More Than A JPEG
By: @0xLayerTwo
Being immersed in NFT culture, one can understand the appeal. There is a strong and outspoken community with numerous well developed sub-communities thriving within the greater ecosystem. There is novel technology with a plethora of use cases that would greatly benefit the public when properly applied and integrated. There is financial opportunity for those who are willing to take the risks. Yet, with these positives, there are certainly negatives.
There is a new scam or rug pull daily that drains liquidity and enthusiasm out of new users. There is a new story every day about a malicious link draining tens or hundreds of thousands of dollars worth of NFTs and Crypto from unsuspecting users in an instant. The chart below from analytics firm Chainalysis shows that approximately $20 Billion has been drained from the market by scammers.
So how do I convince someone like my Mom, Dad, or non-crypto friend that NFTs are anything more than a scam? By focusing on what they can be.
What are NFTs?
NFTs (Non-Fungible Tokens) are tokens that we can use to represent true ownership of items that are not fungible, or interchangeable for other items because they have unique properties. They let us tokenize things like art, collectibles, membership, event tickets, real estate, legal documents and whatever else one may think of. I say they represent true ownership because they can only have one official owner at a time (the wallet that holds it) and that ownership is open and notorious, meaning the entire world can see what wallet owns it by simply looking up the NFT on their chain of choice’s native block explorer.
On the other hand, items that are fungible are not unique, in the sense that a $100 USD Bill can be exchanged for a different $100 USD Bill and the holder would be in the exact same position it was in previously. Each NFT has a unique code that identifies it, and no one can modify the record of ownership or copy/paste a new NFT into existence (yes, even if they can right click save as on your image).
NFTs are minted through smart contracts that assign ownership and which can even manage the transferability of the NFT's after the mint (whether that is a free or paid mint). This allows creators to continue to earn as their work becomes more valuable by setting a secondary royalty (typically somewhere between 2.5-10%, but this is completely up to the creator). For example, if an artist starts out small and sells their initial collection of 100 digital 1/1 pieces for 1 ETH, and over time, this artist rises in popularity and that initial work that was worth 1 ETH is now worth 20 ETH. Every transaction that occurs along the way will contribute that royalty amount back to the creator, so if their work becomes more valuable, they will see some of the benefit.
This is also applicable in a larger scale and more commercial setting. Lets say the NFL moves to an NFT Ticketing system. Even setting the secondary royalties as low as 1-2% would drive incredible revenue back to the teams and league and allow them to share in the revenues of those who are selling their tickets. Smart contracts would even allow them to limit the royalty to only being applicable if the NFT is sold for more than it previously was, so they only share in the profit, but allow ticket holders to recoup as much of the loss if possible if taking one.
The Many Use Cases of NFTs
As we established above, the potential use cases are only limited by the imaginations of creators. That being said, there certainly are specific use cases that are amongst the earliest being explored. Lets dive into some of the use cases that we currently see in the space.
Art
By far the most abundant use case today, programmable art is redefining the landscape for content creators, combining creativity and technology uniquely to allow for greater flexibility in terms of delivering content to ones community.
Artists such as Murat Pak, Beeple, Snowfro and many many more have thrived with this freedom, developing hardcore communities and interacting directly with them without the need for art brokers, galleries, or any advertising other than social media (and maybe a discord). There has been a proven return for artists willing to cultivate an organic community, and there is no longer a need to have thousands or millions of followers worldwide to make a living with art.
Art can also be used as a tool for social movements. In the most famous occurrence yet, Clock, an NFT created by Pak, who is known for using unique token models. The dynamic NFT, meaning the metadata updates causing the image to change, shows the total number of days since WikiLeaks founder Julian Assange was imprisoned. AssangeDAO, which was formed to raise funds for his legal defense, ultimately raised and bid just over 16,593 ETH ($52.7 million) to purchase the NFT. Pak then donated the funds to the Wau Holland Stiftung Moral Courage Project to aid in Assange’s defense.
Supply Chain
With the promise of benefits to all supply chain partners, blockchain has blended effortlessly into the world of fashion, shipping, produce, and more. Consumers can simply check the information they need to check in relation to one of their purchases and accessories online, eliminating the danger of counterfeiting or deceptive trade practices. For example, users might simply scan a QR code found on price tags for garments and accessories in the form of an NFT, or a supplier can scan an item out as it leaves the supplier and upload it to the blockchain with pictures or other data, and all parties involved can be held accountable for late shipments or damage to items because we will be able to prove whos custody they happened in.
Education and Professional Licensure
NFT use cases can also provide significant benefits for confirming educational degrees, professional licenses and certifications. Successful students are typically issued course completion certificates in either digital or physical format, similar to any other degree or license. Administrators at the K-12 Level, University, and even governmental levels could save a lot of time using NFTs to access and manage such data. NFT-based degrees, certificates and licenses relieve the load of record checking and verification. As a result, the technique makes it easy to keep track of proof of course completion or licensing.
Further, Vitalik Buterin has discussed the idea of Soulbound Tokens, or Tokens that cannot be transferred from wallet to wallet (and potentially can not be removed, or can only be revoked by the grantor). In relation to licensure and education, this would ensure that people are not able to create a false market for licenses and degrees. The thread below goes a little deeper into Soulbound Tokens if you are interested.
Ticketing
Blockchain technology's immutability (inability to be changed) aids in the prevention of counterfeit collectibles and tickets. Tickets are a gating mechanism, designed to grant their holders access to an event or offering. Whether it’s for a sporting even, class or concert, a ticket is a one-of-one pass granting access only to its holder. We already see token-gated discord servers, and we see token-gated events during weeks such as Art Basel, NFT NYC, and more. In the United States, secondary sales are massive market, equating to a nearly $12 billion secondary market and accounting for nearly 20% of the domestic ticket market, according to SeatGeek management estimates for 2022. I am willing to bet that the sum is even larger, not taking into account unreported sales via generalized payment processing apps like Venmo, Zelle, CashApp or just giving someone cash in the parking lot. Using smart contracts, an event organizer can set automatic royalty payment any time a ticket to their event is resold, unlocking a whole new kind of post-sale revenue capture for creators.
Membership
Like traditional membership programs, NFT-based programs can take many different forms. For example, NFT ownership can unlock access to an exclusive online community like Bored Ape Yacht Club or Proof, provide users with voting rights in a DAO like LinksDAO, or offer access to a private dining club and culinary experiences like Gary Vee’s Flyfish Club.
NFT-based memberships are more beneficial than traditional programs for a host of reasons. We have discussed that it is impossible to counterfeit membership NFTs or create duplicates. This helps brands prevent fraud. It also assists individuals in that users no longer need to worry about losing their physical cards or forgetting their sign-on information. Further, limiting the supply of memberships and creating scarcity through NFTs allows massive global brands that are used to catering to millions plan and focus on delivering exceptional experiences to a much smaller and specialized group of core holders.
Real Estate
NFTs, in theory, can provide easy ways to transfer ownership of ones home in a fraud-proof way eliminating the need for title insurance, shares in real estate investments or virtual real estate, and can be used for financing purposes.
NFTs could allow people to buy and sell fractional ownership in rental properties, potentially in a liquid market without a middle-man. This would open up the world of property investing to many more people and create better options for those that need to unlock equity without borrowing or moving.
In the future, it may be possible to borrow by issuing NFTs backed by ownership of your property. Individual investors could then buy an NFT representing a small part of the debt. Holders of the NFTs would then receive repayments via the blockchain in proportion to how much they lent out.
The possibilities of NFTs are endless, and their applications and use cases are in their tadpole stage. It is easy to understand why people who haven’t taken the time to understand the potential applications and use cases that could be generated from the technology underlying those JPEGS.
Not financial, legal or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. All opinions expressed are solely those of the individual author. This newsletter is not legal advice and does not create an attorney-client relationship. This newsletter does not constitute tax advice. Talk to your independent attorney and/or accountant for any questions specific to you. Always do your own research and use caution when interacting with smart contracts or the blockchain