Non-fungible tokens have received an enormous amount of attention in 2021. This has led to many, mostly those unfamiliar with cryptocurrency, to discount the innovation of them and declare them nothing more than hype.
The take that NFTs are nothing more than hype is not even false – there is a lot of hype surrounding NFTs. However, the amount of hype surrounding NFTs does not discount the innovation, and potential for innovation, that NFTs provide to cryptocurrency.
This article will explain why NFTs are a combination of hype and innovation. And this is perfectly normal for a nascent technology like NFTs.
NFTs Explained Simply
The exact technical specifications of how NFTs work goes far beyond the scope of this article. However, it is still useful to explain NFTs in a simple manner, hence this section.
So, the basics of NFTs are they are non-fungible tokens on a smart chain compatible blockchain (ie. Ethereum, Solana, etc.). Non-fungible means that each and every token is unique.
This is in contrast to a standard cryptocurrency like Ether or Bitcoin where 1 bitcoin = 1 bitcoin. All of the coins are the same.
A smart contract can also be programmed onto the token itself, which is really what opens the door to so many possibilities with NFTs. A good example is that an NFT project can program its NFTs with a royalty property. This means that a certain percentage of the total sale price will be sent to the developer/artist.
That is all an NFT is at the end of the day. It’s nothing more than a unique token on a smart chain blockchain.
Things get more interesting with NFTs, however, because properties and files can be attached to these unique tokens.
Basically, any image can be attached to this unique token. This is often done with digital art in order to authenticate ownership of the artwork.
Anyone can right-click and save a CryptoPunk NFT, but only one person can own the NFT token associated with that artwork.
To summarize, NFTs are more than just artwork tokens. They are unique cryptocurrency tokens that can have digital files (MP3, JPEG, GIFs, etc.) and smart contracts attached to them.
You have likely seen news headlines about NFTs like CryptoPunks, Bored Apes, or artwork by Beeple selling for hundreds of thousands, millions, or tens of millions of dollars.
Those stories are true. The NFT artwork really does sell for that much money, which is exactly why everyone will claim that the NFT market is nothing more than a hyped marketplace and a fad.
Well, those naysayers are half-right. The NFT marketplace is certainly a hyped marketplace. It is at the point where with the proper marketing anyone can throw together an NFT collection and sell hundreds of thousands of dollars worth of NFTs.
It’s extremely hyped. In fact, the NFT art market is in a bubble at the moment.
Here’s the thing, this is not a bad thing. It’s actually perfectly normal for this to occur.
The NFT art market, and the broader cryptocurrency industry, has a few things going on that allow this to occur:
- The NFT art market is extremely fragmented.
- There are a few dominant NFT artists and projects, but the broader industry is extremely fragmented.
- The NFT art market is a new technology.
- New technologies always have these hype, bubble phases before a market leader emerges.
- The Dot Com bubble saw this with thousands of internet companies appearing. The vast majority failed because they did not innovate fast enough (ie. Yahoo, AskJeeves, etc.).
- The automotive industry also had something similar occur at the turn of the 20th century with hundreds of auto manufacturers appearing on the scene. The industry eventually consolidated into what we see today.
- New technologies always have these hype, bubble phases before a market leader emerges.
NFTs have a similar thing going for them. It’s a new industry that people want to get into because of the potential for profit, so a lot of entrepreneurs launch projects. Most of these projects fail, people wise up to the fact that most projects, and the industry crashes once people stop investing in projects.
The beautiful thing is that if the underlying technology is actually good, then the industry will reemerge. Internet companies were extremely hyped when the internet first became mainstream in the late 90s. Did the internet disappear along with all the internet companies that failed in the late 90s?
It did not because the underlying technology had some use to it.
NFTs fall into the exact same category as that. The next section will explain some of the innovation that is occurring with NFTs.
The Potential for Innovation with NFTs
There are a lot of potential uses for NFTs. We will keep it simple and say that just about everything in meatspace will be turned into an NFT at some point.
NFTs really are that powerful of a technology.
Anyway, here are some specific examples of industries that will get disrupted by NFTs and potential uses for the technology.
NFTs and Music
The music industry will be one of the first industries to see a major shakeup because of NFTs. For those that do not know, the music industry was disrupted in a huge way by the internet because it took a lot of the power away from record companies.
Basically, people stopped buying records because they could pirate them online. The launch of YouTube made it possible for musicians to garner a following without the help of a record company, which was something that did not occur before the internet.
Now, NFTs don’t stop piracy. Though it is certainly possible for NFTs to greatly reduce piracy.
Instead, NFTs have the potential to give even more power to independent musicians the same way that YouTube gave power to independent musicians.
Remember how we said that NFTs can have any media file attached to them?
One use case that has already seen some real world use is musicians selling an NFT of one of their songs.
People want original art, original recordings, and they even want 1 of 1 NFT for a particular song.
Again, things go a lot deeper with NFTs than simply attaching a media file to them. Musicians have attached other rights to owning their NFT like backstage passes, unreleased songs, a royalty percentage, and even input on the lyrics for an upcoming song.
Musicians can also charge a royalty for all future sales of the NFT. The royalty might sound aggravating, but it actually aligns the interests of the musician with that of the holder of the NFT.
The musician wants to be successful because that increases the value of their NFTs (they get a cut of future sales) and the NFT holder wants the value of the NFT to increase.
We have already seen famous musicians like Steve Aoki and Deadmau5 utilizing NFTs as an additional source of revenue.
The biggest beneficiary of this, however, will be independent musicians as it allows another route for monetization.
To summarize, NFTs will give even more power to musicians by allowing them to generate another revenue stream. It will also increase the connection between the fans, at least the ones that purchase an NFT from the musician, and the musicians.
It will be a win-win for all parties other than the record companies.
NFTs and Gaming
The gaming industry will also see a major disruption from NFTs. Gaming will likely see the largest disruption from NFTs because NFTs fit so perfectly with gaming.
Again, NFTs will probably be a negative for the major, centralized businesses in the industry and a positive for the smaller, independent businesses and the gamers.
NFTs will disrupt gaming in a few different ways. The most notable way is that gamers will actually own their in-game items.
This is certainly not the case now. You do not legally own any of the items you have in a game. Those in-game items, which can be worth quite a lot of real-life money, do not belong to you.
It’s in the terms and conditions of the game.
NFTs in games change this because gamers wholly own the NFTs that they use in the game. This means they can sell the NFT without any issue.
That is just one part of how NFTs will change gaming, though.
There is a new trend in gaming, NFT gaming to be specific, called play to earn gaming. It is exactly what it sounds like. Gamers can play games that allow them to earn money by selling in-game items for real-life money.
This already exists in a lot of games, but it goes against the terms and conditions of the game and can result in the banning of your account.
Play to earn game developers don’t care about that. They take the opposite approach and encourage gamers to play their game for a living.
The impact that NFTs will have on the gaming industry should be apparent. They will completely change the industry in two ways:
- Gamers will legally own their in-game items (NFTs).
- Gamers can play the game for an income.
NFKeys are not actually a thing, yet. We actually just invented that term right now to describe one major use for NFTs that will almost certainly become a norm.
Have you used MetaMask on a website?
For those that have not, MetaMask is a browser extension that allows you to connect your Ethereum wallet to a Web3 application like Uniswap. It is how people purchase NFTs and interact with DeFi.
Here’s a thought experiment. What if all websites that require a login issued an “NFKey” to your Ethereum wallet that authorizes access?
All that would be required to login is connecting MetaMask to the website.
This is a much more secure method because it does not require entering a password into the browser. There is also not a username and password database that can be hacked and leaked on the internet.
We know, something like this could be a little confusing on mobile or using a friend’s computer. It’s likely a decade away from being a regular thing, but it will occur at some point.
NFTs and The Metaverse
Finally, you have most likely heard the word “metaverse” thrown around a lot in 2021. Facebook recently changed their name from Facebook to Meta in reference to this term.
The metaverse is a combination of virtual reality, augmented reality, social media, and gaming to form a digital reality.
NFTs fit into this because, well, NFTs are digital. An NFT would essentially be the items in the metaverse.
We will put it this way, NFTs in the metaverse would be virtual reality in-game items. This concept is explored in the Steven Spielberg movie Ready Player One based on the book of the same name by Ernest Cline.
The movie and book take place in a world that has a virtual reality game called Oasis. Players can create in-game items that they can sell for cash in the real world. Some players can also choose to perform necessary tasks in the game to earn money, which has parallels to play to earn games.
It’s a good movie, and even better book, that describes one of the major use cases for NFTs perfectly. We highly recommend reading the book and watching the movie to have a full understanding of the future of NFTs.
We hope this article adequately explains how NFTs are much, much more than just hyped up JPEGs. Quite frankly, people that view NFTs as nothing more than JPEGs do not have much understanding about the underlying technology of NFTs and the many use cases for them.
It’s a little unfortunate that the artwork has received so much hype because that can leave a bad impression about the technology. But we have no doubt that the underlying technology of NFTs will completely change the way that we use the internet.