The Essence of Non-Fungible Token (NFT) and what we are missing about the NFT
In the blockchain, there are two types of tokens; one is a token representing “value” known as ERC-20, and the other is representing “right” known as ERC- 721 or Non-Fungible Token (NFT).
Since the auction of Beeple’s NFT, many media have focused on NFTs as digital collections. However, NFT is not a just thing for digital collections. The real essence of NFT is representing the “right” of something in the blockchain.
ERC-20 token for “value” and ERC-721 token for “right.”
In the well-known blockchain network Ethereum, block generators(miners) get a coin(Ether) as a reward for block generation.
However, as the Ethereum ecosystem extended to various Decentralized apps (Dapp), or Decentralized finances (DeFi), the Ethereum ecosystem needs a standardized interface for representing the coin.
Readers may think that already there are coins, then why do we need a new interface?
If you have experienced crypto trading in exchanges, you will think that `I have traded coins without any problems. What is wrong?`
There is no problem with crypto trading, but coins are inefficient to use in Dapp or DeFi.
In Dapp or DeFi, there are various services, such as bartering valuable things, but coins are inefficient for these services because of some reasons like the high-cost fees, and compatibility. Thus, standardized interface tokens, such as ERC-20 and ERC-721, are proposed for efficient services of Dapp and DeFi.
We can find this kind of system for efficient service in the real world. For example, airlines, such as Qatar Airways, and Emirates, give mileage when passengers pay currencies for a flight, and passengers can barter mileage for a flight ticket later. If we take currencies and mileage of the real world to the blockchain ecosystems, these equivalent to coins and tokens.
Specifically, the ERC-20 token represents something having “value” in the Ethereum ecosystem, so we can utilize the ERC-20 token for bartering in Dapp or DeFi as we did in the real world using the mileage for airlines’ services.
However, to cover various services in the Ethereum ecosystem, the Ethereum ecosystem needs not only a token representing “value” but also a token representing “right.”
Let’s think about “right” in the real world. If Alice pays currencies for a flight, an airline not only gives mileage, which represents “value” for bartering but also gives a flight ticket, which represents the “right” to take the flight.
The ERC-20 represents something having “value” in the Ethereum ecosystem. Then what represents “right” in the Ethereum ecosystem? It is why ERC-721, known as NFT, has emerged.
Representing “right” is the essence of the NFT.
The essence of NFT
I have mentioned representing “right” is the essence of the NFT. Then what is the meaning of buying NFT?
Buying NFT means buying the “right” of something.
For a better understanding of buying the “right” of something, let’s see the case of buying “right” in the real world. The most common example is real estate, such as lands or buildings.
For example, when Alice buys a building, it does not mean that Alice brings the building in a pocket, but it means Alice brings the “right” of the building in a pocket. Namely, Alice can make money by renting or selling the building because Alice has the “right” of the building.
Let’s come back to the NFT. Many media or content platforms mint NFTs, and investors purchase NFTs. Now, we must recognize there is something weird. Investors bought NFTs representing “right” of the contents, but investors do not own any right of contents. Can investors make money using their NFT except selling NFT?
For example, let’s assume Netflix minted NFT using episode 1 of the Squid game and sold it to Alice. Can Alice make money using Alice’s NFT? In the current NFT market, the only way that Alice can make money is by selling the Squid game episode 1 NFT for profit. Still, Netflix makes money using the Squid game episode 1 even though Netflix sold the “right” of the Squid game episode 1.
People will not buy a “right” of buildings if they cannot make any money using the “right” of buildings. However, in the NFT market, these things are happening.
Currently, we are missing that buying NFTs means buying the “right” of content, like purchasing the copyright of contents. However, many media and platforms are minting and selling NFTs without giving any “right” of content to NFT investors.
NFT prices are not a bubble but reasonable if investors get a real “right” of NFT contents because we can expect that as the value of contents increases, the value of NFT will increase too.
However, if NFT holders do not have any “right”, it is ridiculous trading, and it must be better to buy action figures instead of buying NFT.
Right use way of NFT’s “right”
In my opinion, the most notable use case of NFT is the liquidity pool (LP) NFT of Uniswap v3.
In Uniswap v3, when Alice gives liquidity to LP, Alice gets an NFT representing liquidity. For example, if Alice gives 10 Ethers and 10 DAIs to LP for liquidity, Alice gets LP NFT representing that ‘you have the “right” of 10 Ethers, 10 DAIs, and liquidity reward’. Thus, if Bob buys LP NFT to Alice, Bob gets “right” of Alice’s Ethers, DAIs, and liquidation rewards.
If you are not familiar with Uniswap, it must be good to understand that if you imagine like Alice built an apartment using 10 Ethers and 10 DAIs to get room renting fees, and Bob purchased this apartment from Alice.
What is next
In this post, I introduced what we have to know about NFT.
For the next post, I am planning to write about trading in the futures market using NFT. It is not proven profitable, but I think it will be one of the use cases of NFT in future.
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