The Growing Ecosystem of Non-Fungible Tokens (NFTs)

Updated: Jun 29

This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.


Written by Guest Contributor, Adi Ben-Ari,

Founder & CEO of collaborative application builder, Applied Blockchain

. The third most expensive auction sale ever of a work by a living artist ($69,346,250 million). “Everydays: The First 5000 Days,“ a collage, by the digital artist Beeple. Christie‘s images via Reuters.
. The third most expensive auction sale ever of a work by a living artist ($69,346,250 million). “Everydays: The First 5000 Days,“ a collage, by the digital artist Beeple. Christie‘s images via Reuters.

This month prestigious auction house Christies sold a single lot of digital art using blockchain NFT (nonfungible tokens) for $69,346,250 million. The auction was watched live by 22 million people. “Christie’s had never offered a new media artwork of this scale or importance before,” says Noah Davis, specialist in Post-War & Contemporary Art at Christie’s in New York. “Acquiring Beeple’s work is a unique opportunity to own an entry in the blockchain itself created by one of the world’s leading digital artists”.


The Christies sale is significant for a number of reasons:


  1. Christies is a world-class institution built on trust and reputation.

  2. The artwork is in digital form.

  3. The ownership record is in the form of a blockchain NFT on the Ethereum blockchain.

  4. Christies received payment for the work in Eth (the cryptocurrency behind the Ethereum smart contract platform).


The National Basketball Association (NBA) is a professional basketball league in North America. In 2019-2020 turnover for the NBA was $8.3 billion. In July 2019 a joint venture was created between the National Basketball Association, the NBA Players Association and Dapper Labs, and in October of 2020 the NBA Top Shot beta site went live. In a few short months the platform has generated over $200m in earnings. NBA Top Shot provides collectible digital “moments” from NBA games. The ownership record is in the form of a blockchain NFT recorded on the Flow blockchain developed by Dapper Labs.


Rapper MF DOOM created a set of augmented reality masks, and subsequently minted NFT’s to represent their ownership. The masks are hosted on augmented reality (AR) platform Illust Space. Unfortunately, and coincidentally, he died on Halloween, the same day that the NFT sale concluded. The collectibles are likely one of his last creative projects. His private keys are now in the possession of his family, and smart contracts will continue to automatically transfer royalties to them from every NFT sale in perpetuity.


On Friday, 5th of March 2021, Jack Dorsey, CEO of Twitter, launched the sale of the first Tweet posted on the social platform as an NFT. The NFT is on sale at a current price (at the time of writing) of $2.5m on the Valuable marketplace which offers collectible tweets.


These events are significant in terms of the value attained as well as the parties involved. Many organisations are now exploring the opportunity offered by NFTs. Some are more strategic, such as NBA Top Shots, while others are more opportunistic in nature.


It is worth unpacking these developments, and examining the technical, legal and strategic aspects.


The cost of replicating an item in the digital world is almost zero. Think of the copy and paste mechanism that damages the rights of economic use of photos or other works of art on the internet. Blockchain doesn’t prevent this. It doesn’t protect the data or the digital representation of the item. However, blockchain NFT’s allow ownership of the items to be recorded, shared, published, and potentially openly traded across multiple venues, thereby increasing their liquidity. They also allow royalties to continue to be paid out to the original creators regardless of where or how the items are sold.


It is important to understood that the blockchain record (NFT) does not:


  1. Provide unique access to the digital item

  2. Prevent duplication of the digital item

  3. Provide legal ownership rights or copyright, unless explicitly granted in the terms of agreement where the item is sold.


NFT’s do:


  1. Prevent duplication of ownership records.

  2. Refer to a digital item.

  3. Include cryptographic proof that they (the ownership records) were created by the artist, if such proof is provided.

  4. Provide an efficient mechanism for sale and trade over digital platforms


Recent NFT sales demonstrate that such ownership records, in particular those that are rare, are highly valued. It should be noted that the digital item itself cannot be rare, as it may always be replicated and distributed, but rather it is the ownership record itself that is rare.


Items, especially those of an artistic nature, become digitally rare as their ownership records are nonfungible, that is, they are unique. Non-fungible tokens are tradable, universal blockchain-based ownership records for specific items. Unlike digital currencies such as Bitcoin, and fungible tokens such as utility tokens, non-fungible tokens are not interchangeable with each other.


One of the attractions to NFT’s is that, unlike physical items of value, they can be easily traded and exchanged over the internet.


THE MAIN CHARACTERISTICS OF NFT ARE THE FOLLOWING:


Uniqueness: NFTs contain metadata where various information may be recorded. This information includes properties and reference to the digital item, making the ownership link.


Authenticity: Blockchain technology enables proof that the NFT originated from the order (assuming their public key can be verified), and an immutable history of prior trades.


Ownership: It is possible for the owner of a unique token to identify themselves, and to transfer ownership to others.


Rarity: The value of NFTs comes from their scarcity. Developers of these tokens often limit their distribution in order to increase rarity


Indivisibility: NFT’s in their basic form can only be bought, sold and stored in their entirety. It is possible for the owner to fractionalise an NFT using an additional set of smart contracts.


Verifiability: Being anchored in a blockchain, items can be traced back to their original creator, allowing pieces to be authenticated without the need for third-party verification


From a technical perspective, NFTs represent a particular type of cryptographic token that is defined:


  1. Using a standard; for example Ethereum ERC-721) and ERC-1155. Ethereum is by far the most widely used platform for NFT’s, and the standard definitions enable liquidy across multiple venues and exchanges. However, Ethereum suffers from a high transaction fee (can be as high as $50 per transaction, depending on the price of Ether), and low throughput leading to long transaction confirmation times (hours, even days).

  2. Natively in the general purpose blockchain platform (e.g. Algorand). Algorand offers native NFT token capability, so no need for a standard smart contract, low transaction fees and high throughput capabilities.

  3. Natively in a dedicated NFT blockchain platform (e.g. Flow ). The developers behind CryptoKitties, DapperLabs created their own blockchain, Flow, and used it for NBA Top Shot. The platform is proprietary, has a low transaction fee and high throughput, but is managed by a single commercial entity, and it is still unclear how open the platform will be.


Types of NFT marketplace (custodial, OpenSea)


NFT Custody


Particular attention should be paid to custody of an NFT, which, just like cryptocurrency, may be held by a third party custodian or exchange, or in a digital wallet held by the owner. A number of NFT marketplaces have appeared recently, and some differ in the way they handle custody. In the cryptocurrency world we have custodial exchanges like Coinbase and Kraken and non-custodial exchanges (typically decentralized exchanges) such as Uniswap. The tradeoff is between usability (e.g. using a simple web or mobile application that most people are familiar with) vs self-custody, which involves giving the user a wallet that they must understand how to install and use. Similarly, in the NFT world there are marketplaces that provide a simple, standard web user experience, such as NBA Top Shot and Nifty Gateway, on the one hand, and marketplaces that assume self-custody, such as OpenSea on the other.


NFT USE CASES

The technical model of the non-fungible token is likely to become application in many areas:


  • Art. Blockchain NFT’s can be used to address known problems in the art world including: property, corporeality, manipulation, and value.


A recent Netflix documentary “Made You Look” describes an $80m+ fake art fraud that led to the downfall of one of New York’s most reputable galleries and dealers.


The ability to combine the identity of a work with the creative path of the same, and to bring this history to the blockchain NFT, allows each creative action and passage of the work to be documented in immutable form, which maintains information and generates provenance that is harder to forge. The structure “tells” the entire story of the work, and it would be very difficult to alter its sequence. The artwork metadata stored in the NFT must, of course, uniquely identify the physical or digital work.


  • Collectibles. Music, and rare collectibles are just some examples of real objects whose ownership records are digitized with NFTs. In practice, these NFTs could represent fractions of physical assets, including real estate, cars, or wines that can be stored and exchanged as tokens of ownership on a blockchain.


  • Supply Chain. NFT’s can also be used to represent physical components and products flowing through a supply chain. This enables provenance checks to be made on a per-item basis. Some benefits of tokenizing these assets are proof of quality control, ethical sourcing and the reduction of counterfeiting, although these do depend on the ability to scan and uniquely identify the physical item.


In supply chain we generally see blockchain applied at three levels:


  1. Organisations: NFTs can be used to identify organisations and their credentials (e.g. anti-slavery, ISO certification)

  2. Paperwork: The traditional supply chain system records all the property titles and registration, contracts, purchase orders, invoices and payments through cumbersome paperwork. Blockchain can digitize and connect the entire process, and some documents could be securitised (e.g. invoices) using NFT’s.

  3. Products and components in a supply chain should be represented as an NFT.

  4. NFTs can be used to track materials as they move through the supply chain, and they can represent the provenance, the quality assurance, and sustainability properties of products.


Liquidity


The possibility of certifying and digitising ownership records of both physical and digital items in a way that they can be openly traded in multiple venues introduces speculation and increased liquidity to previously illiquid markets. Major players are rapidly moving in this direction, seizing the opportunity to capitalize on a broader shift towards tokenization and digital assets.


Developments in public blockchains, including decentralised exchanges (DEX) and decentralized finance (DeFi) are creating tremendously efficient alternative financial services infrastructure. NFTs are starting to do the same for collectibles and unique items. This is the real value of NFT’s: bringing liquidity to previously illiquid markets and items.


Developments in public blockchains involving cryptocurrencies, including Decentralised Exchanges and Decentralized Finance (DeFi), are creating tremendously efficient alternative financial services infrastructure. NFTs are starting to do the same for collectibles.


Whether you attach any value to the speculative activity or not, you cannot ignore the maturing and growing mainstream adoption of the technology.



References

  • Decrypt: MF DOOM, Enigmatic Rapper Leaves Behind Crypt