What is an NFT?
An introduction to Non-Fungible Tokens (NFTs).
For those catching up, throughout the last year NFT’s have made their way into mainstream culture, focused largely on the creation and sale of digital art. But what exactly are NFT’s, and is there room to evolve?
What does NFT stand for?
NFT stands for non-fungible tokens; meaning each token is unique and non-interchangeable. NFT’s allow for digital content, whether that be a video, image, or text, to become logged and authenticated on a blockchain. This provides each NFT a unique digital ID that cannot be copied; helping to ensure authenticity and ownership of the NFT. Once an NFT is logged onto a blockchain network, every transaction (from transfers to sales) is recorded on chain; creating an accessible ledger that provides provenance and price history of the NFT.
Mainstream NFT Use
The main use of NFT’s currently revolve around the creation and sale of digital art/content; mostly on the Ethereum network. By tokenizing their content, creators are able to directly monetize their work.
In order to tokenize their content, creators pay a fee to ‘mint’ their work before listing it on an NFT marketplace, such as OpenSea and Rarible. When an NFT is minted, a smart contract is created and stored on the blockchain network. The smart contract stores all the necessary information in regards to the NFT, including the terms of the contract. Creators can then sell their NFT on the market freely, and depending on the terms of the smart contract, receive royalties each time the NFT is sold.
Anyone can create an NFT. All that is required is a digital wallet, cryptocurrency for the smart-contract creation fee, and a connection to an NFT marketplace.
Some have argued the current NFT market is one of speculation and can come crashing down fast and soon. And while there might be some truth to the concern expressed by individuals within the community, there are other use cases for NFT’s being ignored that will ensure the survival and continued use of the technology.
Other NFT Applications
While the current focus of NFT’s linger on solving the problems surrounding ownership of digital assets, there are still plenty of other use-cases when it comes to NFT’s. In fact, NFT’s have the potential to serve as an instrument for decentralized finance (DeFi), and even contribute to its growth in the long term; creating new opportunities for investment.
DeFi’s financial management is possible through the use of various tools, such as cryptocurrencies, smart contracts, and oracles which can effectively work with different types of financial solutions, instruments, and processes. Since DeFi offers the use of financial instruments without the reliance of intermediaries (such as banks, brokerages, or exchanges) when you take into account NFT’s ability to represent a digital asset, the potential for mainstream use of NFT’s in DeFi is all but inevitable.
With NFT’s individuals could eventually tokenize physical assets instead of just digital assets; effectively turning the physical asset into a tokenized security. By tokenizing tangible assets, comes the opportunity for investors to have greater liquidity.
This would be hugely beneficial for various industries, including real estate. Not only would individuals be able to transfer land deeds/provide proof of ownership, but also enable the use of smart contract in property rentals (allowing automatic payments). With a property represented as an NFT, interested buyers and renters would have the ability to know everything about the property’s past; including owners and modifications.
Another way NFT’s can be utilized would be to use them with software licensing. Some have argued NFT based licenses could reduce piracy, and have proposed licenses that would act as an asset for users, allowing people to sell their license in an open market. This would benefit both the user and software developer as the user could potentially profit off the sale of their license, and the developer would be entitled to a profit share of any sale or revenue generated (depending on the terms of the governing smart-contract).
Conclusions
As the more practical uses NFT’s and blockchain technology continue to develop, we can surely expect to see more people tokenizing both digital and physical assets; making NFT’s a strong tool for changing the perception and management of assets as a whole. And with the underlying technology still under progress, further applications of NFT’s are still likely to be discovered.
