The Many Use Cases of NFTs

Design on Canva. Crypto Logos from this website.

NFT = Non Fungible Token. What does that mean? In order to understand, let's try to learn what fungible is first. A fungible item is one that can be interchanged with another such item for all practical purposes. For example the dollar bill or any other currency. One twenty dollar bill can be exchanged with two 10 dollar bills or other twenty-dollar bills. So the dollar is fungible. Commodities(same grade), common shares(same company) etc are all fungible items.

Let's try to understand non-fungile now with the example of a piece of land. One piece of land cannot be replaced with another. Two owners can swap land of the same value but that will be more of barter of two different assets. Two land plots will differ in one or more attributes. For example, a corner plot of land of the same size is generally of a higher value than a regular plot. This is not true for fungible items, it does not matter if the dollar bill is old or new — both will have the same value. So in the case of non-fungible assets, each unit(land) has unique characteristics(for land consider — location, fertility, size and so on) that add or subtract value.

In summary, fungible items are defined by their value and non-fungible items by their unique properties (and hence cannot be exchanged).

Technically, NFT is a non-interchangeable unit of data stored on a blockchain. It can be sold and traded but it cannot be exchanged or replaced because of its unique cryptographic signature. Here’s a video from Finematics that explains some basics about NFTs and DeFi

Video Credits: Finematics

DeFi is Decentralized Finance. In the world of web3, everything is decentralized so any finance based application in the world of web3 is a DeFi app. If you are wondering what is web3 — consider it to be a blockchain-based version of the internet for simplicity. An internet where everything is decentralized and built on top of a blockchain! One can say that web3 is the base of the decentralized future — DAOs(Decentralized Autonomous Organizations), DeFis, GameFi, DApps(Decentralized Applications), Metaverse, creator economy and so on.

Let's go back to NFTs as web3 is out of scope for this story. NFTs can be implemented on any blockchain that supports smart contracts. The most common ones are Ethereum based — ERC 721 and ERC 1155.

Tezos, Polkadot, Cosmos, Binance Smart Chain, Solana, Matic, Cardano and so on also support the creation of NFTs.

In order to understand what use cases NFTs can solve, we must first understand some of the unique properties/mechanisms of the physical world that can be replicated in the digital world using NFTs.

1. Scarcity- “Scarcity refers to a basic economics problem — the gap between limited resources and theoretically limitless wants.” The primary causes of economic scarcity are demand-induced, supply-induced, and structural. Any NFT that has this unique property is likely to do well in future. So limited editions of anything, popular art and creator tokens for fans can all do well theoretically.
2. Uniqueness/Originality — Famous paintings, custom-built homes/cars etc all have this attribute.
3. Proof of Ownership — How does one prove that an asset belongs to them? Physical control does not prove ownership. One can have physical control of a piece of land or art even though they do not have the ownership. Depending on what the asset is there are different ways to prove ownership. NFTs provide a way for the same in the digital world.
4. Exchange — A movie ticket bought can be transferred to any other person. The same is true for passes for some events. The benefits that come with the ticket/pass are transferred to another person with the exchange. This can be replicated in the digital world too.
5. Royalties — In the most simple terms, royalties are payments to the owner of the asset for using that asset. An author will get royalties on the books sold, a singer on the copies sold and so on. In most cases, there is a mediator between the creator and the person who uses the asset.

Over the last few years, NFTs have been used in many areas, some of which are mentioned below. There are many more use cases that can be implemented using NFTs.

1. Digital Art /Collectibles — Any digital art can be minted as an NFT and it then becomes a unique digital art as the hash associated with each NFT is unique. Many traditional art auction houses like Christie’s have entered the NFT world in the last few years. NFTs are designed to give ownership of work only and do not restrict making any copies. Just like we can find print copies of The Last Supper but there is only one original, there can be only one original NFT based digital art. Many individual artists have also sold their digital art as NFTs. NFTs have been used to create Digital Collectibles by many well-known brands and franchises. Many digital collectibles based new communities have also started in the last 2 to 3 years. Digital collectibles have also been used in games.
2. Digital version of real-world items — Many real-world items can be replicated in the digital world using NFTs. For instance, tickets to events, legal documents/deeds and so on
3. Gaming — In addition to providing in-game items /collectibles, NFTs can be used to create new revenue models in-game economy. Imagine trading a farm created in-game like Farmville or selling a particular level that you have reached in a game to someone else who wants to play that. New avenues of generating money by doing something you already like. Collectibles can be resold to new players generating revenue for both gamers and game creators.
4. NFT Domains— As of now, IP addresses are mapped with domain names to find any website. In the web3 world, we have equivalent services like Ethereum name service which provide alternate website names powered by NFTs. NFT domains are new web extensions that are linked to the blockchain via smart contracts. NFT domains map hexadecimal wallet addresses into human-readable form and enables censorship-resistant websites.
5. Authentication — Since NFTs are unique and cannot be reproduced, they can be used for verification and authentication also. Everledger uses NFTs to solve this use case in the supply chain. Identity credentials like driver licenses, course certifications etc can also be issued as NFT in future.
6. Proof of ownership — Cryptographic proof of ownership can be used as a key in future to unlock cars, homes or any other physical assets. NFTs can be used to tokenise ownership of physical assets giving way to fractional ownership of real estate etc. As the ownership is settled by NFTs, they can also be used in decentralized loan applications also.
7. Royalties — Creators can earn some commission on each future sale by using NFTs. Creators can have a smart contract that triggers an auto payment to the original creator whenever the NFT change hand. So a music video or digital audio will earn recurring revenue if it’s transferred. NFTs will also allow creators to directly sell their content to a mass audience without any intermediatory.

There are no limits to what the creative human mind can up with! The use of NFT is not limited to the above uses cases only but these are the common ones.

References & Further Reading

1. Non Fungible Token — Wikipedia
2. Fungible Goods — Investopedia
3. Non Fungible Token — Ethereum Site
4. Scarcity — Investopedia
5. NFTs a question of ownership.
6. Crypto Kitties sold for USD 172,000
7. Twitter Thread on Ether Rock

About the Author

Arpit is a seasoned technologist with vast experience in leading large cross-functional and cross-geography teams. Arpit also consults clients on competitive market analysis, defining MVPs, product ideation, product monetisation and go live strategies.

Arpit believes we should all contribute back to society. He has set his goals for social work in five broad areas. You can read more about the same in his blog post “Do Good, Together” on Tumblr. Arpit is interested in working with people who want to contribute towards the same goals.

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