Non-Fungible Tokens, or NFTs, have soared in popularity over the past two years as a means of trading digital art. But the blockchain landscape evolves fast, and NFTs have many potential uses – both online and in the offline world. While art was their first killer application, NFTs have plenty more to offer.
What Is An NFT?
Most digital assets, such as BTC, ETH, USDC, and TIME, are ‘fungible’. There are many of them – typically millions or billions – and the tokens are all interchangeable with each other. One USDT is exactly the same as another. They are also highly divisible, often down to millionths or billionths of a token.
NFTs are unique or limited-edition runs of blockchain tokens, which cannot be subdivided. A token can therefore only be owned in its entirety, or not at all.
These properties have made NFTs a popular means of trading special digital assets: one-off or rare series of items used in a wide range of applications across the blockchain world, and increasingly away from it. Here are six of the most noteworthy use cases for NFTs.
When a physical painting is bought and sold, its ownership is always clear. One instance of the painting exists in one place. In the digital world, though, things are very different. If an artist creates a digital image, what does it mean to sell it, when anyone can copy the same image unlimited times?
NFTs offer a means of registering the provenance and ownership of digital images in a way that was impossible before blockchain. While the artwork itself can be copied (just as anyone can take a photo of the Mona Lisa or buy a reproduction), the NFT contains a unique digital fingerprint of the file, as well as a record of who created it, and when.
This kind of virtual receipt allows digital artworks to be traded effectively for the first time. The idea caught the imagination of the crypto community but quickly spread beyond it. Digital art is now big business, with mainstream auction houses like Christie’s getting in on the action. Some of the most valuable art ever sold takes the form of NFTs, such as Beeple’s Everydays – which, at $69 million, makes the creator one of the three highest-selling living artists in the world.
In the early 1990s, the music industry ran into the existential problem of file-sharing. As with digital images, MP3s could easily be copied and distributed, forcing record companies to pivot or go out of business. NFTs and blockchain have offered musicians a new toolkit for monetising their work.
For example, NFTs allow musicians to sell new tracks with specific terms or special conditions attached. They can write a new song, perform and record it, and sell it to a single ‘superfan’ as an NFT that provides exclusive access to the music file. The NFT can even confer lifetime rights on the buyer, or can come bundled with other material such as artwork, videos and more. There may be a single copy, or a limited edition run of a few hundred. This is the approach that Grimes, ex-girlfriend of Elon Musk, used to sell almost $6 million worth of tokens in a matter of minutes in March 2021.
Royalty payments can even be coded into the NFT smart contract, so that whenever a token is sold on the secondary market, a percentage of the price passes back to the artist – ensuring the musician always benefits from activity on the secondary market.
Blockchain games have emerged as a major new subsection of the gaming industry. These games reward users with tokens that, since they are hosted on the blockchain, can be transferred and traded on internal and external marketplaces, independently of the game itself. The tokens include regular ‘fungible’ tokens that serve as in-game currencies. However, NFTs are also used to represent anything from users’ characters themselves to weapons, land, skins, special items, and much more.
The ability to distribute tokens that have real value through gaming activities has given rise to the Play to Earn (P2E) sector, which includes games such as Axie Infinity, Illuvium, Gods Unchained, and many, many more. Users can generate meaningful income by playing their favourite titles, monetising their activities for crypto in various ways. They can simply play, earning the game’s native currency, which can be traded for other cryptos or fiat money. But they can also develop their characters, which take the form of NFTs, through playing successfully. These NFTs can then be used to generate higher earnings, because the characters are more experienced and powerful. Consequently, they can also be sold for more money on the secondary market. A system of P2E ‘scholarships’ has even grown up around the blockchain gaming world, allowing owners of valuable NFTs to lend them to players in return for a proportion of their daily earnings.
It’s not just items in the digital world that can be represented as NFTs. Non-fungible tokens are playing a vital role in digitalising real-world assets, enabling them to be traded on the blockchain and integrated into DeFi protocols.
Just like digital assets, real-world assets can be fungible (currencies, bonds, stocks, etc) or non-fungible – items that have value but that are not immediately comparable to other assets. Examples include property, paintings, classic cars, and diamonds. Despite their value, these are often illiquid; it’s difficult to trade them because the market is inefficient and it can be hard for sellers to find and communicate with buyers.
By ‘tokenising’ these assets, linking them to NFTs, it’s possible to integrate them with frictionless, global, 24/7 blockchain-based markets. Examples that already exist involve tokenised diamonds, real estate, and more unusual assets like invoice financing (short-term loans against money due to be received). Once they are tokenised, it’s possible to borrow money against these assets, just as protocols like Compound and Aave allow borrowing against regular crypto tokens.
How do you categorise a project like Bored Apes? On the surface, Apes are a limited-edition run of NFTs in the same vein as CryptoPunks, which are highly valuable as some of the earliest and most iconic examples of digital art. But the Bored Ape Yacht Club is far more than that: It’s ‘A limited NFT collection where the token itself doubles as your membership to a swamp club for apes.’
The artwork – 10,000 unique images with different rarity characteristics – makes Apes intriguing collectibles in their own right. But Apes are part of a much larger metaverse ecosystem, with holders granted access to exclusive features, gaining priority placement for new NFT projects, and receiving regular airdrops that can be enormously valuable in their own right. For example, Ape holders were all dropped a ‘serum’ token that allowed them to mint a Mutant Ape, as part of a larger run of 20,000. Anyone who held a Bored Ape or a Mutant Ape later received an allocation of the much-hyped ApeCoin token, with Bored Apes being dropped a larger amount.
Apes, then, are a very special kind of metaverse token that act as an Access All Areas pass to an ecosystem of games, participation in digital worlds, and a flow of new NFTs.
Given the versatility of NFTs, it should come as no surprise that they are increasingly being integrated into DeFi platforms. Real-world assets are just one use case. More and more, NFTs are being used as vouchers for specific functionality. This is a little like the financial doors opened by having a high enough balance or trading volume, or the benefits of a ‘gold’ or ‘platinum’ credit card.
For example, Teller Finance has issued NFTs that unlock the ability to access loans without collateral. Charged Particles allows users to create NFTs that contain other digital assets, including further NFTs and ERC20 tokens. This enables the creation of interest-bearing NFTs. Meanwhile Ruby.Exchange is pioneering NFTs that provide perks like reduced trading fees on the AMM and higher yields for liquidity providers. And, of course, several major DeFi projects have begun to incorporate NFTs that represent digital and real-world assets as new types of collateral.
NFTs have many other potential use cases, with examples around identity management and access to online services being some of the most interesting to watch in the coming years.