What are NFTs and how can they grow your business?
Is NFT another acronym we will never remember? A passing trend we will soon forget? An IT revolution that will change our lives?
We can’t (yet) foresee the future, but we’re getting more and more excited about the evolution of NFTs and we firmly believe that this is just the beginning of a great turning point.
To help you discover this technology, we have asked ourselves some questions and tried to give some answers.
- What is an NFT?
- What do I need an NFT for?
- Why does the world need NFTs?
- How do NFTs work technically?
- Which sectors are actively using NFTs?
- How can I apply NFTs to my business?
What is an NFT?
NFT stands for Non-Fungible Token – one of those typical names that means absolutely nothing to us mere mortals! A clearer term might be code or unique identifier.
An NFT is a code, i.e. a sequence of numbers, which is stored on the blockchain and with which a piece of information, a concept or an asset can be associated.
You can think of the IMEI code of your smartphone, the code of your airline ticket or your tax code as the equivalent of NFTs in everyday life. All these examples have one thing in common: they uniquely represent one object (or individual) and are not interchangeable.
If the concept of blockchain is not clear to you, take a look at this article before going on!
What am I supposed to do with an NFT?
We have said that an NFT is a unique code, but what is its purpose? That’s’ easy! This code can be associated with a physical or digital object, e.g. a real work of art or a digital product (e.g. a smartphone app).
The NFT itself and the information on its owner are stored on the blockchain and this ensures its verifiability over time.
The association between an asset and its NFT is usually through metadata, i.e. supporting information specifying what it is. This metadata may reside directly on the blockchain (on-chain) or externally (off-chain). For example, the NFT metadata of an artwork could be a link to a high-resolution photograph of the work.
Moreover, these NFTs can be traded or sold between individuals, just as one would do with a physical object. To this end, there are several marketplaces where more than 200 different types of NFTs can be auctioned and traded, the most famous being OpenSea.
Why does the world need NFTs?
NFTs can solve some of the problems we have on the Internet today. Now that everything has become more digital, it is necessary to replicate some properties of physical objects in the Real World™, such as rarity, uniqueness and proof of ownership, also for digital objects.
Let’s take an example with music: let’s assume that I am a musician and I want to distribute a certain number of “premium” copies of my album to my most loyal listeners. In the physical world, I could do this by, for example, pressing a limited edition vinyl containing the tracks of the album. But what if I wanted to do it digitally? Without NFT there would be no way to do that, because even if I distributed the mp3 file of the tracks to the 100 most dedicated fans, anyone with access to the file could duplicate it and distribute it to everyone, invalidating the uniqueness. Of course, even vinyl can be copied with a special recording system, but the copy is not of the same value as the original, because the value of the object lies in the fact of owning the original and being able to certify it, not in the content itself (i.e. the tracks). In digital form, however, once an mp3 file has been duplicated, the original and the copy are indistinguishable and the person who bought the original work has no way of certifying that he actually owns the original and not a copy.
One approach currently used to solve this problem is to delegate the distribution of the file to a third party provider, who distributes the MP3 file in such a way as to prevent it from being copied and provides the purchaser with a certificate of ownership of the copy; think for example of iTunes for the music world. The problem is that in this case, as opposed to the physical version, you are bound by the policies of this provider. For example, the buyer cannot resell the file, lend it, or give it to a friend. What if the platform closes or changes policies or technologies? You could lose possession of the work.
This is a typical case where NFTs can make a difference because they are digitally unique: each NFT must have an owner-and this is in the public domain- and easy for anyone to verify. By associating the NFT with the MP3 track, you could prove that you have purchased that limited copy. Even if the file is copied and distributed, only you who bought the NFT can prove that it is yours and not a counterfeit copy.
Of course, this doesn’t apply to music only , but to any unique (or rare) exchangeable digital object.
How do NFTs technically work?
🤓 Nerd warning: if you are not interested in technicalities and/or if everything that follows seems too “nerdy”… you are allowed to skip this paragraph!
From a technical point of view, an NFT is implemented by means of a smart contract, i.e. software that resides on the blockchain and stores its state on it.
In order to standardise and allow interaction among NFTs created by different individuals or organisations, the Ethereum community has proposed standards to follow when developing your own smart contract. These standards appear as programming interfaces, which clearly define which functionalities a smart contract must have to be considered an NFT.
The most commonly used standard today, as well as the first one released, is ERC-721, and it requires the specification of the functionalities needed to identify the owner and to allow the exchange among users. This standard has some limitations, as it makes it possible for a smart contract to handle only one type of NFT at a time.
This sets several limitations, for example in the world of online games. If we wanted to manage the purchase of different collectibles in the game, or create a virtual currency to be able to exchange them within the game (e.g. gems, etc…) we would be forced to create a huge amount of smart contracts.
In order to solve this problem, a new standard, called ERC-1155, has been proposed, which allows to:
- manage multiple types of NFTs in a single contract;
- save resources (gas) for NFT transfers by bundling multiple transactions into a single bulk transaction;
- use both Fungible and Non-Fungible tokens in a single contract.
Which sectors are actively using NFTs?
Art – If Andy Warhol was at the height of his creative powers at this point in history, he would probably be selling his “Campbell’s Soup” as NFT. In fact, the world in which NFTs are experiencing exponential growth is undoubtedly that of art, which is often a victim of copyright infringement: NFTs eliminate the problems of counterfeiting and fraud by providing proof of ownership and authenticity. On 12 March 2021, Christie’s auctioned and sold the NFT of Beeple’s ‘Everydays : the first 5000 days’ for a staggering $69 million, making it the third most expensive work by a living artist at auction.
Collectibles – Virtual collectibles are currently one of the most popular applications of NFTs. One of the earliest uses was a game called CryptoKitties, which allows users to collect, sell and breed virtual kittens: with a few lucky mutations, you can end up with very valuable rarities. At the moment, a record-breaking CryptoKitty has been sold for $140,000.
Gaming – NFTs are also exploding in the gaming sector, as game items can easily be turned into NFTs and traded in peer-to-peer markets. My Crypto Heroes, for example, is a multiplayer role-playing game in which players can level up heroes through quests and tournaments, buying weapons and equipment (represented as NFTs) in the dedicated store on OpenSea.
Virtual worlds – Another use case for NFTs are virtual worlds, i.e. platforms that allow users to create, own and monetise plots of virtual land and other NFT objects in-game. In the world of Decentraland, in order to uniquely define each piece of land, the metadata of NFTs consists of virtual coordinates and the properties of the plot, such as the percentage of land covered by grass or the buildings it has.
Sport – NFTs are also emerging in the world of sports. NBA Shot is one of the best known and most successful cases: users can buy and resell reels of ‘sports moments’, whose circulation indicates their rarity and thus determines their price. Recently, a Lebron James reel has been sold for $208,000, and Michael Jordan hasn’t yet offered it for sale!
How can I apply NFTs to my business?
As we have seen, NFTs are slowly conquering various sectors, but there are still so many possibilities. Their popularity is opening up a wide range of opportunities for real and virtual world assets.
From collecting to certifying workmanship, from selling events and moments to selling digital objects, NFT is an adaptable technology that can add value and authenticity to a product or service. Which use case catches your interest the most and what value can it bring to you?