What are NFTs?
NFTs (non-fungible tokens) are a new class of digital objects you can own and trade. Unlike the digital items you buy in games like Fortnite — they’re unique and can’t be copied. They can represent anything from a song to an article in a game, to a piece of land in virtual reality, or a token for a physical land title or a person’s identity.
If you own an NFT, you have the right to do things with it — like sell it or lend it to someone else — and no one else has that right.
Why are they needed?
NFTs are stored on blockchains, which means they can be traded securely without having to trust each other. Authenticating a physical asset like artwork, premium liquor, and fine wine is costly and time-consuming, involving connoisseurs, lawyers, notaries, and several other intermediaries. NFTs enable such a transaction efficiently and cost-effectively, which opens new opportunities for ownership.
How are they valued/monetized?
As Naval has concisely described
“One of the most important things to consider when buying an NFT is how the community around it is faring. But what makes them so useful? The thing is, their value is determined by the community around them.If the community is dying, the NFT is likely bleeding value. But if the community is surging, the NFT is likely gaining value.”
At the fundamental level, the hype for NFTs on platforms like BAYC and Cryptopunks mirrors the human desire to seek social status by possessing things of value. That value is amplified by the scarce nature of the underlying asset. NFTs gain value when displayed and promoted within thriving communities.
NFTs are more than images
Beyond the applicability of viewing and owning art, there are several potential use-cases that NFTs have that are still untapped and are unique to the web3.0 world. These include features like immediate verifiability & composability, which are either time-consuming or hard to enforce in the traditional web2.0 world.
NFTs can use smart contracts to provide royalties to a musician every time a song is played or a version of a composable song (think remixes or variations of the original).
Napster(web) > Spotify(web2) > NFT music platform(web3)
A look back at the digital piracy of music from the web1 world. The problem described with piracy is what the new NFT music platform solves. It is what Napster for music should always have been — the ability to legally download or stream music while paying back a fee (one time or recurring based on the number of plays) to the original artist.
It also solves other problems like removing the intermediary in this transaction (ex, Spotify) and giving a greater percentage back to the artist. It also can solve the problem of derivatives. If a song is remixed or a portion of the track is reused (ex, in a TikTok or Instagram video), a smart contract will enforce that the appropriate royalties are paid back to the original creator of the song. It relies on network effects and the community around the NFT asset, which the musician needs to invest the time to build or figure out.
The composability of NFTs provides a unique opportunity for artists and creators where they no longer need to worry about copyrights, IP, and patents. Instead, they focus on creating content used and derived to form new artifacts. At the same time, the underlying technology ensures the appropriate royalties for the original and its derivatives.
Not all NFT platforms are created equal
The network effect of a Spotify-like service with a potential reach of hundreds of millions of listeners is why they can charge a premium as an intermediary. This is also seen in the web2 world with companies like Etsy and Shopify allowing artists to sell directly to consumers through these platforms. The big difference will be high-value, scarce assets and creators will bubble up to the top on the new NFT platforms, and communities will form around these categories of tokens. More on how NFT music platforms are challenging the incumbents here.
NFT-based central identity
While NFTs today is talked mostly about digital art, future applications will have a far-reaching impact and make NFT tokens a unique identity for many people in the web3 world. Imagine controlling your digital identity via an NFT pass, controlling whom you share data with, and even monetizing it.
The NFT-based central digital identity will solve several problems, including anonymous, automated bots on Twitter, requiring multiple identity providers like a Gmail account, Facebook, and Twitter to verify our identity and fast, secure, and verifiable access to private data like SSNs, license ID, etc. which can be used to speed up KYC processes.
Some of the real-world problems implementing these are the fact that there will be a push by companies to create several central identity provider services (think of Gmail or Facebook authenticator’s next version as an NFT-based central id provider including e-mail and other attributes). At the same time, different DAO(decentralized autonomous organizations) will also compete to provide these services. Several marketplaces to trade NFT will appear, and ultimately, the network effects of the community will drive artists and users towards a platform.
While it seems like it’s back to the future with the streaming music example of Napster > Spotify > (Napster++ web3 version), the push towards a secure, permissionless, decentralized peer-peer network with composability levels the playing field for everyone and allows unfettered access to create new businesses and disrupt existing ones.