In a previous post, I explained the basics of NFTs. In this post, I will continue to give more insight into NFTs and the possibilities/opportunities it has. NFTs are still in early adoption and embracing NFTs as an investor right now, making it part of your portfolio might have a very positive impact on your portfolio value in the (near) future.
We are just at the start of this NFT journey and stepping in now might end in a return on your investment, similarly to cryptos 5-10 years ago. Personally, I think digital assets and content will become equally important (and valuable) as physical items and their scarcity will define the price of these assets and content.
Currently, most NFTs are in the form of JPEG or GIF formats but the NFT market is evolving quickly which starts granting the owner the right and option to directly access data or a community, putting the creation of all kinds of content (not only in the form of JPEGs or GIFs) in a completely different perspective. This leads to opportunities to monetize content that is related to NFTs.
A small recap
NFTs stand for Non-Fungible Tokens and refer to digital assets that you can’t change for an asset of the same type. Contrary to fungible assets, that can be substituted or traded for another asset of the same type (like bitcoins, ether, etc.), NFTs are unique and can’t be substituted. They are one-of-a-kind digital representations of information or data where the holder of an NFT has proof of ownership. It works exactly the same as owning an original painting: in both cases, the owner has a certificate of ownership.
The start of NFTs
NFTs started with the introduction of Colored Coins in 2012. Colored Coins represented real-world assets on the Bitcoin blockchain. They were created out of small parts of a bitcoin (BTC), known as satoshis. Colored Coins could represent anything: property, coupons, shares, subscriptions, etc. Because the Bitcoin network was not created with NFTs in mind, the utilization of Colored Coins was not very effective. This limited the success of Colored Coins and with the introduction of the Ethereum blockchain, Colored Coins became obsolete.
In 2017, the Ethereum network started to gain adoption because of an NFT project that was focused on Pepe memes. The hype of this meme got at its peak when a Rare Pepe on the Counterparty protocol of Ethereum, known as “Homer Pepe” sold for $320K.
After Rare Pepe’s success, an NFT project was developed, known as Cryptopunks. Cryptopunks are unique 8-bit characters that are generated on the Ethereum blockchain. The project was launched in June 2017 and every created character is unique. Each avatar has its own distinct combination of characteristics and features. In the first 3 years of Cryptopunks (2017-2019), the total sales volume was at $866K. Currently (November 2021) the most expensive Cryptopunk was sold at 4,2K Ethereum which is over $16M.
Cryptopunks is built on the Ethereum Request for Comment 20 (ERC 20) and allows developers to create tokens that can interact with other tokens and network applications. This can be done in a very easy way. Because ERC 20 tokens were created as standardized tokens that can be easily changed 1-1 with other tokens, they are not best suited for completely unique tokens (NFTs).
Introduction of ERC-721 and ERC-1155
Because standardization had to be removed for unique NFTs, ERC-721 and ERC-1155 were created.
ERC-721s framework was first built as the standard for NFTs on the Ethereum blockchain by storing unique identifiers for every token to track ownership and movements of the tokens. The first project on the ERC-721 standard was CryptoKitties which launched in 2017.
This virtual NFT game allows users to adopt, raise and trade virtual cats on the Ethereum blockchain. At the height of the project, its overwhelming demand weighed on the Ethereum network and impacted its ability to efficiently process transactions on the blockchain. This exposed Ethereum’s current lack of scalability, an issue that is being worked on that will end up in a Hard Fork update of the Ethereum blockchain.
With the success of CryptoKitties, the most popular NFT marketplaces started to grow rapidly. Marketplaces and infrastructure such as Nifty Gateway, SuperRare, Rarible, and OpenSea all gained huge traction.
One of the most negative side effects of the ERC-721 framework is its big gas fees. Because of this, ERC-1155 has become very popular in the past years. ERC-1155 tokens significantly reduce the gas fees, compared to ERC-721 tokens because it allows sending multiple tokens in a single transaction. Batching of transactions leads to significant savings in gas costs and shortens the time spent while waiting for new blocks in recognizing single transfers. Shortly summarized: ERC-1155 can hold an infinite variety of items (tokens) in one smart contract which is one block in the blockchain, while ERC-721 requires one smart contract for each item created.
Personally, I expect that within time ERC-721 will cease to exist because of this, especially when NFTs are going to become more popular/generally adopted.
NFT value
For a lot of people, the value of NFTs is not clear. Especially when an NFT has no immediate utility.
A good example of this is the sale of a piece of digital art, “Everydays – The first 5000 days”, by NFT artist Beeple. In March 2021 this NFT artwork was auctioned and its starting bid was $100. It was eventually sold for $69M.
Bits and bytes can be easily duplicated and owned because if an individual buys the right to make legitimate copies of a digital piece of art it certainly would devalue the original digital art. So if you can just download a JPEG or GIF of Beeple’s “Everydays”, what is the value of actually owning the original? The answer to this question is pretty straightforward. The value is derived from the status of originating ownership. The ownership history or ownership status is provable and immutable on a blockchain. This gives value because ownership is fixed. It’s like possessing a physical piece of art. If physical art pieces trade from one owner to another for generations, the latest owner will be able to prove the authenticity of the piece. This provable ownership can be applied to art pieces but also to goods that are protected with copyrights. This verifiable ownership is the key value driver for NFT collectors and users alike.
In our current digital world where younger generations interact more online than offline, the notion of digital scarcity and digital identity is close to physical scarcity and physical identity and in the future, the value of the digital property will probably surpass that of physical property. This is amplified with the blurring boundaries between the real world and the virtual world. Because of this, people are currently learning to place value on digital identity and reputation more than ever before.
NFTs support this transition because they can track every interaction or connection to ever occur on digital content, resulting in a direct connection between the creator of content and the user.
Digital creation of content and the role NFTs can play
Platforms that currently connect the creators of digital content with users have a monopoly on the content that is distributed. The users access a copy of the content and the creators do not necessarily own the content themselves. Good examples of platforms that claim ownership of content are Facebook and YouTube. These media platforms generate huge profits from their users and content creators are paid less for the quality of their content and more for the attention, and the duration of the attention it can put up. Most of the time, creators only get a very small percentage of advertisement revenues.
NFTs can step in and create (more) value for these content creators. There currently is a lack of claimed ownership and even a scarcity of content. Imagine an NFT that can give access to a YouTube post, controlled by the owner and/or creator of the content. This way, creators will have the ability to generate direct revenue. Platforms acting as middlemen might cease to exist, creating a fair ecosystem for content creators and their users. Like crypto, NFTs have the power to cut out third parties because the value is programmed into the asset/content.
I think that this is also one of the reasons why platforms like Facebook try to take the lead in creating a Metaverse. This way they can still play a big part in all of this. It is no coincidence that Facebook is currently working on its own crypto named “Libra”. In my opinion, it is a smart move by Facebook to take a very active role.
Generating revenue through NFTs
How can you generate revenue directly through an NFT by creating content? One way is through royalties. NFT royalties allow an artist or a content creator to receive a percentage of secondary sales. Each time your NFT is sold or changes hands, the smart contract will automatically trigger and execute royalty payments to the identified creator or author of the work.
In addition to this, a creator also has the option to sell a percentage of the underlying copyrights to an NFT, which would grant the buyer/user a portion of the earned royalties. This royalty system of NFTs can create a continuous revenue stream, especially if the content increases in popularity.
Final thoughts
I think NFTs will play a big role in our society of the future. The world is digitizing in a compounding way and digital ownership is becoming a bigger part of society. A lot of digital content is managed by big media platforms, owned by the big tech companies and content creators have not much choice on how to utilize their content. I think the playing field will be evening out in the near future when the adoption of NFTs gives additional opportunities to creators of content in offering their creations to users. However, this is only possible with stable blockchain networks that are able to manage smart contracts in a cheap and efficient way and Tech platforms like Facebook and Google won’t go down without a fight when they start losing revenue because they are cut out.
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