NFT Basics and Use Cases Beyond Digital Art

Non-fungible tokens received enormous attention during 2021-2022, mostly for questionable digital art sales. However, NFT technology has legitimate use cases beyond speculation.

What Makes NFTs Different

Fungible tokens like Bitcoin are interchangeable - one bitcoin equals any other bitcoin. Non-fungible tokens are unique - each has distinct properties and isn't directly interchangeable.

This uniqueness enables representing individual items on blockchains: specific real estate parcels, individual event tickets, or particular pieces of art.

Token Standards

ERC-721 established the NFT standard on Ethereum. Each token has a unique identifier and separate ownership.

ERC-1155 supports both fungible and non-fungible tokens in one contract. This works well for gaming items where you might have both unique artifacts and stackable resources.

Metadata and Storage

NFTs themselves are typically just pointers to metadata and images stored elsewhere. This creates problems - if external storage disappears, NFTs become pointers to nothing.

IPFS (InterPlanetary File System) provides more persistent decentralized storage than standard web hosting. However, IPFS data can still disappear if no one pins it.

Fully on-chain NFTs store all data on the blockchain itself. This provides true permanence but limits complexity due to blockchain storage costs.

Digital Art Speculation

The 2021 NFT art boom saw low-quality generated art selling for thousands or millions. Most participants were speculating, not collecting art they appreciated.

Predictably, prices collapsed. Most NFT collections are now worth small fractions of peak prices. The art use case hasn't disappeared but the speculation has mostly deflated.

Digital Ownership Rights

NFTs enable proving ownership of digital items. Musicians can sell limited digital albums. Writers can sell numbered digital book editions.

However, legal frameworks haven't caught up. NFT ownership doesn't automatically grant copyright or reproduction rights unless explicitly included.

Gaming Applications

Video games could use NFTs for in-game items that players truly own and can trade outside game ecosystems. This would break current models where game publishers control all digital items.

However, major game publishers have little incentive to enable this. They profit from controlling item economies. Most "blockchain games" have been low-quality cash grabs.

Ticketing Systems

Event tickets as NFTs could reduce scalping and fraud while enabling verified resale markets. Organizers could earn royalties on secondary sales.

Some events have experimented with NFT tickets. However, blockchain transaction costs and complexity have limited adoption. Traditional digital tickets work acceptably for most uses.

Digital Identity

NFTs could represent identity credentials, certifications, or memberships. Your university degree, professional licenses, or club memberships could be verifiable NFTs.

This would enable instant verification without contacting issuing institutions. However, privacy concerns arise - having your entire credential history on public blockchains creates issues.

Domain Names

Blockchain-based domain systems like Ethereum Name Service use NFTs to represent domain ownership. These domains work within crypto ecosystems but not traditional internet.

ENS domains (.eth) can simplify cryptocurrency addresses but have limited use outside crypto. Integration with traditional DNS seems unlikely.

Loyalty Programs

Brands could issue NFT-based loyalty benefits. These would be tradeable, potentially creating markets for loyalty points.

However, companies gain little from letting customers trade loyalty benefits. Current non-blockchain systems work adequately. Blockchain adds complexity without clear benefits.

Intellectual Property

NFTs could track intellectual property rights, licensing agreements, and royalty payments. Smart contracts could automate royalty distribution.

Music industry experimentation with NFTs has occurred. However, existing licensing systems work, even if inefficiently. Blockchain adoption requires overcoming significant industry inertia.

Real Estate

Property deeds as NFTs could simplify transfers and create fractional ownership markets. However, legal systems must recognize blockchain records, which mostly hasn't happened.

Some jurisdictions are experimenting with blockchain property records. Full adoption requires legal framework changes unlikely to happen quickly.

Supply Chain Tracking

NFTs could track individual product units through supply chains, proving authenticity and provenance. This could combat counterfeiting.

However, blockchain only proves digital records, not physical reality. Someone can create NFT claiming something is authentic Gucci while shipping counterfeit goods.

Fractionalization

Expensive NFTs can be fractionalized - divided into fungible shares that multiple people own. This creates liquidity for otherwise illiquid assets.

However, fractionalized NFTs might be securities requiring regulatory compliance. Legal clarity is lacking in most jurisdictions.

Creator Royalties

NFT standards can include automatic royalties on secondary sales. Artists receive percentages of future sales without manual enforcement.

However, enforcement depends on marketplaces honoring royalties. Some major marketplaces made royalties optional, undermining this benefit.

Environmental Concerns

NFTs on Proof of Work blockchains consume substantial energy. Ethereum's move to Proof of Stake eliminated most NFT energy consumption, but NFTs on other chains still have environmental impact.

This environmental cost is difficult to justify for speculative digital images. More practical use cases might justify the impact better.

Market Manipulation

NFT markets are largely unregulated. Wash trading - selling NFTs to yourself to create fake price history - is common. Bots and coordinated groups manipulate prices.

Buying NFTs based on reported sale prices is risky. Actual market depth is often much lower than highlighted sales suggest.

Investment Considerations

Most NFTs are illiquid. Selling requires finding buyers willing to pay your price. This differs from fungible tokens with continuous liquid markets.

NFT valuations are highly subjective. Two people can have wildly different value assessments for the same NFT with little objective basis for resolution.

Conclusion

NFT technology enables representing unique digital items on blockchains. However, most current applications are speculative or solve problems that don't urgently need blockchain solutions. Legitimate use cases exist in digital ownership, credentials, and rights management, but mainstream adoption requires legal framework development and improved user experience. Approach NFT investments with extreme caution and skepticism.