nahmii Use Cases: The Potential of Non-Fungible Tokens

In preparation for nahmii’s release on the mainnet, we’re continuing our deep dive into different aspects of the protocol and what it means for you. Previous blog posts have covered the technical challenges of developing nahmii and the tools we’ve built to help users interact with the system (the CLI and SDK). Next we’re looking at possible applications for nahmii’s unique technology, focusing first on non-fungible tokens. These special tokens have the potential to revolutionise whole industries, from video games to online gaming and more. Given their importance, we’re starting with a two-part blog post. Today’s post looks at what non-fungible tokens are, why they’re exciting and what is holding them back. In the second part of the post, we explain how nahmii will solve these issues and discuss some novel use cases.

These articles will be the first in a series of blog posts on nahmii uses cases, so stay tuned for further articles on financial services, online gaming and IoT (amongst others!).

What are Non-Fungible Tokens?

Whether something is ‘fungible’ or not is simply a question of interchangeability. If one asset, like a dollar in your bank account, can be changed for another without anyone noticing then that asset is fungible. Your first car, your engraved watch and your wedding ring cannot be exchanged in the same way; they have no identical equivalent and are therefore non-fungible.

The same definition can be applied to cryptographic tokens. Ether and Bitcoin are represented by fungible coins, as any 1 ETH or BTC is worth the same as any other. Non-fungible tokens (NFTs) are a special class of Ethereum tokens, conforming to ERC-721 or ERC-1155, which are identified by some unique property. Just as your engraved watch is unique because of the personalised message, each NFT is marked with unique metadata. This explains why each NFT has no direct equivalent, unlike currencies, and is therefore not interchangeable.

Unique Tokens, Unique Opportunity

One of the key principles behind our work at hubii is that all types of assets, both physical and digital, can be tokenised. Once an asset is represented as a token on the blockchain, it can safely stored, transferred and traded. While most digital assets are fungible, hence suitable for the usual Ethererum ERC-20 standard, some assets are unique and therefore need a non-fungible token. This is the first piece of the puzzle for NFTs: they play a crucial role of our tokenisation vision.

The size of the opportunity presented by NFTs is best understood by looking at physical non-fungible goods. For every kind of trade in physical non-fungible goods, we can create an equivalent on the blockchain using digital NFTs. Think of all the ways that unique physical goods are used: they are traded, collected, rented, used as tickets, certificates, licenses, promotional items and more. Now imagine that we can do all of that on the blockchain.

The Problem

All implementations of NFTs using the ERC-721 standard are built on Ethereum, adding a new transaction to the network every time a token is created, transferred or changed. Without a suitable scaling solution Ethereum is currently fundamentally unsuitable for any form of high volume token trading, as it lacks the required transactional throughput. Similarly, all transactions incur a unpredictable gas cost with variable latency. Taken together, these issues with the underlying Ethereum blockchain are preventing the deployment of commercially-relevant NFT applications.

Transaction fees on the Ethereum network have also limited the usefulness of non-fungible tokens to date. Ethereum’s transaction fees are unpredictable and every on-chain transaction incurs a cost, almost always more than a few cents. With loot boxes and other sources of in-game items potentially generating many new ERC-721 tokens per minute, these costs can quickly become unaffordable. Not only does this limit the scope of tradeable items, as each must be worth more than the transaction fee to justify the trade, applications are restricted in the number of new items that they can create.

The transactional throughput of the Ethereum network poses a further problem: latency. As the network becomes swamped by more transactions than it can handle, users must wait longer and longer for their transactions to be confirmed. Not only is this frustrating, it has the potential to render whole applications unusable until the network can catch up.

Consider a typical use case from the video games industry. A player opens a loot box containing five in-game items, each of which is unique in some way. These items are represented by five NFTs, which must either be newly minted by the smart contract or transferred to the player from an existing supply. Before the player can use their items, they must first wait for the network to process the transaction. Given the performance limitations of the Ethereum mainchain, the entire network can currently only process about three of these loot box openings per second. This is clearly unsuitable for any commercial-scale application. While this particular issue may be addressed by the proposed ERC-1155 NFT standard, which aims to improve how Ethereum handles NFTs, other problems like unpredictable transaction fees and latency remain.

The Solution

Until they can be processed on a faster, cheaper and more predictable network than Ethereum, NFTs will never fulfil their potential to revolutionise digital asset management. The issues facing NFTs — capacity, fees and latency — are all addressed by nahmii, hubii’s scaling solution for Ethereum. Our solution offers effectively unlimited scaling, predictably low fees and near-instant transaction latency. More information about nahmii’s technical specification and developer tools can be found in our previous blog posts.

In the next post in this series, we explain how nahmii can provide the platform for NFTs to flourish and highlight some of the most interesting use cases for the technology. We’re very excited about how nahmii will drive adoption of NFTs and we’re sure that you will be too. Stay tuned!