NFTs: Beyond Monkey Jpegs and Flipping

A, B, C, D... N, F, T, S…Oops!

It doesn't follow the usual pattern. But that's precisely why this tale exists - to help you understand the intriguing world of NFTs.

NFTs became a buzzword in 2021 with massive sales skyrocketing to millions of dollars for one piece! Here's a rundown of the events preceding this present time.

• 2012: The first mention of NFTs is published by a whitepaper to describe a concept called "coloured coins".

• 2014: Kevin McCoy creates the first NFT, "Quantum."

• 2015: The first blockchain-based game, "Spells of Genesis" is launched.

• 2016: One of the first popular NFT collections, Rare Pepes is released.

• 2017: CryptoKitties is launched, becoming the first major NFT project.

• 2021: NFTs become mainstream reaching $25 billion in sales.

• 2021: The most expensive NFT is sold for $69.3 million.

• 2023: Jack Dorsey's NFT tweet initially sold for $2.9 million in 2021 is being auctioned at $280.

The hype around NFTs has died down, and there are many reasons why this happened so quickly. It could be due to the fact that this technology is still in its early stages, so it will take time to harness its benefits and mitigate its disadvantages successfully.

NFTs are not bad. It aims to infuse so many benefits, some of which are still unscratched like proof of ownership, interoperability, security and transparency into a digital asset. Contrary to popular belief, they are not just limited to Bored Apes JPEGs or a get-rich-quick scheme- there's much more.

In this tale, you will unravel:

• What NFTs are
• How NFTs work
• What NFTs are used for with literal mind-blowing use-cases
• Challenges faced with owning or purchasing an NFT
• Future possible innovations with NFTs

What are NFTs?

Non-Fungible Tokens (NFTs) are a new form of technology that represents digital assets recorded on the blockchain to establish ownership.

Every activity including sales and purchase of an NFT is facilitated by the blockchain using cryptocurrencies like Ethereum, Solana, Polygon and many others as methods of exchange to facilitate payment. The fees required to buy or sell an NFT are determined by the type of blockchain network the NFT is hosted on. For instance, Ethereum-based NFTs will cost more because of high demand and gas fees.

Every NFT is unique and distinct from others in the same collection-no two NFTs are the same. They may have a pattern of design to make items in the collection recognizable by community members, but that doesn't blur their uniqueness.

The uniqueness of NFTs helps to differentiate the original from the fake. It's easy to take a screenshot of an original NFT however, when traced to the blockchain, the counterfeit will be spotted.

Two significant things make NFTs peculiar:

• Metadata: Each NFT contains distinct data, such as title, description, name of its creator, and provenance data, which shows who has owned the NFT in the past.

• Algorithm: One major thing that differentiates NFTS, especially in a collection are algorithms. Algorithms are programmable instructions used to determine distinct features of NFTs.

Some of the features determined could include attributes, appearance and rarity. It is assumed that the rarer an NFT is, the more valuable it is likely to be.

Popular NFT collection Bored Apes Yacht Club, used random algorithms to mint 10,000 unique NFTs.

How do NFTs work?

NFTs are like batons in a relay race. Every time the baton is passed, it is recorded to prove the authenticity of ownership.

In the digital world, they can be likened to digital certificates.

• A creator makes the NFTs and puts them out for sale in a marketplace like Opensea
• Someone who loves the item purchases it using the valid currency the NFT is hosted on.
• There is a transfer of ownership with historical data to prove that the NFT has passed through the hands of the creator to the buyer.
• The new owner now has the NFT in their personal collection and will decide what to use it for. For instance, it could be used:
  • As a store of value or investment
  • To access specific benefits depending on what the NFT offers.
  • For online displays like social media profile pictures.
• The new owner decides to sell the item and the circle continues.

Differentiating NFTs from cryptocurrencies

NFTs and cryptocurrencies are important aspects of Web3 that can be mistaken.

The table below illustrates the differences between both of them.

Exploring NFT use-cases

NFTs can be used for:

• Digital Art and Collectibles

Previously, digital artists had no way to prove ownership of their work especially when shared online. Too many duplicates of one work spread out without credit or monetary value driven to the owner.

In 2017, Cath Simard, a photographer encountered the same challenge after a picture she took went viral on social media. She decided to authenticate the image by uploading it on the Ethereum blockchain as an NFT and since then, she has been monetizing her work as NFTs.

Like Cath, many artists have taken the same path to authenticate and monetize their work through selling NFTs and the royalties attached to secondary sales.

• Gaming and virtual assets

In the world of gaming, NFTs are now used to earn rewards and facilitate trading- players can own and sell their assets across gaming platforms.

For virtual assets, Decentraland is a typical example of a virtual world that uses NFTs to incorporate interaction and collaboration amongst users on the platform.

The use of NFTs in gaming and virtual assets hasn't been fully actualized. More innovations are setting in.

• Music tokenization

With NFTs, artists can tokenize their music rights, earn royalties from it and even transfer the rights by selling the NFTs to fans.

This gives artists full ownership of their masterpieces rather than receiving a part of their payment from streaming platforms.

Also, some music artists have recently used NFTs to provide exclusive offers to their fans, thereby forming a stronger community.

• Real-World Assets

Real estate investors can provide liquidity by tokenizing physical assets on the blockchain, putting them up for sale and enabling people to buy fractions of the asset.

This can also be viewed as a marketing strategy employed by realtors to target a wider audience online.

Challenges associated with NFTs

From the surface level, many take NFTs to majorly be all about scams. Now that we've seen use cases, let's discuss the challenges.

• Volatile: It's important you do your research (DYOR) before buying an NFT so you don't sell at a loss.
• Counterfeit: Fake NFTs are created to duplicate original versions. Due diligence must be carried out to spot doppelganger stores.
• High transaction fees: Most times NFTs don't come cheap and this makes it difficult for everyone to get involved in the market.
• Zero regulation: There is no regulatory framework to protect the rights of buyers and sellers in the marketplace. For instance, someone could create an NFT that looks exactly like that of another brand without copyright permission from the creator.
• Fraud risks: Hackers have made away with funds from NFT wallets without getting caught. More security checks have to be put in place.

Future Outlook and Innovations

This is just the beginning of what's to come in the world of NFTs.

• To minimize NFT scams, there is a possibility that proper regulations will be put in place.
• NFTs will experience more diverse use cases, such as confidential NFTs that provide users with full control over their data and compensate them for its use. It has not yet been fully realized, but this use case has the potential to revolutionize the way we think about data ownership and privacy.
• There will likely be a new system introduced to facilitate interoperability of NFTS - NFTs will easily be transferred from one network to another. This would open up larger possibilities for developers to incorporate NFTs into dApps and embed them into DeFI, AI, AR and VR.