NFTs: What are they good for?

This post was originally published on the Token Daily blog. Token Daily is an excellent resource for discovering high-quality crypto content.

Much of the excitement and attention in crypto today is around cryptocurrencies as a new form of money and store of value. These fungible assets are (theoretically) identical to one another. If you dig deeper, you’ll start to discover another blockchain use case — non-fungible assets where every individual token is unique and distinguishable. Unique metadata like individual token IDs, avatars, and even chain of custody mean no two tokens are identical. Today, they’re known as non-fungible tokens (NFTs) based on Ethereum’s ERC721 token standard. They’ve been used to represent collectibles, debt, software licenses, and other forms of tokenized information that require uniqueness. In this post I’ll explore what makes these tokens unique, how they’re being used today, and the potential opportunities going forward.

It starts as a toy

In an often referenced post by Chris Dixon, Chris cites that “The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a toy…Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs.” This is the current state of NFTs right now.

The main use case for NFTs today has been cryptocollectibles like CryptoKitties — a collectible cat game where each cat is scarce, unique, and represented as an NFT — which is as you might guess, a toy. The game has limited interactivity and revolves around the assets themselves. And yet, despite the scalability and usability challenges of crypto today, CryptoKitties has minted 800k+ kitties, facilitated over $25 million in aggregate transactional value, introduced 10’s of thousands of new consumers to crypto, and kickstarted a whole new ecosystem of developers and apps building around the ERC721 standard.

For fully on-chain dapps like CryptoKitties, usage (or lack thereof) is public. It’s no secret that CryptoKitties’ DAU is down 98.7%. While DAUs may not ultimately be the best metric to evaluate these new types of assets, critics of cryptocollectibles today will cite that the hype has already subsided. They’re not wrong, however the very properties that made Cryptokitties unique are the same properties that may lead to the next wave of consumers interacting with crypto.

What makes NFT-backed digital goods unique?

NFTs exist at the intersection of programmable value and access. Starting with cryptocollectibles, NFTs enable sound digital goods and offer:

Provable scarcity — Each digital good is a unique token and its unique existence is provable at any time.

Implications: Digital goods that need to be unique now can be because they can’t be copied. For example, digital event tickets are often duplicated and resold. With NFTs, a ticket issuer can prevent counterfeits and allow consumers to have confidence in what they’re buying.

Programmability — The token itself references all unique information about the good, but since blockchains are public, other apps can build their own experiences that incorporate the tokens. CryptoKitties is doing this with their KittyVerse which already has 30+ apps building around the Kitty assets.

Implications: NFTs enable digital goods to be used, collected, and combined in unique ways both in 1st party (those who create the asset) and 3rd party experiences (those who are building second layer apps around them) that were not possible before. Developers are just scratching the surface of what’s possible here.

True ownership — For the first time, consumers can truly own digital goods they buy or earn — the goods can never be taken from them. The goods’ existence are no longer dependent on a single centralized organization, but rather the underlying decentralized protocol itself.

Implications: Digital goods can now live on even if the service who created them ceases to exist. NFTs that represent these goods are cryptographically secured and remain intact on the blockchain. Extrapolating further, this implies goods can now exist well beyond one’s lifetime and be inherited by future family descendants. Similar to how cryptocurrencies enable self-sovereign money, NFTs enable self-sovereign digital goods.

Liquidity — Blockchains offer unstoppable, trustless, international, 24/7 value exchange. Digital goods owners can now price their goods and safely trade/sell them worldwide.

Implications: All tokenized assets can be valued and bought by a global audience. Digital goods can be put up for auction on marketplaces like Rare Bits without having to worry about counterparty risk. Additionally, they can extend digital commerce in new ways across different apps. Imagine seeing a digital artist tokenize their work and later have it featured in a blog post authored by an independent fan. A reader of the blog post could theoretically purchase the item directly in page and have it instantly transferred into their wallet right as they read the post.

Visible chain of custody — All aspects of ownership — i.e. who owns it, holding period, etc — are now public and accessible.

Implications: While identity is still a necessary layer to make sense of this custody chain, everything from creation to a digital good’s 100th owner is accessible. Desirability and pricing of individual digital goods could vary based on who created it, as well as who previously owned or used it.

Depending on the type of digital good, some of these properties matter more than others. Where things get interesting is the combination of these properties to enable new use cases that have never existed or simply weren’t possible with pre-crypto digital goods.

Consider the scenario:

A well-known creator generates a cryptocollectible and sends it to a consumer. The market sets a price on the collectible based on properties like its rarity, utility it provides, who created it, and how it was earned. The consumer then trustlessly lends the collectible out to another consumer who commits to paying a weekly lending fee as a percentage of its market value at the time. As lending fees are received by the lender, a portion of the fees are automatically sent back to the creator as a royalty payment.

In this example, digital goods, and the utility they provide, can be trustlessly borrowed and generate new forms of value. It might sound crazy on the surface, but the primitives and apps being built right now make the above possible in the near future.

Ushering in the next wave of consumers to use crypto

The barriers to use most crypto products today are still high: usability is poor and confusing, the learning curve is steep compared to how mainstream consumers interact on the internet today, and blockchains don’t scale (yet). Despite all of this, there’s a good chance that the apps that bring the next wave of millions of people into crypto are based on these kinds of goods.

NFTs make crypto feel tangible in a way cryptocurrencies don’t. They’ve inspired a new wave of entrepreneurs and developers to build and experiment with digital goods in unique ways. While it’s all a form of consumer experimentation right now, the next killer crypto app might just start as a toy based on NFTs with the end consumer unaware they’re interacting with a crypto-based digital good.

As I’ve been going down the crypto rabbit hole, I’ve become intrigued by the potential of NFTs. I actively tweet @toddg777 about NFTs, the broader crypto ecosystem, and products/projects that will help accelerate consumer adoption and usability.