NFTs are currently taking the digital art and collectibles world by storm. Digital artists are seeing their lives change thanks to huge sales to a new crypto-audience. And celebrities are joining in as they spot a new opportunity to connect with fans. But digital art is only one way to use NFTs. Really they can be used to represent ownership of any unique asset, like a deed for an item in the digital or physical realm.
What’s an NFT?
NFTs are tokens that we can use to represent ownership of unique items. They let us tokenise things like art, collectibles, even real estate. They can only have one official owner at a time and they’re secured by the Ethereum blockchain – no one can modify the record of ownership or copy/paste a new NFT into existence.
NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like your furniture, a song file, or your computer. These things are not interchangeable for other items because they have unique properties.
Fungible items, on the other hand, can be exchanged because their value defines them rather than their unique properties.
The internet of assets
NFTs and Ethereum solve some of the problems that exist in the internet today. As everything becomes more digital, there’s a need to replicate the properties of physical items like scarcity, uniqueness, and proof of ownership. Not to mention that digital items often only work in the context of their product. For example you can’t re-sell an iTunes mp3 you’ve purchased, or you can’t exchange one company’s loyalty points for another platform’s credit even if there’s a market for it.
Here’s how an internet of NFTs compared to the internet most of us use today looks…
|An NFT internet||The internet today|
|NFTs are digitally unique, no two NFTs are the same.||A copy of a file, like an .mp3 or .jpg, is the same as the original.|
|Every NFT must have an owner and this is of public record and easy for anyone to verify.||Ownership records of digital items are stored on servers controlled by institutions – you must take their word for it.|
|NFTs are compatible with anything built using Ethereum. An NFT ticket for an event can be traded on every Ethereum marketplace, for an entirely different NFT. You could trade a piece of art for a ticket!||Companies with digital items must build their own infrastructure. For example an app that issues digital tickets for events would have to build their own ticket exchange.|
|Creators can retain ownership rights over their own work, and claim resale royalties directly.||Platforms, such as music streaming services, retain the majority of profits from sales.|
|Items can be used in surprising ways. For example, you can use digital artwork as collateral in a decentralised loan.|
The NFT world is relatively new. In theory, the scope for NFTs is anything that is unique that needs provable ownership. Here are some examples of NFTs that exist today, to help you get the idea:
- A unique digital artwork
- A unique sneaker in a limited-run fashion line
- An in-game item
- An essay
- A digital collectible
- A domain name
- A ticket that gives you access to an event or a coupon
- Holy Bibles NFT
We use NFTs to give back to our contributors and we’ve even got our own NFT domain name.
POAPs (Proof of attendance protocol)
If you contribute to ethereum.org, you can claim a POAP NFT. These are collectibles that prove you participated in an event. Some crypto meetups have used POAPs as a form of ticket to their events. More on contributing.
This website has an alternative domain name powered by NFTs, ethereum.eth. Our
.org address is centrally managed by a domain name system (DNS) provider, whereas ethereum
.eth is registered on Ethereum via the Ethereum Name Service (ENS). And its owned and managed by us.
How do NFTs work?
NFTs are different from ERC-20 tokens, such as DAI or LINK, in that each individual token is completely unique and is not divisible. NFTs give the ability to assign or claim ownership of any unique piece of digital data, trackable by using Ethereum’s blockchain as a public ledger. An NFT is minted from digital objects as a representation of digital or non-digital assets. For example, an NFT could represent:
- Digital Art:
- Real World Items:
- Deeds to a car
- Tickets to a real world event
- Tokenized invoices
- Legal documents
- Lots and lots more options to get creative with!
An NFT can only have one owner at a time. Ownership is managed through the uniqueID and metadata that no other token can replicate. NFTs are minted through smart contracts that assign ownership and manage the transferability of the NFT’s. When someone creates or mints an NFT, they execute code stored in smart contracts that conform to different standards, such as ERC-721. This information is added to the blockchain where the NFT is being managed. The minting process, from a high level, has the following steps that it goes through:
- Creating a new block
- Validating information
- Recording information into the blockchain
NFT’s have some special properties:
- Each token minted has a unique identifier that is directly linked to one Ethereum address.
- They’re not directly interchangeable with other tokens 1:1. For example 1 ETH is exactly the same as another ETH. This isn’t the case with NFTs.
- Each token has an owner and this information is easily verifiable.
- They live on Ethereum and can be bought and sold on any Ethereum-based NFT market.
In other words, if you own an NFT:
- You can easily prove you own it.
- Proving you own an NFT is very similar to proving you have ETH in your account.
- For example, let’s say you purchase an NFT, and the ownership of the unique token is transferred to your wallet via your public address.
- The token proves that your copy of the digital file is the original.
- Your private key is proof-of-ownership of the original.
- The content creator’s public key serves as a certificate of authenticity for that particular digital artefact.
- The creators public key is essentially a permanent part of the token’s history. The creator’s public key can demonstrate that the token you hold was created by a particular individual, thus contributing to its market value (vs a counterfeit).
- Another way to think about proving you own the NFT is by signing messages to prove you own the private key behind the address.
- As mentioned above, your private key is proof-of-ownership of the original. This tells us that the private keys behind that address control the NFT.
- A signed message can be used as proof that you own your private keys without revealing them to anybody and thus proving you own the NFT as well!
- No one can manipulate it in any way.
- You can sell it, and in some cases this will earn the original creator resale royalties.
- Or, you can hold it forever, resting comfortably knowing your asset is secured by your wallet on Ethereum.
And if you create an NFT:
- You can easily prove you’re the creator.
- You determine the scarcity.
- You can earn royalties every time it’s sold.
- You can sell it on any NFT market or peer-to-peer. You’re not locked in to any platform and you don’t need anyone to intermediate.
The creator of an NFT gets to decide the scarcity of their asset.
For example, consider a ticket to a sporting event. Just as an organizer of an event can choose how many tickets to sell, the creator of an NFT can decide how many replicas exist. Sometimes these are exact replicas, such as 5000 General Admission tickets. Sometimes several are minted that are very similar, but each slightly different, such as a ticket with an assigned seat. In another case, the creator may want to create an NFT where only one is minted as a special rare collectible.
In these cases, each NFT would still have a unique identifier (like a bar code on a traditional “ticket”), with only one owner. The intended scarcity of the NFT matters, and is up to the creator. A creator may intend to make each NFT completely unique to create scarcity, or have reasons to produce several thousand replicas. Remember, this information is all public.
Some NFTs will automatically pay out royalties to their creators when they’re sold. This is still a developing concept but it’s one of the most powerful. Original owners of EulerBeats Originals earn an 8% royalty every time the NFT is sold on. And some platforms, like Foundation and Zora, support royalties for their artists.
This is completely automatic so creators can just sit back and earn royalties as their work is sold from person to person. At the moment, figuring out royalties is very manual and lacks accuracy – a lot of creators don’t get paid what they deserve. If your NFT has a royalty programmed into it, you’ll never miss out.
What are NFTs used for?
Here’s more information of some of the better developed use-cases and visions for NFTs on Ethereum.
- Digital content
- Gaming items
- Domain names
- Physical items
- Investments and collateral
Maximising earnings for creators
The biggest use of NFTs today is in the digital content realm. That’s because that industry today is broken. Content creators see their profits and earning potential swallowed by platforms.
An artist publishing work on a social network makes money for the platform who sell ads to the artists followers. They get exposure in return, but exposure doesn’t pay the bills.
NFTs power a new creator economy where creators don’t hand ownership of their content over to the platforms they use to publicise it. Ownership is baked into the content itself.
When they sell their content, funds go directly to them. If the new owner then sells the NFT, the original creator can even automatically receive royalties. This is guaranteed every time it’s sold because the creator’s address is part of the token’s metadata – metadata which can’t be modified.