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June 12, 2022

NFTs

The use-case for NFT's is to take an object that is otherwise replicable, and make it digitally scarce. Blockchain technology allows for this solution to exist, as blockchains keep an immutable and public record of every transaction.

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First things first, forget what you know about NFTs, since it's probably that they're only pictures of monkeys (or pictures of anything). At the risk of sounding dramatic, using NFTs to make monkey pictures is the same as using an iPhone as a hammer; can you do it? Sure I guess so, but what a waste.

What is Digital Scarcity?

Music can be pirated and duplicated to no end; that distribution model means creators are may not be paid for their work. Same goes for movies, shows, books, and other forms of media. People can copyright their media, but it's not fool proof.

How about another example: software. Software companies often release license keys that are required to use their product. Ever use Photoshop or FL Studio? Anyone can download the software, but you can't actually use it until you pay for a license key.

Video games? Sure you still buy a physical disc these days but you don't need it in the system to play - the entire game exists on your console and the disc acts as a security key.

Ticketing: anyone that likes concerts knows that you've got a real risk of getting scammed with a fake one if you buy second hand. Memberships, subscriptions, legal documents, and so on and so on.

Digital scarcity is a credibly maintained limitation for digital products, and many industries struggle with it.

How NFTs Can Combat This

An NFT, or Non-Fungible Token, is a strategy to combat the simple problem that digital assets can be replicated. The use-case for NFT's is to take an object that is otherwise replicable, and make it digitally scarce. You're probably familiar with those above solutions (license keys, copyright, centralized validation), and they're not terrible solutions, but they can be optimized.

Some common problems with those legacy solutions for digital scarcity are that there's no resale market, copyright only works with compliant parties, and you're trusting a centralized entity to continue leasing the service.

With a resale market, users can resell products they no longer use, and recoup costs. With a universal copyright in the form of an NFT, creators are guaranteed royalties and credit for their work. With a decentralized system, you're not at the mercy of an institution that can change their terms of service on a whim; self-sovereignty is security.

Let's break down the words in 'NFT'

I'll come back to how NFTs serve the above situations, but first we'll break down the words within it. Fungible means interchangeable, or equivalent. A gold bar is an example of something that's fungible. If I have a gold bar, it doesn't really matter what I do with it, it's still worth the same as any other gold bar and it is the same from a financial perspective. Maybe I was given the gold bar in exchange for doing something illegal - doesn't matter it's still worth the same amount. Cash can be considered fungible by some; if I give a bartender $5 to pay for a beer, they won't care if it's crumpled up or a bit dirty, $5 is $5.

If you want to get specific, every $5 bill has a serial number on it, which makes them distinguishable, and therefore non-fungible, but that's not too relevant in the scope of this article. NFTs, however, are blatantly non-fungible. Every single one of them is different, on purpose. The difference is their tokenID; past that, the metadata for each and every token can be specified.

If you look at Bitcoin or Ethereum, every single Ether token has the same properties - certain one's aren't worth more than others or more able to contribute towards a validator node - they all have the same function. If you wanted to, you could give all of your ERC721 tokens the same functionality, but they could still be distinguished by an ID number. A token is a crypto that is not the native coin for a network. Ether is a coin because it is the native coin for Ethereum's network, but any NFTs or ERC20s built on top of Ethereum are tokens.

A Concise Definition

An NFT is a digital item (or a digital representation of a physical item), structured in a way that it can easily be validated to avoid counterfeiting. Blockchain technology allows this to be true, as an immutable and public record stands of every transaction any NFT has been involved in. The most common form of NFTs is the ERC721 token standard on Ethereum.

Use Cases:

Media: As I mentioned above, use-cases for NFTs are software, media, tickets, legal documents, and much more. Blockchains are immutable records, so you can be confident in the authenticity of information stored as an NFT. NFTs are created by smart contracts, so they're programmable. I could program an NFT that holds the ownership rights to a song I make, and make it so every time those rights (the NFT) are resold, I'm automatically given a cut of the same - guaranteed royalties.

Tickets: How about tickets? Physical tickets are easy to authenticate and make a nice souvenir, but cost money to distribute. QR code tickets allow for fast and free distribution, but are easier to counterfeit. The best of both worlds is a ticket on a blockchain: you have a permanent ticket on a blockchain, with easy distribution, simple validation, and impossible to counterfeit. If I'm buying an NFT ticket secondhand for a concert, I can check the address of the contract that created the ticket, check the owner, and make sure it's legit. All of this information is stored on an immutable, public blockchain - meaning it can't be tampered with. The history of everywhere that ticket has been is visible. I can also even check if the ticket has been used to check into the event yet or not. I think we're very close to this being the norm.

Access/Memberships: An NFT can also work as a membership, whether that membership is like a license key to use a software will vary but it's popularly used for online communities. 'Own this NFT and you can view my marketing course' or join a discord. BAYC and other popular monkey NFTs are memberships to clubs, essentially.

Video Games: Video games themselves can be sold as NFTs, where the game is pure software and the NFT is a license key to play. Within video games, DLC and in-game items are a great use-case for NFTs as they can become forcibly scarce, yet easy to distribute without fear of pirating. Unlike current scarcity solutions, NFTs can easily be resold. If you don't want to play your video game anymore, easily resell it to someone else online in an instant.

Physical Validation: Shoes, watches, handbags, and many other apparel items are frequently counterfeited. If you could tie a physical item to an NFT, you could easily validate the item by confirming its accompanying NFT on the blockchain.

Other: medical documents, legal documents (title to your car), subscriptions

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