Many potential investors wonder if nonfungible tokens are a boon or a bubble as they gain mainstream popularity. Since the possibilities of NFTs seem plentiful, real-world examples and use cases of this new technology are important to gauge their value, sustainability and future.
Theoretically, NFTs -- digital tokens of virtual and real-world assets -- can be applied to any item. Although experiencing growing pains as a technology and a financial instrument, NFTs offer a new means of making money digitizing assets, monetizing intellectual property and verifying the authenticity of physical assets on the internet. They are applied increasingly for establishing the authenticity of various unique, collectible and valuable items.
As the market develops, both buyers and sellers should proceed cautiously. Although broad-based application of NFTs has not yet occurred, the groundwork is being laid for more widespread uses, proponents of the technology assert.
As NFTs go through their ups and downs, the biggest obstacle to adoption is not technology, but usability, said Evin McMullen, co-founder of Serto, a Consensys company. "We must enhance the user experience to make it more relevant, simple and enjoyable for business users and individual consumers," she said.
What are nonfungible tokens (NFTs)?
NFTs are one-of-a-kind cryptographic assets that exist on blockchain technology. Due to their uniqueness, NFTs are nonfungible, which means they are not mutually interchangeable. This contrasts with fungible assets -- such as a one-dollar bill, a piece of gold or a bitcoin -- each of which can be interchanged with like items. NFTs are based on decentralized finance (DeFi), in which assets and market players act on a person-to-person and decentralized basis. DeFi eliminates the involvement of intermediaries.
Converting a real-world asset into a digital asset makes processes more efficient and provides easier verification of originality and scarcity of information on digital platforms. A key characteristic of NFTs is exclusivity; they can restrict the rights of individuals on specific assets.
The allure of NFTs lies in their digital representation of physical assets combined with the use of unique identification as well as the tamper-resistant blockchain of smart contracts. Thanks to blockchain, the tokens cannot be copied, removed or destroyed. Blockchain also enables NFTs to be tracked back to their real owners and eliminates the need for third-party verification. Blockchain protects the ownership of the NFT, giving the owner the exclusive right to conduct transactions and transfer the token. Even the issuer of the NFT cannot replicate or transfer it without owner permission.
NFT use cases
NFTs have generated a lot of attention and become a reality in the arts and entertainment worlds. Yet, beyond these early applications, many real-world business use cases -- from licensing and certifications to real estate to supply chain management and logistics -- are still at an early stage.
Identification, certification and documentation
Although personal identity management is one area in which NFTs can shine, it's still early days for this type of application. As NFTs contain code with a unique set of information, they can be used to tokenize documentation such as degrees, academic certificates, licenses and other qualifications as well as medical records, birth and death certificates. The identity or certification can be issued directly over the blockchain as an NFT, which can be traced back to the owner. So, employing NFTs to digitally store and protect medical history, personal profiles, education and address details gives users better control of their data and can help prevent identity theft.
A similar concept could be applied to driver's licenses or passports in the future. While NFTs could help eliminate driver's license, visa and passport forgeries, details about the technology -- possibly using a mobile app -- have yet to be worked out.
A related application is the use of NFTs for vaccine passports. The Republic of San Marino announced its adoption of NFT COVID-19 vaccination passports. The tokens will help authenticate the documents and reduce counterfeits.
Domain name ownership
With a blockchain domain system, owners can control their domains using private keys. The Internet Corporation for Assigned Names and Numbers (ICANN) controls the standard domain name service (DNS) and there is limited oversight of these domains. This raises concerns about censorship and security. Blockchain domain names are recorded permanently in a public registry and cannot be deleted or altered by a third party, helping to eliminate these concerns.
Blockchain domain NFTs enable easy trading as well as customizable domain names. The Ethereum Name Service (ENS) and Unstoppable Domains, decentralized alternatives to the standard DNS, provide crypto-addresses that are similar to an Instagram or Twitter handle, but each name must be unique. Although Instagram and Twitter users are not allowed to sell their usernames, ENS and Unstoppable Domains let users buy and sell crypto-addresses. The more popular names have higher prices.
NFTs have applications for selling digital real estate in both the virtual and real worlds. In the virtual world, digital real estate applications are gaining ground in games such as Decentraland. Participants create and purchase areas in a virtual world. Using NFT ensures that the objects' original producers and owners can be identified.
Another example of virtual real estate is the digital "Mars House," which represents a home framed in glass and surrounded by neon lights. Although the "home" sold for $500K, the owner cannot go inside because it is virtual. Other examples of virtual real estate include a Twitter page that is selling virtual properties as well as the buying and selling of real estate on virtual role-playing games like Superworld.
Virtual real estate NFTs are exchangeable on NFT marketplaces through transactions that are more efficient and transparent than real-world real estate transactions. Ownership of virtual real estate is recorded on a decentralized ledger through an NFT, rather than using a traditional deed or title. Holders are the perpetual owners of their digital items.
While there are already several examples of virtual real estate sales, real-world real estate applications of NFT are in their infancy. In the future, using NFTs and blockchain in the real world could be an efficient way to check titles and verify ownership history. However, this type of application raises concerns regarding security. Although blockchain helps make NFTs more secure, they can still be hacked. Other issues need to be ironed out. For example, if a private key to an asset on blockchain is misplaced, access to the asset could be lost.
Art, luxury brands, sports, and athletic and other memorabilia
Applications for NFTs have taken off are primarily in the collectibles, art, gaming and virtual worlds. Early use cases include Cryptopunks, which are 24×24 pixel art images that are algorithmically generated, and Cryptokitties, a virtual game. Other examples include:
- An NFT collage by digital artist Beeple that sold for $69 million in March 2021
- A digital image of a New York Times column, which sold at a charity auction for $560,000 in cryptocurrency
- Ditto Music's placement of NFTs on its blockchain platform Bluebox to allow purchasing shares in songs
Sports tickets and other collectibles are also being tokenized. Examples of sports digital collectibles include "Moments," sold on the NBA Top Shot platform. Moments might include a video clip of the player making a move or the NBA's Top Shot, a blockchain-based trading card system that offers game highlights.
Crypto-art and other entertainment applications derive most of their value from the ability to provide digital verification of their authenticity and ownership. In markets plagued by counterfeiting and fraud -- such as art, luxury brands or other collectibles -- NFTs can provide authentication. NFTs for art and other applications cannot be altered or copied, which is important in preventing plagiarism and creative theft and helps artists monetize their business. Additionally, NFTs give digital art the qualities of being original and rare, similar to physical art. They can be tracked from the origin of an artist or seller. Also, they enable anyone to see the selling price and how many times the artwork has been sold.
The prevention of fraud and plagiarism are also crucial in the media and film industries, which are still-emerging markets for NFTs. Files can be appended to the blockchain as an NFT to prevent them from being copied or shared without owners' permission.
Supply chain and logistics
The main function of NFTs in the supply chain lies in authenticating products, ensuring their quality and verifying their origin. Although in the early stages, NFTs on blockchain are suitable for logistics applications because of their immutability and transparency, which keeps supply chain data authentic and reliable. In the food and other perishable industries, knowing where the goods have been and for how much time is crucial.
NFTs eliminate counterfeiting, help trace the movement of goods along the supply chain and assure uniqueness. This would be applicable to supply chains for luxury fashion brands. For businesses like the auto industry, NFTs can also provide information regarding each material and component in a particular product. This could help with cost control. NFTs would also be useful for industries looking to track the use of recyclable and sustainable materials.