The Amazing Technology Behind NFTs and Why It’s Important To Web 3
What do people mean when they say they are into NFTs for the technology? Why is this so important and what does this have to do with web 3? Although NFT tech can be a bit tricky at first, its actually simpler than you think.
All it takes is a little bit of time and patients to understand this complicated industry. With that in mind, here is a quick round up of the main technology behind NFTs and how this is beneficial to the development of web 3.
Lets start with what NFTs actually are.
Put simply, an NFT is just a digital asset that you can own, such as a picture or a piece of writing. That asset has to be stored somewhere, so it is kept on a platform called the blockchain.
The blockchain is not technically a platform, though. Its actually a digital ledger that logs all the data surrounding these digital assets, such as when the asset was sold and to whom. This is much the same as a company ledger which records all their sales over a set period of time.
Now we understand the blockchain a little better, lets get a magnifying glass and look closer at how this data is stored.
NFTs are backed by something called a smart contract. Smart contracts are really important to web 3 and have been evolving over the last few years. The use of smart contacts has enabled users to revamp business models and generate new forms of business.
For example, Bacon Protocol uses smart contracts on the Ethereum blockchain to lend money for mortgages. People with a home that meets the companies criteria can use an NFT as collateral to borrow money, and users can lend money and earn interest from the protocol.
The suggests the technology behind NFTs are actually paving the way for web 3s future.
What is a smart contract?
NFTs use smart contracts as a digital sales agreement between the buyer and seller of the asset.
The smart contract allows the seller to set rules and terms for the sale, such as any royalties they want to receive on secondary sales. When someone buys this NFT, the contract ensures these terms and conditions are met and then records this sale on the blockchain. It will also execute any terms afterwards without using a middleman.
This means a smart contract is totally decentralised once it is on the blockchain.
A smart contract is a programme made of if and when statements that will activate when a condition of the contract is met. When an NFT is sold, the transaction data is compressed and coded into something called a “block”. This block also contains the NFTs unique identifiable number and the smart contract associated with it. The block is then attached to the previous block on the blockchain and the NFTs unique identifiable number can now be tracked. For example, if you wanted to track an NFT on the Ethereum blockchain, all you need to do is head to etherscan.io and search for a wallet address, block, token, transaction or ENS.
This method of storing data is more secure than previous web 2 methods because a block cannot be changed once it has been added to the blockchain (not without editing all previous blocks on the chain). This data is also stored on multiple systems, meaning any abnormal data would be quickly identified.
Smart contracts can do a range of things, including:
- Transferring asset ownership
- Verifying asset ownership
- Securing asset quality (for example, a minted NFT cannot be fractionalised for further sale)
- Managing royalty payments
- Provides identifying information (such as wallet addresses)
- Linking to other digital assets
Contrary to popular belief, NFTs are not actually stored in your wallet. They are stored on the blockchain with the smart contract attached which verified your wallet is the owner. You can learn more about where an NFT is stored here.
The use of smart contracts in NFT technology is part of why users are so interested in their potential. They provide a method of total honesty when buying and selling, giving a new dynamic of trust to the digital world.
This idea of decentralisation is also a major component to web 3s agenda. Decentralisation of the web is a huge talking point among the NFT community and may just be possible with the advancements we are making today.
What are dApps?
DApps is short for “decentralised apps” and refers to the programmes used to build web 3. These include blockchains, decentralised networks of servers that communicate with each other (nodes), or a hybrid of the two.
Web 2 is built on centralised platforms, such as social media, shopping site or streaming services. This means all the user information goes through to the same server and owner choses how to redistribute it. The owner also have control of said server and if said server goes offline, so will the platform.
In a decentralised network, there is no single entity controlling the platform and therefore no single server is responsible for it. Instead, multiple servers run the network and maintain the information stream. This means a decentralised network is extremely difficult to attack, such down or cheat.
DApps run on a decentralised network, allowing users to get more comfortable with the idea of being in control. In fact, we can understand more about dApps when we also look at DAOs.
What is a DAO?
DAO stands for “decentralised autonomous organisation” and refers to an entity run by a community with no central authority. Each community member contributes to the organisation and helps to maintain it through various activities, such as voting on the future of the project. A DAO is run using blockchain protocol and smart contracts to enforce the organisations rules and regulations.
Typically, you gain membership to a DAO by purchasing a token (NFT). This token will then give you voting rights within the community and allow you to vote alongside other members to decide the rules and regulations for the DAO. The money used to buy this token will be sent to the developers and allow them to work on the decisions proposed by the community.
During development, the developers are in control of the project. However, once the project is launched and the smart contracts have been put into place, the organisation should run autonomously. The developers will then have the same level of power as other community members, creating a perfectly level playing field. This is also called a bottom-up structure.
Why are the benefits of a DAO structure?
DAOs use smart contracts on the blockchain and are therefore completely transparent about their practices. Since their is no single entity to control the organisation, the power is put in the hands of its users. Since the organisation is so transparent, users are also more likely to trust the organisation and feel comfortable using it.
The users are the people who matter most to an organisation, but sometimes this concept can get lost among centralised organisations. It is easy for personal interest to get in the way of community interest when making decisions. However, if the collective is responsible for making decisions instead of the individual, the values of the people become the forefront of the organisation, making it a more enjoyable platform to use.
This level of openness, community and participation discourages users from behaving in a way that harms the DAO and actively encourages a feeling of responsibility towards the community.
DAOs are also much more secure than centralised platforms or apps. They run on pre-made smart contracts to execute orders when conditions are met. Once these contracts have been added to the blockchain by the developers, these rules cannot be changed. The organisation truly is decentralised.
What are the issues with a DAO structure?
A concern for the use of a DAO structure is they rely on new technology which not a lot of people are experienced with. Smart contracts cannot be changed once added to the blockchain, so they must be airtight to avoid loopholes, bugs and hacks. If a contract is vulnerable, the entire system could be destroyed. Those looking to build a DAO will need a programmer with a lot of experience who won’t make this mistake.
Another concern for DAO is the fact it is decentralised. Once the project has launched, no one is able to control the organisation. Again, this means the smart contracts must be solid to avoid exploitation. But this also means there is no one responsible if the organisation causes harm. For example, if sensitive material is released on a centralised system, the host is responsible for removing it from the platform, but who does this responsibility fall onto in a decentralised system.
There is also the challenge of bringing the community together. A traditional organisation can share information and come to decisions faster when the results rely on just a select few. However, a DAO relies on votes from several people in different time zones to make decisions.
Sharing information with such a group can also be tricky due to time differences, resources, priorities, language and incentives, making unity that much harder and decision making that much longer.
Where is NFT technology taking us?
Amara's law refers to the cycle that new technology goes through when it is first introduced to the market. The law states that new technology will be met with a lot of hype and investors will overestimate its potential. Over time, this hype will fade as the reality is under met and people will claim this technology was just a fad right before its uses become obvious and mainstream.
If this is the case, NFTs are likely near the end of the hype phase. In the last few years, people have flocked to the NFT space with the hopes of flipping some JPEGs and making a few bucks. While this is still possible, it’s becoming increasingly difficult to spot a valuable NFT project within such a saturated market.
If we are now entering the slow-down and doubt phase of Amara’s law, the possibilities of investing in NFT technology may only just be beginning. Now is the perfect time for innovators to create something new with the technology and begin working towards the ultimate goal of making the tech mainstream. For example, some have speculated that companies may be able to distribute their stock via NFTs, allowing them to directly interact with shareholders and maintain better control of share distribution.
In fact, this is already possible with small businesses unable to get onto a stock exchange. Young businesses can chose to create and sell a series of NFTs in exchange for a section of the company. Not only does this raise money for the organisation’s ambitions, but it also allows them to engage directly with the stakeholders and adapt their business model to suit them.
This is why community is such a huge part of the NFT space. Being able to talk directly to your customers and find out what problems they have that need solving allows you to understand your market and build a solid business. All the while, the shareholder’s assets are growing in value and the business’s movements are entirely transparent, promoting a trustworthy relationship which otherwise could not have been achieved.
Although there are still kinks in the technology, NFTs are here to stay and the advancements over the next year will be one to keep your eye on.
So, why are people interested in NFTs for technology? The answer is simple.
NFT technology is playing a huge role in developing web 3 and has the potential to change multiple industries, including the sports, gaming and music industry. Those who are looking at NFTs for their technology are keeping their eyes on the future. Maybe you will spot the next big thing.
While this is a huge feat, the best way to tackle this challenge is learn all you can about NFT and web 3 technology. Fortunately, we are dedicated to doing just that and will be posting regular updates for you to read. There is plenty to learn.
Guess what? We launching our own NFT project where you the audience can take control. With so much room to grow, who knows where the possibilities could end? Our missions include completing a community chosen project, donating to the beloved charity NABB and giveaways (including a classic motorcycle)! You can check out our roadmap and join our discord to be part of the ride. We are also on on Medium, Twitter, Instagram or YouTube. There is no obligation to join in, but feel free to start a conversation and get to know us.
If you have any questions or queries, you can also contact us directly and we will be happy to help.
