NFTs and Dynamic NFTs (dNFT) Guide 📚🗽 (all about NFT’s)
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It all started with the popularization of NFTs and the emergence of different use cases. NFTs have become one of the foremost applications of blockchain technology. And then, replaceable and upgradable NFTs appeared. These switchable NFTs, which we call dynamic NFTs (dNFTs), have begun to expand the design space that NFTs can address thanks to their ability to adapt and change in response to external events and data. Now do not think about what these are, do not worry. 😅
In this content, I discuss what NFTs are, the difference between Static and Dynamic NFTs, how dNFTs take NFTs’ uses to the next level, current and potential dNFT use cases, and potential problems. Here we go! 👻
Sub-headings in this Guide are as follows:
- Understanding NFTs
- Non-Fungibility and Fungibility
- A brief history of NFTs
- What are NFT use-cases
- NFTs and Metadata
- Static NFTs
- Dynamic NFTs
- dNFT Examples
- Potential uses
- Oracles for dNFTs
Shall We Start With Understanding NFTs?🛠️
NFT’s offer users a new ownership and distribution model. Imagine purchasing a digital artwork on the Internet for a reasonable price and receiving a unique digital TOKEN that proves your authority or ownership over the artwork you purchased. Wouldn’t it be great? That’s basically what NFT is.
“Non-Fungible Tokens or NFTs are digital tokens created on a blockchain AND each representing something unique, such as digital artwork, a special in-game item, trading card collections, or any other distinct digital/physical asset.”
Here we first need to understand the concepts of fungible and non-fungible.
Fungibility & Non-Fungibility🛠️
Simply put, fungibility means that assets are mutable, exchangeable, and have lots of themselves. How does? My Dollar is the same as your dollar. And you can change $100 into two separate $50. Or you can exchange 5 $20 for $100. Can’t you?
Immutability, that is, non-fungibility, when strictly defined, means only one original asset. We cannot exchange any painting for a genuine Van Gogh painting, it is not an equal deal because to be equivalent to each other, they must be of the same breed.
What makes a work of art special is that it is unique. This is actually called non-fungible.🌍
For example, let me add an image of how much of the assets on Walmart’s balance sheet are non-fungible. This image also helps us to understand the difference between the two concepts:
Non-Fungible tokens, or simply NFTs, extend the concept of non-tradable by leveraging blockchain networks like Ethereum to represent unique physical and/or digital assets.
NFT ownership is verified and tracked from the outset using a public blockchain, allowing users to verify the origin and ownership of any NFT.🏖
For this reason, NFTs are best described as a “certificate of authenticity” issued by the original creator on the blockchain, which provides cryptographic proof that the official entity to which an NFT is linked is the rightful owner.🎡
What advantages do NFTs provide? For example, what privilege does having an NFT give us? :
✏NFTs allow artists to monetize their digital artworks,
✏They allow games to create provably rare in-game items, for example, they allow creating game avatars,
✏NFTs also promote digital collectibles ecosystems, encouraging the creation of collections,
In fact, it is not limited to these. We will examine the new use cases and examples of dNFTs, which increase the usage areas of NFTs in particular, to this ecosystem. It provides a wide range of benefits such as arrows and more.
A Brief History of NFTs 📊
NFTs first became popular in 2017 with the release of CryptoKitties, a decentralized application (dApp) for users on Ethereum. Thanks to CryptoKitties, users were feeding and collecting digital cats. However, 2021 saw a significant resurgence in interest in NFTs, both by collectors and artists.
Additional information: The ERC721 standard has accelerated both the development and release of new NFTs and the creation of various marketplaces such as Rarible, OpenSea, and SuperRare.
NFT marketplaces, as the name suggests, are platforms that allow users to seamlessly list, buy and sell NFTs, supporting the growth of the NFT ecosystem. The volume of NFTs traded in these markets continues to grow, with over 100,000 active users gaining over $1 billion in volume per month.
Another purpose of NFTs is to increase efficiency in the ownership and transfer of ownership of the original assets. NFTs also aim to reduce the need for middlemen, especially given the exploited labor of Marketplaces and creators.
What are NFT Use-Cases? 👻
NFTs actually offer a flexible and broad framework for monitoring and benefiting ownership of a wide variety of digital and physical assets using a blockchain network.
The variety of use cases for NFTs is growing every day, but here are a few common NFT use cases that are emerging today:
📌 Digital Art NFTs
By symbolizing their work, artists can monetize their craft and then tap into the global market of potential customers who only need an internet connection to purchase. Unlike regular art products, NFTs can be listed on global, permissionless, and online marketplaces and can even provide creators with revenue from all secondary sales.
One of the most recognizable NFT use cases is tokenized ownership of digital artworks.
An example of NFT art making headlines is the famous digital artist Beeple. His piece “Everydays: The First 5000 Days” a collage of 5,000 images that took 13 years to create, was tokenized as an NFT on Ethereum and sold for over $69 million. Beeple has managed to monetize the digital artwork and create cryptographic proof that the particular NFT is the official copy. Beeple’s illustrations are just one of the thousands of different digital art collections released and sold worldwide as NFT.
📌 Game NFTs
NFTs are an essential component of blockchain-based video games because they allow tokenization, tracking, and transfer of unique in-game items. In traditional online video games, central publishers have full control over the distribution, ownership, and attributes of in-game items that often determine the value of certain characters and game outcomes. If the publisher has a technical problem and goes down, users will potentially lose access to all game items they’ve spent hours, days, weeks, or even more.
📌 NFT Collections🛸
Similar to collecting physical trading cards or postage stamps, NFTs empower a new type of digital collectibles. Collectors can purchase digital objects they deem valuable.
Unlike physical collections, which can be slow to transport and expensive to maintain, NFTs are fully digital so they can be transferred in seconds. As their transmission takes place in the digital world, their quality never deteriorates.
Some of the most well-known NFT collections are CryptoPunks, a collection of 10,000 unique 8-bit style characters that are algorithmically generated so that no two characters are exactly alike. CryptoPunks was one of the first NFTs ever created and was given away for free.✈
Collectible NFTs are increasingly being used as profile pictures on social media platforms like Twitter and Discord. Doing so provides a powerful signaling mechanism where like-minded individuals can show their interest in an NFT collection and join a community of like-minded individuals.
As an important note, because NFTs are stored on the blockchain, users can cryptographically prove to others that they own the image used in their profile picture.
📌 Music Album NFTs🛸
Blockchains have given music artists the ability to tokenize their work through NFTs as a way to increase revenue and increase fan-base engagement. With the Covid-19 pandemic resulting in an 85% reduction in music industry revenue, additional revenue from NFTs has helped artists offset these losses, while also giving fans a way to earn special benefits such as limited memorabilia and even direct access to artists’ time.
📌 Real Estate NFTs🛸
NFTs can also represent ownership of real-world assets, such as real estate, to provide additional liquidity to traditionally fragmented markets. The tokenization of real estate significantly increases the efficiency of ownership transfer and provides a single source of truth about the authenticity and origin of a particular property. The concept of tokenizing real-world assets can be extended to include many types of assets, such as physical statements, government documents, certificates, and diplomas.
While still in the early stages, real-world assets designated NFTs open up a whole range of new possibilities, from income-generating real estate tokens backed by rental income to issuing digital credentials without the need for a physical document counterpart.
So what’s next?
From early 2021 to the end of 2022, brands like Nike, LVMH, Tiffany & Co either started their own NFT projects or acquired NFT partners.
What else can this technology provide? To understand this, we must first understand metadata :
NFT’s and Metadata
Metadata is information that describes the elements of a resource or data. In short, it can be summarized as data/information about data. In practice, they are similar to the card catalog or bibliography in libraries. If we think of books as data sources, just as library cards give information about books, metadata also gives information about data. So how do we use NFTs and metadata together😉
👍🏻 nFTs basically consist of two main parts: tokenID and metadata
“Metadata includes all critical data that defines the entity.”
NFTs can act according to the smart contracts they are written on. For example, smart contracts can interact with protocols in a strict way. That is, the smart contract can tell an NFT what it can and should not do.
A question comes to mind here, right?
- For example, is it possible to extend NFTs beyond art and collectibles by adding more programmability and functionality? Can we make changes to the way we use NFT’s metadata?
The metadata of most existing NFTs includes names, descriptions, and detailed information that point to the media file. However, due to the flexibility of the metadata described above, metadata can be used to indicate many things. Like what?
- Expiration dates
- Underlying assets
- Usage prices
- Due dates
- Wages earned
- Third-party information
- Fixed rates
- Depreciation rates
- In-game level information
Let’s take an example right now. Uniswap v3 uses NFTs to represent the positions of Liquidity Providers (LPs). NFT specifies in its metadata the LP’s fee tier, range, pool ID, location details, size, and earned fee. Below I have included the code from the Uniswap v3 smart contract that defines the metadata for the NFTs representing the LP’s location, and you can review it:
✔ Static NFTs 👽
With static NFT, metadata is defined when the token is mined, and then there is no predetermined change to the metadata. So, for example, consider the bored monkey NFT. This NFT contains the bored monkey picture, and this NFT is not open to any changes. Having static metadata is great for art and collection NFTs because they don’t change afterward.
However, artworks and collectibles are not the only uses for NFTs. In some use cases, many properties in the metadata need to be updated to create a robust and open NFT system.
For example, wages earned accumulate throughout the liquidity supply cycle, a position’s core assets may change, players’ performance in games affects their characters’ levels. You have applied to the loyalty program and your level is increasing day by day, and you want the color and content of your NFT to change.
THAT’S WHAT MAKES IT DYNAMIC NFT
✔ Dynamic NFT (dNFT) 🎈
Dynamic NFTs (dNFTs) are NFTs that can evolve and acquire new attributes based on certain conditions, such as external data.
Static NFTs are currently the most common type of NFT and are used mainly by NFT art projects and play-to-win game projects and as digital collectibles. Beyond these use cases, they offer a unique value proposition for digitizing real-world items such as real-world property titles, patents, and other unique identifiers. However, this model is limited by the persistence of static NFTs because the metadata attached to them is fixed after they are printed on a blockchain.
Dynamic NFTs (dNFTs) have unique tokenID (ownership) and dynamic metadata.
Use cases like tokenizing real-world assets, creating progression-based video games, or creating blockchain-based fantasy sports leagues often require data to be updated. dNFTs can update the properties of their metadata while maintaining their unique ID.
Simply put, a dynamic NFT is one that can change with external conditions. A change in a dynamic NFT usually refers to changes in the metadata of the NFT triggered by a smart contract.
Metadata change is done by coding automatic changes within the NFT smart contract, which provides the underlying NFT with instructions on when and how its metadata should change.
dNFTs are referred to by some as NFT 2.0. So don’t be surprised if you see this expression.
Unique tokenIDs serve as identifiers for dNFTs, while dynamic metadata; actions may vary based on external conditions, including results or data updates.
dNFTs basically need two pieces of information to know how to update metadata:
1- when and how metadata to underlying NFT changes
2- instructions on what is needed
3- access to relevant external data sources
So where are these instructions located? Instructions are written in smart contracts and data sources come from on-chain/off-chain data fed by manipulation-proof and decentralized oracles.
dNFTs can be mined based on certain external conditions, such as a hidden location in the virtual world or a real-life sports team winning a match.
dNFTs may also contain “hidden features” that are revealed through user interactions rather than metadata. For example, the transfer function can be disabled after scanning a QR code, which is useful for using NFT as a ticket.
For example as a use case: because there are often different levels of membership (think bronze, silver, gold, etc.), it makes sense to update a loyalty NFT rather than issue a new one. Using dynamic NFTs can also unlock more customizability for customers; For example, an organization can raise NFT in some way, executing limited-time loyalty missions on each completion.
🔉Security Problem for Metadata
Having dynamic metadata definitely brings more challenges in terms of security.
Securing metadata is just as important as securing ownership, since metadata precisely defines existence.
The most common question to consider is where to host the metadata. Hosting the metadata on a central server is cheaper but prevents the metadata from being explicitly accessed. Hosting metadata on-chain can be costly because every significant change in metadata incurs gas fees. Also, all forms of descriptive attributes need to be stored on-chain (except numeric attributes), which is expensive.
What Are the Potential Uses?
NFT metadata is where the token’s name is specified, properties are assigned, and file links are placed. TokenID provides a permanent identifier for verifiable ownership, while metadata is the essence of NFT, meaning it contains the elements that make it useful.
Prolific NFT art projects often feature a variety of features, some rare than others. These properties are placed next to an IPFS link to an NFT’s metadata, an image, or a video corresponding to the NFT’s properties. In a dNFT, these properties vary with external conditions.
This functionality can be useful for character progression, which is the core principle of many different game models in blockchain games. When starting a game for the first time with a playable NFT character, NFT has key stats that are reflected in its metadata. As the player continues to level up, the metadata in NFT changes to reflect the character’s development.
Another situation where metadata changes are useful is the tokenization of real-world assets, where a set of changing metrics is often required. 🌞
For example, an NFT representing a property may reflect its maintenance history, age, market value, and more. 🏘
Symbolizing these changing entities, therefore, requires NFTs with the ability to update with changing metadata.
These are just a few hypothetical use cases for dNFTs. In reality, changes to a dNFT’s metadata can be triggered by any number of off-chain or on-chain events; this speaks to the unlimited potential that dNFTs have for expanding the NFT design space.
While the current Web3 ecosystem is mostly made up of static NFTs, a few notable projects have already launched dNFT innovation.
Oracles for dNFTs
An often overlooked component of dNFT design is how to reliably provide the information and functionality needed to create a secure, fair and automated dNFT process.
As mentioned above, dynamic NFT metadata changes can be triggered in various ways depending on external conditions. These conditions can exist both on-chain and off-chain. However, blockchains are inherently inaccessible to off-chain data and computation.
You’re probably asking the question: “Oracles are basically APIs for blockchain, right? And the answer is yes, in a way. Oracles are the equivalent of APIs for the blockchain world. However, they are not like regular APIs as you cannot use API calls for smart contract updates.
The reason is simple.
Blockchains are deterministic systems. That is, if all nodes in the blockchain perform the same transactions (transaction verification), they should come to the same state. If blockchains were not deterministic, there is no possible way to achieve consensus, as nodes would arrive at different outputs for the same executed transactions. Let’s see this with an example:
For a DeFi protocol smart contract that needs to update token prices, they need to get this data from off-chain sources. If they used API calls, the results for each node could potentially be different, depending on when the nodes executed those API calls. In this case, for any transaction derived from these prices, it is impossible to reach consensus for these nodes as the transactions will be different.
Oracles present this information as a transaction, thus eliminating the risk of asynchronous API calls with different results. That is the power of oracle.
dNFTs and the upcoming wave of Soulbound tokens
The dynamic concept can also be applied to Soulbound Tokens, also known as SBTs.
Soulbound Tokens are a unique new type of token very similar to NFTs, but with one important nuance they are not transferable. That is, they cannot be sent to any address other than the token holder, so they cannot be “linked” to the address.
SBTs can be used to display additional information about an address, and that address decides what information is actually shared publicly.
Thus, we can also see dSBTs, SBTs that cannot be transferred but can be updated. I will write another post about this later :)
In addition, if you want to develop dNFT on the Polygon Blockchain, you can refer to my article on this subject.
By the way, you can sign up for my Meetup page, join my Telegram group, follow me on Twitter to be informed about the events I organize in the Blockchain ecosystem!👻 I hope my articles, contents and shares are beneficial to you. Do not hesitate to contact me 🔮
