rewards that players earn for their achievements also increase. This creates a positive feedback loop that drives the value of the tokens even higher.

Novel Financial Instruments

Self-Repaying Loans

This is a type of asset where you can deposit crypto collateral (usually 200% of the available funds), borrow against them, and then have the future yield on those assets automatically pay off your debt. A loan whose value only goes down, and where your collateral can never get liquidated.

Instant Crowdfunding

Crowdfunding is a process where individuals or organizations raise money from a large number of people, typically through the internet. The money is typically used to finance a project or venture.

Blockchain-based crowdfunding is a great way for content creators to raise money for their projects. In blockchain-based crowdfunding, content creators typically offer rewards to those who contribute to their project. These rewards can take a variety of forms, including unique digital assets, exclusive access to content, or even a portion of the profits from the sale of the NFT.

Tokenized equity

In tokenized equity, the equity of a company is represented by an NFT. The holder of the NFT is the shareholder, and the company is the issuer. The terms of the equity are encoded into the smart contract that creates the NFT.

Tokenized equity has a number of advantages over traditional equity.

The first advantage is that the security would be self-executing. This means that the terms of the equity would be automatically enforced. This would reduce or eliminate the need for middlemen, such as lawyers and accountants, to enforce the contract.

The second advantage is that the security would be tamper-proof. This means that the terms of the equity would be immutable and could not be changed without the consent of the holder of the NFT. This would reduce the risk of fraud and protect the interests of the shareholder.

The third advantage is that the security would be transparent. This means that the terms of the equity would be public and could be verified by anyone.

City Coins

CityCoins describes itself as an avenue for citizens to generate crypto-based revenue for themselves and the cities where they live. Think of it as a system that allows users to contribute crypto funds to their home city, or support other cities, in exchange for rewards.

Users of the CityCoins platform have already begun to issue tokens for a handful of major cities, designed to help improve the lives of people living in them. Interestingly, the project has opted to base its operation on a bitcoin-powered ecosystem such that users and cities can potentially earn bitcoin.

Miami and New York have emerged as the first two cities where CityCoins have been launched. There is also the opportunity for citizens to introduce CityCoins for their cities inside and beyond the borders of the United States of America.

Editor's note: If this can help solve the problem of lack of housing and social payments that give one just enough to fail here in Vancouver, I'm all for it.

Flash Loans

Flash loans are a new type of financial instrument that has no analog in the real world and can only exist when created on the blockchain. Flash loans are created when a borrower takes out a loan from a lender, performs an arbitrage transaction with the funds, and returns the funds to the lender, all in the same block and in a few short seconds. Flash loans give borrowers access to funds without the need for a traditional lending process. As a disadvantage, flash loans usually have higher interest rates than traditional loans (although a smart contract can mitigate this downside by making sure that only profitable trades will be executed, including interest and fees).

The use of flash loans opens up financial possibilities that were once the exclusive domain of cryptoewhales. Commonly, they are used to arbitrage price differences between exchanges. In the case of an asset that is offered for a lower price on one exchange than on another, a borrower could get a flash loan and use the funds to buy the asset on one exchange and sell it on another, taking the difference as profit. It's not uncommon for flash loans to offer access to (temporarily) millions or hundreds of millions of dollars, as these margins are generally quite small.

Woah to the Non-Believer

You might still scoff at these types of financial products, but in my view and in the view of insitutional investors who are beginning to dump money into the blockchain space wherever possible, blockchain is putting into the hands of anyone who cares to a) learn and b) participate with sustained effort, a new suite of investment vehicles which were the province only of the ultra-wealthy a scant few years ago.

If these technologies did not pose such a dangerous threat to Communist systems and societies whose governments are held in place by the impoverished majority of their populations, would China and Russia be outlawing blockchain technology and viewing it as such a serious threat?

Yes, it is possible to purchase a Lamborghini or a private jet with cryptocurrencies, but that was possible with traditional investment vehicles as well. The point is that, with blockchain technology, the average person now has access to investment opportunities that were once only available to the ultra-wealthy.

This is an important point, as it democratizes access to investment opportunities. With blockchain technology, anyone who is willing to learn can participate in the cryptocurrency market. This opens up the market to a much wider audience and drives up the demand for cryptocurrencies. As the demand for cryptocurrencies increases, the value of the tokens increases, creating a positive feedback loop that drives the value of the tokens even higher.

ย 
Share this