NFTsI don’t have a technical background. And this is what I know about NFTs
Last year, the NFT market generated over 23 billion US dollars, compared to 100 million in 2020. With brands like Nike, Gucci and Burberry presenting their first virtual NFT wearables, celebrities such as Eminem, Jimmy Fallon and Neymar investing in popular NFT projects and auction houses like Christie's and Sotheby's auctioning digital art pieces and accepting cryptocurrency as payment, the NFT market is hot and booming.
Since I have no technical background, it’s sometimes hard to understand what these NFTs are and if, or how, they will play a role in our daily lives. With all these new buzzwords flying around the internet, such as WEB 3.0, DAO’s or E2P, it is hard to keep up and really understand the foundations of these ideas, as it is to anticipate what role I could play in this as a consumer/investor and working for a tech company. As mentioned in my latest post about the Metaverse, I am writing a series of articles about these topics for people that, like me, have no technical background. My hope with this series is to help us all gather an understanding of how these upcoming technologies will impact our lives, for the good, and the bad.
What is an NFT?
Before jumping into the description of NFT’s, also known as Non-Fungible Tokens, it’s important to understand a couple of concepts. For the sake of clarity, I will divide the definition of an NFT into two essential parts; the concept of “non-fungible”, and the concept of “token”. The word fungible is described as “the ability of a good or asset to be interchanged with other individual goods or assets of the same type”, or in other words, something fungible is replaceable. So non-fungible means that the object is unique and can’t be replaced by a similar good. A 1 Kg sack of potatoes for example is fungible because I can trade it for another 1 Kg sack of potatoes and I own exactly the same thing. On the other hand, a painting from Vincent van Gogh can’t be traded for a similar good because it's unique and only one of the same was ever created, which means it’s not interchangeable, thus non-fungible. A token is a digital representation of value or rights that can be sold or bought. If we combine these previous two concepts, non-fungible and token, we get NFTs; in other terms, a unique unit of data that is linked to digital or physical content, providing a proof of ownership. This content can be images, music, documents, videos, items in video games, etc. These NFTs can be bought with the use of cryptocurrencies on online marketplaces such as OpenSea and Rarible.
NFTs are sold on online marketplaces by making use of blockchain technology. To keep it simple and not too technical, the blockchain is essentially a secured open database of transactions that can’t be regulated or supervised by a third party, for example, banks. These records of transactions are publicly available and show who is the owner, what did they pay for it, and at what time did this transaction occur. All these transactions are constantly verified by the whole blockchain, and thus no one is able to make a transaction without it being registered by all of the computers connected to the blockchain.
The implications for our daily lives
With the description of NFTs a bit more clear, the next natural question is, what are the implications of NFTs for our daily lives? And, how could it change the way we are living right now? Well, as NFTs are linked to a piece of digital or physical content, let’s first talk about what they offer to artists and creators. To start with, NFTs allow the creator of the art piece to earn an income from every sale. This means that every time the art piece switches owners and is purchased by someone else, the artist will get a percentage fee of the selling price, most often this is 5%, 10% or 15%. These instructions can be implemented by uploading the art piece to the marketplace and are called smart contracts and can also be used the other way around; the artist can use these proceedings to give back to the community (owners of these NFTs) for supporting him or her.
NFT’s could also be used for event tickets. Since they make it impossible to fake these tickets, it is a secure way of selling them but also generating some income from the second-hand market by making use of the smart contracts I previously mentioned. For example, when you bought an NFT ticket for a concert, but suddenly you can’t go, you can sell this ticket to another person. A percentage of this transaction value will be sent back to the event organizer. This will generate a second income stream for the creators of the events and ensure that they have certain control over the second-hand market.
The gaming community is full of early adopters that are willing to test and invest in new technologies. As mentioned in my last article, gamers have already adopted the habit of spending money on digital-only costumes, buying dances for their digital characters, or Fifa packs for their ultimate team. Imagine if you could trade these game skins or costumes for an actual cryptocurrency instead of just owning it, as it is currently. NFTs could be used for generating clothing for your character in a game, which could be easily transferred to your character in other games. You could style your avatar with Nike's or Gucci shoes and could easily trade these on online marketplaces. Since these NFTs are unique, the clothing brand can ensure that this digital clothing is real. This implementation of NFTs could really expand the way we understand online shopping and buying branded products, and it is already offering big brands new ways in which to connect with young or tech-savvy communities.
Although some of the NFT applications I have mentioned may sound fun but only related to a specific niche, the reach of this new technology goes way beyond those spaces. For example, NFTs could be used for voting for elections. Imagine that your vote is an NFT, that can’t be traded or sold, and it is unique and bound to your personal information. This means that all problems (or claims) of possible fraud in the election could evaporate. Incorrect recounts, fake votes, or hacked election systems; all could disappear from the democratic process thanks to this technology.
Your personal documentation
Not only can NFTs play a significant role in democracy, but as well in simple transactions of everyday life. Your ID, birth certificate, or the paper that shows that you are the owner of your home could all become an NFT. Normally, these documents are stored in a centralized database (meaning that your data is stored in a single place). The issue with these centralized systems is that they can be hacked and all your personal information can be stolen and sold on the dark web. With the help of the blockchain and the technology of NFTs, it is impossible for people to steal this information or make fake documents since these are unique, have proof of ownership and are stored on the decentralized blockchain.
Not all are good news...
With all these new possibilities, this technology also comes with important shortcomings. All these applications of NFTs run on the blockchain. Nowadays, existing blockchains such as Ethereum are using huge amounts of power, approximately 110 TWH per year, which is the equivalent of approximately 9 times the total energy consumption of Google every year, or the total power consumption of the Netherlands. To make matters worse, a single Ethereum transaction could power a US household for 8.41 days. Considering these numbers, we have a long way to go before the implementation of these new technologies can be done in a sustainable way. That said, the attention that these technologies based on the blockchain are gathering, next to the need to ultimately power them through renewable technologies, could push countries and other powerful organizations to accelerate the research on storing energy produced from renewable sources, which could have a deep positive impact.
As with any new technology, innovation and progress come both with amazing possibilities for our society and with threads of its misuse. Once again it is up to all of us to, first of all, stay informed, and secondly, for those working in tech, strive towards its positive application.
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