From sea shells to stones, physical tokens have represented units of value for thousands of years. Recently, blockchain technology has given rise to the digital token economy, where items of value can be represented cryptographically.
A growing marketplace has rapidly formed around this new technology and mirroring the essence of crypto, NFTs are based on the principles of freedom and self-sovereignty, where NFT ownership cannot be taken away unless one chooses to trade their asset. These qualities have attracted millions of users, and they hold high regard in blockchain communities and increasingly for more diverse use cases.
To take a quick step back, Non-Fungible Tokens (NFTs) prove ownership of digital assets via the data they store on a blockchain.
While Bitcoin pioneered the world’s first decentralized digital token, Ethereum enabled the creation of custom tokens using its own native token standards. Standardizing both fungible and non-fungible tokens radically improves the developer experience and overall adoption, thus helping to spawn an ecosystem with millions of users and participants.
These standards empowered a cohort of developers to issue their own tokens on Ethereum. The two most popular token standards used today are ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens).
Proof of Ownership
NFTs grant immutable, data-backed ownership of a physical or digital item and the location via metadata that points to a location that is both public and secure, such as IPFS. While NFTs are widely known (and came into the mass domain) mainly via the digital art world, NFTs generally do not store the artwork itself on-chain. For most NFT images, storing rich imagery on Ethereum would be cost-prohibitive. Rather, NFTs use both off-chain (web2) and on-chain (web3) tech.
NFT ownership can be tracked on a blockchain by a unique ID, similar to a regular ownership document. This grants NFTs a number of benefits:
- Ownership
Users can guarantee that an NFT is really owned by a wallet certified through reliable on-chain data
- Traceability
Everyone has access to an NFT provenance to verify a chain of ownership from mint onwards
- Auditability
Anyone can audit individual wallets and NFT collections to ensure legitimacy.
All of these benefits bring unique advantages to a wide range of use cases, expanding far beyond simple collectibles.
Applications Above and Beyond
NFTs have forever altered the way people can store, exchange, and represent value through a digital medium.
While we have seen NFTs drive popularity with digital artwork, trading cards, and other collectibles, the major use case and golden- ticket for this technology is its potential to unlock trillions of dollars in traditionally illiquid assets.
Assets such as real estate and intellectual property are two stark examples of highly illiquid assets, meaning that they cannot be rapidly converted into cash. Converting such assets to NFTs would unlock the opportunity for such assets to be fractionalized and more easily traded and accessible for a digital-first consumer base, eliminating a trove of middlemen and antiquated paperwork. Such applications hold great potential for future opportunities
While still in its infancy, non-fungible tokens present massive opportunities for the future of commerce, including:
- NFT Tokenization
The most common current use case for NFTs is tokenizing assets. Art is commonly used for tokenization because of its uniqueness. However, tokenizing assets extend to traditional industries such as real estate, where properties in crypto-friendly jurisdictions (such as Switzerland) are increasingly represented digitally on the blockchain.
- NFT Marketplaces
NFT marketplaces are the equivalent of exchanges for tokenized assets. They offer a secure platform for people to buy, sell and bid on assets that they can own in exchange for a transaction fee, typically the native cryptocurrency of the blockchain they’re minted on. These marketplaces offer a user-friendly medium for interacting with NFTs.
- NFT Loan Collateral
One of the major drawbacks of issuing loans on the blockchain is the inability to secure collateral. A potential use case for NFTs would be the tokenization of real-world assets that could be used to secure a loan on the blockchain. This would be given to the entity issuing a loan which could be liquidated if the person receiving the loan failed to make repayments.
The Future for NFTs Needs no Boundaries
To date, the NFT industry has unlocked billions of dollars, but that is just the tip of the iceberg as they are now well positioned and poised to generate further value through a new wave of innovative digital services and the melding of native crypto, Wall Street, and Main Street. A new class of applications spans dozens of industries, from finance, social media, supply chain, healthcare, insurance, and beyond.
Such use cases are developed on the building blocks of the affordable, modular, and reliable underlying infrastructure that is critical to paving the path toward this ambitious and sustainable future.
Building a Sturdy Foundation
Over the years, infrastructure services have dramatically reshaped the way crypto businesses are built, and the role of infrastructure is equally important for the NFT industry. While the need for reliable blockchain infrastructure has technically existed since the introduction of Bitcoin, it is only relatively recently that builders have had access to the tools needed to support the growth of this decentralized future. NFTs are no exception.
The dawn of cloud-based infrastructure radically reduced overheads for web companies, with consumers enjoying faster, more responsive applications while developers could focus their time building innovative products. Blockchain follows the same deflationary route as other technologies, radically reducing costs associated with legacy systems.
NFTs rely on infrastructure providers, such as marketplaces, wallets, explorers, and the underlying blockchain itself, to support users and drive mass adoption.
However, this tooling is only made possible through quality infrastructure operators and operators who are trusted to support everyone, from nascent networks and startups to the world’s largest financial institutions. Operators who can leverage technology at the scale of the ‘traditional’ web giants.
One thing is certain: NFTs and their many applications are here to stay, and their applications and machinations within many sectors will continue to expand well into the future.
Andrew Howell, Senior Director of Blockchain Engineering at Blockdaemon, Andrew oversees node and staking infrastructure operations for 50+ protocols. He ensures that Blockdaemon’s infrastructure is operating reliably, while leading efforts building monitoring tools, incident response, and plans for new products. He’s Blockdaemon’s Chief Degen and keeps our business aligned with the new up-and-coming innovative Blockchain technologies