*Opinion Article - Concepts below are explained with a lack of detail for ease of comprehension*
It's rare that something has the potential to change everything
I guess it’s really blockchain that changed everything, but NFTs certainly are poised to be one of the biggest use-cases of the underlying technology, much like how websites make up the internet.
NFTs are a recording of a transaction over the web. It’s a record of who had something first.
Wait, I thought NFTs are just jpegs that people are buying because they’re dumb?
Yes, those exist, and those people exist. I’d agree with you, it’s way overhyped. You can literally screenshot an NFT and send several copies of the image to anyone in the world. However, only 1 person has the real virtual thing. Yeah, you read that right. And you thought pet rocks were weird.
Why does it matter that I have the ‘real’ virtual thing?
Think about it like this. Every transaction is tracked on the blockchain, and those transaction records can’t be edited, hacked, or forged (seriously). When Albert makes an NFT and sells it to Bob, it shows that Bob now owns the NFT and anyone in the world can verify it by looking at the blockchain. As a result, we all collectively agree that Bob owns the thing. If Bob decides to screenshot it and make 100 new NFTs to sell them to Caleb, Dani, Zach and friends, they totally could, but anyone could still see that Bob bought the original from Albert because the transaction is time-stamped. It’s important to own the real thing because it can now share similar properties as personal assets.
Ok so what.
You own things in real life, like a car or a house. Those things could just as easily be represented by NFTs, aka tokens. Currently it’s validated that you own those things in real life by paperwork, government records, and third parties. Now we don’t need any of those middlemen because we can validate on the blockchain.
That sounds ridiculous
It is, but sometimes the truth is stranger than fiction.
So what is an NFT then?
An NFT is a proof of ownership of something. It’s a record.
It’s not a jpeg. A jpeg is a very particular type of NFT.
What are the risks? There’s gotta be risks, right?
Of course! If your car got into an accident, the car isn’t worth as much. The title to the car didn’t change at all, but the underlying asset did. Same goes for NFTs – the NFT didn’t change, but the underlying asset did. The NFT is just a record of ownership, like the title to your car.
Here’s one of those gems you won’t find in a typical news article about NFTs – those NFTs of jpegs that people have been buying for millions? The jpegs aren’t actually stored on the blockchain because that would be prohibitively expensive, instead, they’re stored on centralized servers belonging to some company, but the string of metadata that proves you own the jpeg is stored on the blockchain. So, if the centralized company gets hacked or just decides not to support the database anymore, your metadata directs to a 404-error link. That’s some expensive metadata. But it’s also why LITERALLY ANYTHING can be an NFT, because it’s just proof of a transaction that took place. NFT’s are a transparent promise from one person to another that anyone can look at.
Nice, I’m ready to go buy a crypto punk for a cool million dollars that I have lying in my backyard.
Not so fast. There’s one more thing. NFT’s are usually in the form of smart contracts.
Wait, hold up on your ‘one more thing’ crap!
I read in 3 different headlines that bitcoin is bad for the environment. Why are we speeding up climate change for virtual cats and pixelated images?
Great question! Climate change is literally our generation’s biggest challenge so I’m on board with doing anything possible to slow it down to save as many ecosystems as we can. Some of the original articles that were written which sparked the climate discussion point are actually incorrect. Bitcoin and other Proof of Work (POW) blockchains use a lot of energy intentionally for security, but the energy usage doesn’t scale up drastically with an increase of transactions which they claimed. However, it’s still a valid concern because it’s a TON of energy being used right now, which is why Proof of Stake (POS) was created. Ethereum, which is a much bigger deal than Bitcoin, will be transitioning to a POS blockchain in 2022 which will drop their energy usage by 99% and increase their transaction cap to 100,000+ transactions per second. Many NFTs are built on the Ethereum blockchain, and most blockchains are POS, so NFTs will not be contributing to the destruction of the environment. Happy turtles!
Nice. I’m gonna pretend I know what a proof of stake and an Ethereum is. What were you about to say about smart contacts?
Listen up, this next part’s important, smart contracts are tricky! Pay attention! Your car could be an NFT because it’s the car’s title. Your genome could be an NFT because it a form of an identification. Your company’s stock can be an NFT because NFTs can hold instructions to an executable function called smart contracts, which are basically the rules of an NFT. Those rules are transparent to all individuals because it’s on the blockchain. It’s a contract that can self-execute which opens a whole slew of opportunities.
I tried smart speakers and didn’t think they were so smart.
I tried those too, I think they take off with AR. Smart contracts are different though! Smart contracts, like cyptocurrency, are something that has been invented to run on blockchain technology. It’s closest to a 3rd party escrow service – you set up a contract with certain rules for completion, and add some cryptocurrency or another NFT as reward. Then anyone else can interact with the contract to fulfill the rules and get the reward automatically, without you ever having to touch it again. This same metaphor can be used for all types of smart contracts, and some don’t need money to run. Oh, and they’re super composable, the sky is the limit for what rules you want to set.
Most popularized NFT smart contracts that exist right now have a rule where if the NFT is resold, it pays a royalty of the sale value back to the original minter. So if Albert has a 5% royalty rule, when Bob sells that NFT to Caleb for $100, Albert will get $5 automatically, without ever needing to know who Caleb was. This can go on in perpetuity.
Here’s another that’ll start to make your head spin
Every time one of those NFTs is traded on the open market, the band earns 10% of the sale value, unlocking a huge potential revenue stream. Because higher prices are good for the holders, the holders have an incentive to want to hype up the NFT (and the band), causing the sale prices and royalty payments to rise even higher.
That’s a lot of words and you had to use bullet points. Gimme another
The same KPop band decides to release 10,000 limited edition NFTs of a song they made that give the holder of the Song NFT a new type of NFT, Stream NFT, every time the song is streamed 10,000 times worldwide. Since the KPop band makes $1.00 every time it’s streamed 10,000 times on Spotify, these Stream NFTs are pegged to a value of $0.01 and can be sold back to the KPop band to be burned (destroyed) in exchange for real money.
Basically, the band created a dividend stock out of their song and distributed the profits to 10,000 people who now have a financial incentive to make the song a success. There is no limit to the amount of NFTs you can mint, so maybe you want to create a million song NFTs? That’s quite an army, but potentially a low paid one.
As you can see from these 2 examples, the opportunities here are truly endless, global, and also have no consistent regulations because it’s changing so fast. We’re in the first inning of this game and we’ve already started seeing some incredible applications. You might be looking at the future of work. Tune in for the next article to see how it literally is the future of work in the Philippines with a game called Axie Infinity. And yes, their government is getting involved.
My name is Nick Metzler. I’m a game designer specializing in innovation. If you’d like to learn about the opportunities in this rapidly evolving space, reach out to me and we can set up a consultation where I answer as many questions as I can. This space is going to get more complicated quickly – you may want to learn the basics with me so you can filter out the BS when you hear it.
Please note, I am not a financial advisor so I will not discuss crypto investment ideas such as buying into something like Visa did, but I will tell you some of the reasons they did it, so you can decide. Full indemnification below.
I’m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer, nor any certification of crypto. I’m not a crypto professional through formal education or job experience. I’m a game designer with a business degree. I’m a kid who grew up in Chicago, LA, Brooklyn, and now Austin who sees what future potential these have. The contents in this article are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. By responding to this article, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found in this article.