The Future of NFTs is Much More Than $300,000 JPGs

Information has never been more accessible. The evolution of technology that is Web 2.0 has enabled users to effortlessly access and publish data to the internet. Centralized platforms have enabled the masses to become digital content creators by removing many of Web 1.0's impediments to publication. Search engines have simplified the process of accessing information and social media has allowed for more expressive content and virality. However, Web 2.0 has failed to offer effective digital property rights to protect online content.

Watermarks, trademarks, and other forms of intellectual property have proven to be inadequate in the digital space as it is still extremely difficult for creators to properly monetize their work. Non-fungible tokens (NFTs) are a cornerstone technology of Web 3.0 that offer an entirely new mechanism of accessing, transferring, and owning data on the internet. In the next phase of the Web, NFTs will represent everything from video-game skins to medical records to Louis Vuitton bags.

Twitter handles, Fortnite characters, and even this article belong to the centralized platforms on which they reside. At any moment, Twitter can revoke a username, Fortnite can take away hard-earned skins, and LinkedIn can delete online content. Non-fungible tokens (NFTs) are unique, programmable, certificates of digital ownership that reside on a Blockchain. Any digital file can be turned into an NFT: images, videos, text files, songs, tickets, or even digital deeds to physical objects like a car, a handbag, a pair of sneakers, or diamond jewelry. NFTs are essentially representations of an asset on the internet, but due to these assets residing on decentralized virtual machines (blockchains), these digital assets can be verifiably owned, uniquely identified, and a transactable unit of exchange. In 2021 alone, the NFT market generated over $41 billion in trading volume.

The most well-known and integrated use case of NFTs is digital artwork. Beeple, a widely renown digital artist, has made a career selling his artwork via NFTs. His biggest sales include Everydays: The First 5000 Days which sold for $69 million and Human One, a physical piece accompanied by an NFT, which sold for $28 million. Michael John Peters, who has been working in fine arts for over a decade, explains that it is "easy to fake certificates of authenticity or replicate art. […] NFTs provide an iron clad indestructible proof of ownership along with provenance that will last for eternity. In the future every painting, both digital and physical, will have a NFT attached to it."

Blockchains are entirely-public, decentralized virtual machines that track the movement and ownership of tokens. They are essentially virtual computers that store and update information regarding the digital history and transfer of tokens between public addresses (wallets). Unlike traditional servers, Blockchains are inherently decentralized which is a critical aspect to the security and trust of a digital ownership system. A centralized platform can crash at any moment and a central authority can manipulate the state of the data. A Blockchain, however, does not have a single point of failure and instead utilizes game-theoretic economic incentives to allow for a network of participants to maintain the integrity of the data. Blockchains employ mathematical proofs in the form of cryptography that ensure the validity of new information provided by network participants as well as the immutability of historical data. If a traditional server was used to maintain a ledger for a digital currency or NFT platform, the central authority would have ultimate power and the ability to control and manipulate user assets. A cryptographic, decentralized network provides users with trust in the long-term security of their assets as well as the ability to verifiably claim and transact digital property all within a public, peer-2-peer network.

Blockchains maintain and update token ownership by bundling transactions into cryptographically immutable blocks. Blockchain tokens are divided into two main groups: fungible and non-fungible tokens (NFTs). The key difference is that every NFT is uniquely identified and valued, whereas fungible tokens, like Bitcoin for example, are interchangeable and are of equal value. All tokens are owned by a particular public address (wallet), provide a complete digital history, and can be exchanged between network participants.

NFTs have value due to the cryptographic mechanisms of the Blockchain that allow users to indisputably claim digital property. Through public, private key encryption, owners of an asset can cryptographically prove they are the rightful owner of a wallet and thus have the right to transact any digital asset owned by that public address. Without getting overly technical, when a wallet is instantiated on a Blockchain network, owners of the wallet are provided a cryptographically-generated private key which is used to create digital signatures. These cryptographic signatures allow the owner of a wallet to dictate new transactions while specifically allowing the rest of the network to validate the user as the rightful wallet owner. Since digital signatures are completely unique and can only be generated with the private key, network validators can mathematically verify the user without ever having to see the private key. The significance of public, private key encryption in the case of NFTs is that this mechanism does not rely upon a central authority to maintain a book-entry model but still allows individuals to own and transact digital property.

Lastly, NFTs present an entirely new form of intellectual property through the programmability of the Blockchain. On a programmable Blockchain, token transactions are dictated through smart contracts, which are essentially self-executing software programs that function similarly to "if-else" statements. Smart contracts are dictated completely by code and are guaranteed to run when a predefined set of conditions are met. These software programs are essentially wallets in that they can send and receive tokens and allow tokens to contain certain agreements and perform certain functions. For example, many NFTs pay a 5–10% royalty to the original creator on all secondary sales. The token itself is wrapped in a smart contract whose logic dictates the automatic payment of a portion of each secondary sale to the initial public address that minted the asset. The decentralized verification process of the Blockchain ensures that these contracts are immutable and were properly agreed upon by all involved parties. In other instances, smart contracts allow NFTs to be collateralized in a loan, lent out to another Blockchain address and pay interest, or even to be used as a method of identification on a Web 3.0 app.

The Metaverse is not a new idea. In fact, the term dates back to the 1990's science-fiction novel, Snow Crash. Why are companies today like Facebook (now Meta), Apple, Microsoft, Disney, and Nike going all-in on the Metaverse? The reason is new technologies, and not just the advancement in VR/AR, but specifically due to the innovation of effective digital property rights. NFTs and decentralized technology allows for the digital world to be tokenized and presents the opportunity for an alternative reality in which users can engage in an entirely digital economy. While we do not have a clear picture of what the Metaverse will actually look like, NFTs allow for digital objects to no longer be limited by platforms. Users can physically own content, like a house, username, or avatar, and transact these unique items in a digital economy. Markets require a fungible unit of exchange, for example the dollar, along with uniquely valued assets. The token model of the Blockchain presents the opportunity for a full-fledged digital economy with both fungible and non-fungible units of exchange.

Ark Investment's Cathie Wood stated that the Metaverse is "a big idea that will probably infiltrate… every section in ways that we cannot even imagine right now." Goldman Sachs believes the Metaverse is a $8 trillion opportunity. While the use-case and framework for the Metaverse is still far from fully-developed, the building blocks exist and corporations like Meta, Apple, and Microsoft are investing billions in the idea of a digital reality.

According to Nonfungible.com, $692 million worth of metaverse real estate was bought and sold in 2021. Decentraland and Sandbox are two of the top metaverse platforms and are built upon the Ethereum Blockchain. These games utilize tokens to allow users to fully immerse themselves in a digital reality in which they can purchase land, exchange goods, go shopping, hang out with friends, and attend a work meeting. Both platforms utilize a fungible token to build out an economic framework along with non-fungible tokens to represent digital objects. Decentraland and Sandbox use a non-fungible token standard ( ERC-721) to represent all land and digital objects. Users have the ability to transact these items through an ERC-20 token, a fungible token. The MANA token is the ERC-20 for Decentraland and currently has a market cap of $5 billion while the SAND token for Sandbox has a market cap around $4 billion.

Louis Vuitton, Burberry, Ferrari, and diamond specialist, De Beers, are all experimenting with ways to integrate NFTs into their business models. While none of the companies have released plans to tokenize their physical products, there are many reasons they should. NFTs would dramatically reduce the impact of counterfeit goods. The global volume of counterfeit products is expected to reach $4.2 trillion in 2022. Non-fungible tokens provide an effective mechanism to authenticate physical items in online marketplaces and allow buyers and sellers to agree upon a universal standard of digital ownership.

A Louis Vuitton bag could be serialized and accompanied with a matching NFT. The NFT would serve as a certificate of ownership and provide assurance to all secondary buyers of the item's authenticity. Software could query the Blockchain to determine if the serial number of that bag has in fact been minted and require the seller to cryptographically verify their possession of the asset. Louis Vuitton could collect fees on all secondary transactions and participate in the highly profitable resale business. The luxury resale market was estimated to be $38 billion in 2021, growing at a 10–15% annual rate. Market leader, The RealReal states that they are "the only resale company in the world that authenticates every single item [they] sell." That cumbersome problem disappears with NFTs.

The Blockchain also presents companies with a self-updating certificate model that allows them to easily track the movement of their products in real time. Companies can offer special incentives to product owners such as discounts, access to early releases, and invitations to in-person events. The valuable marketing opportunities inherent in this model have been best exemplified by the Bored Ape Yacht Club collections. Bored Apes are the third-most valuable collection of NFTs with $1.5 billion in all-time sales. Owners of these assets have been constantly sent gifts to their wallet address on the Ethereum Blockchain. An example was a collection of NFT mutant serums with varying rarity. Bored Ape owners had the option to apply the mutant serum to their ape to obtain an entirely new, mutated Ape NFT or sell their serum on the open market. In early January, one of eight "mega mutant serums" sold for $5.8 million. Most recently, Bored Ape holders were given 10,000 of the newly released ApeCoin. Following the launch of the token on popular exchanges, the value of ApeCoin appreciated to nearly $18.00 leaving each NFT holder with nearly $180,000 if sold. Bored Ape NFTs also function as a ticket to a social club that throws live/physical parties, including one on a mega yacht.

Ferrari and other software-based luxury items have the potential to take physical NFTs to an entirely different level. Companies like Ferrari, Mclaren, and Mercedes are increasingly becoming software companies. Cars are transitioning into IoT devices and they are opening the possibility for mass data collection. In the future, cars could connect to the Blockchain like other IoT devices and collect data in a verifiable, secure environment. For example, a 2021 Ferrari being sold on the secondary market could have its mileage and GPS data available on the Blockchain. An NFT could represent the car in a token economy and allow buyers to see the entire digital history of the vehicle before purchase. This would dramatically reduce the potential for odometer fraud and it allows for real-time analysis and security of vehicles across the world. Although some may believe privacy is a concern with the model, the crypto industry offers a unique solution through zero-knowledge proofs. This cryptographic protocol lets users keep sensitive data private, but it still allows for network validity of information through mathematical proofs.

In Web 2.0, it pays to be a middleman. Streaming is the dominant mode of consumption in the music industry today, and streaming services such as Apple and Spotify accounted for over two-thirds of recorded music revenues in the first half of 2021. Major record labels, which own most of the music content have been posting huge profits, but musicians have not been participating in the bounty as they generally receive fractions of pennies per stream. In fact, 0.2% of artists on Spotify generate even $50,000 a year.

NFTs provide artists with a superior economic model in which they can obtain a greater share of profits as well as creative freedom. Daniel Allan, an up and coming pop artist sells digital copies of his songs that come with special incentives for fans. Allan utilizes the programmability of tokens to auction off a share of future master royalties in order to crowdfund his albums. For his 2021 EP, Overstimulated, Allan raised 50 ETH ($140,000) on the first day of trading alone. Allan was able to generate more than enough to produce his music while simultaneously securing a greater share of future royalties than he would have generated by working with a record label. NFTs provide artists with ultimate flexibility and control over their content as intermediaries are no longer responsible for providing monetization channels for artists. Allan currently makes 85% of his living off NFTs.

Music NFTs present an entirely new investment class for fans to benefit from the success of their favorite artists. By purchasing tokens, fans obtain ownership in songs, royalty fees, and other digital collectibles that can grow exponentially in value if the artist becomes mainstream. NFTs open up a historically privatized asset class to retail investors which will bring greater rights and liquidity to creators. The Music industry can be democratized as up and coming artists can escape the constraint of intermediaries and directly leverage the people in order to effectively monetize their work.

Web 2.0 brought us the advent of web applications and an entire industry built around designing, developing, and securing this new technology. The centralized web brought dynamic web pages, social networks, mobile devices, and much more. However, this innovative software also brought centralization to the web in which a few services dictate user access, communication, and publication. Applications collect data like never before and employ powerful algorithms for interpretation and monetization. What the internet is currently missing is a framework that allows these two pieces — data and algorithms — to come together in an ethical manner. NFTs are an entirely new form of intellectual property that allows users to own digital content while maintaining the visibility and usability of the centralized web. The next phase of the internet, Web 3.0, will be built upon token economies that allows users to have ownership of their data without compromising the efficiency and technology present in today's applications.

In this article, I explored the potential opportunity for NFTs in gaming, physical goods, and the entertainment industry. In the next phase of the internet, NFTs are set to disrupt many more industries such as real estate, sports, ticketing, healthcare, pharmaceuticals, and memorabilia. NFTs present an opportunity to tokenize the internet in which digital objects can have precedence over platforms.