Why are Non-Fungible Tokens Valuable?
Blockchain technology is one of those rare advancements that can uproot a variety of different industries and fundamentally change many processes. In its current state, however, many of these potential applications are just that — potential. An area of blockchain technology that has produced some of the earliest traction is Non-Fungible Tokens (NFTs — essentially digital collectibles). While there are certainly projects that have yet to launch or be fully developed, the current projects in market (CryptoKitties, KittyHats, Crypto Punks, etc) have helped prove the worth of the space. By doing so, I believe that the NFT market has become a better channel than general cryptocurrencies to help bring applications of blockchain technology into the mainstream. In the below paragraphs I’ll briefly discuss what NFTs are, where the current market is and why it is prone to help increase adoption of blockchain technology.
The word fungible describes an item that can be replaced with another identical item. Thus, being non-fungible means that a specific thing is unique and has differentiated characteristics of limited quantity.
“NFTs are unique and distinguishable tokens, mostly implemented on the Ethereum blockchain as ERC-721 tokens, which have individual traits and identities.”
Think of these tokens as digital collectibles or property like baseball cards, works of art or even legal documents.
Since early humanity unique and rare collectibles (such as beads, shells and elements) have been popular and often trigger strong emotions. By creating digital scarcity on the blockchain NFTs create digital objects that can be verified as real without going to a third party like a bank or lawyer. Current examples of virtual goods and downloadable content (DLC) are accessories, outfits, “skins”, additional game levels/maps and more. All of the virtual goods and DLC are purchased by people online and used in games to make their character more unique or to add a new experience for the player.
There are a variety of categories in the virtual good and DLC space. In one such category, (“add-ons” i.e. extra maps, levels, etc) EA made over $1B in 2016. If you group together what people spend on rare “skins” (essentially paint-jobs for cars, guns, etc), gear for their character and a few “crypto-collectibles,” this number jumps into the double-digit billions mark. With regard to the current crypto collectible market, there are some CryptoKitties selling for over $60k and even one that sold for $113k.
Why NFTs are valuable?
The trustless nature and scarcity of NFTs create attractive reasons to own them. NFTs are flexible because they are on the blockchain and thus trustless (not subject to a third-party for storage, validation, etc). If a game shuts down, the NFTs used in that game can still be owned by their buyer because they are in the sole custody of that purchaser and not in a database owned by the game developer. Thus, the trustless nature of NFTs creates a custodial advantage of digital collectibles versus current virtual goods and DLC. Further, the contract on the blockchain that is used to create the NFT will show exactly how rare the collectible is. As there is no overseeing third-party, there is no threat of dilution beyond what is in the contract. The transparent scarcity and custodial advantage of NFTs give them a competitive advantage over the currently available virtual goods and DLC. As the NFT space grows, people will begin to appreciate blockchain technology for its advantages over traditional trust systems and become more likely to adopt it in other parts of their lives.
Areas where I’m excited to see NFTs:
- Legal documents
- Games (“skins”, maps, etc)
- Traditional collectibles (cards, accessories, etc)
Applications of the above will also be interesting (i.e. KittyRace using CryptoKitties to race against one another).
A few NFT Projects:
- Crypto Kitties
- KittyRace
- KittyHats
- CryptoPunks
- Decentraland
- Ethercraft
- Ethermon
- Ledger Legends
- Dharma
- CryptoPets
- Crypto Bots
Additional Resources:
- Digital Collectibles and Weird future of digibles
- Anatomy of ERC 721
- Could crypto collectibles be worth trillions?
- Trustless digital assets (NFTs)
- Zombies eating Kitties
- Digital Collectibles: A New Category of Tokens Emerging
- An Overview of Non-fungible Tokens
