In this article, the NFTs phenomenon is explored in several aspects, starting with an overview of the NFT main features and their standards, then providing NFTs use cases, state-of-the-art NFT solutions, ecosystem landscape, and market overview. Afterward, the benefits and challenges of the NFT technology are discussed.
Non-fungible tokens (NFTs) are cryptocurrency tokens that replicate tangible attributes of physical items like uniqueness, scarcity, and proof of ownership. At the same time, they represent unique, intangible, and irreplaceable digital items based on the blockchain. NFTs are being applied to physical and virtual assets to monetize their value.
NFTs are not interchangeable. They are distinguished from one another by metadata and unique identifiers like a barcode that allows them to associate themselves with particular on-chain addresses. Metadata makes them an ideal instrument for confirming ownership of assets. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as Bitcoin or Ethereum. For example, one Bitcoin (BTC) is always equal in value to another. Similarly, a single unit of Ether (ETH) is always equal to another. This fungibility characteristic makes cryptocurrencies suitable as a secure medium of transaction in the digital economy. NFTs shift the crypto paradigm by making each token unique.
The prototypes of NFTs were ‘colored coins’, which refer to experimental assets created on the Bitcoin network in 2012. The first asset representing a non-fungible tradable blockchain marker was created in 2014 as an experiment for the Seven on Seven conference at the New Museum in New York City. It was a video clip named Quantum, whose author registered it on the Namecoin blockchain and sold it to Dash for $4, during a live presentation.
All NFT images were initially hosted on Counterparty, a peer-to-peer financial platform that supported asset creation and trading, with its decentralized exchange and a crypto token. However, at the end of the 2010s, with the advent of similar platforms, Counterparty lost its monopoly on hosting NFTs.
Today, the majority of NFTs are created on the Ethereum blockchain, which is basically a store of data that cannot be altered. Such data can be associated with files containing an image, a video, or an audio file.
While digital collectibles continue to attract the most attention in the crypto community, NFTs' use cases continue to increase and expand from the general ones like digital art and games to fashion, music, academia, tokenization of real-world objects, patents, membership sales, and loyalty programs, domain name ownership, decentralized finance (DeFi) and metaverse items.
Conceptualized by a person, or group of people, using the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency Bitcoin, blockchain is considered one of the distributed ledger technologies (DLTs), a distributed append-only time-stamped data structure that contains an ordered list of various records and these records are connected together through links called chains. It allows a peer-to-peer network where non-trusting members can verifiably interact with each without the need for a trusted authority.
Blockchain provides a solution to the long-standing Byzantine problem, which has been agreed upon with a large network of untrusted participants. Once the shared data on the blockchain is confirmed in most distributed nodes, it becomes immutable because any changes in the stored data will invalidate all subsequent data.
Logically, blockchain can be seen as consisting of several layers: infrastructure (equipment); networks (discovery of nodes, dissemination, and verification of information); consensus (Proof-of-Work, Proof-of-Stake); data (blocks, transactions); applications (smart contracts) and decentralized applications (dApps).
The overall development of blockchain technology can be divided into three streams and briefly described as shown in Figure 1. The first stream is “Blockchain 1.0”, a primitive level that includes cryptocurrencies such as Bitcoin, Ethereum, and others. The second stream is “Blockchain 2.0”, which has embedded distributed ledger agreements and related underlying technologies such as smart contracts and modified consensus protocols. The next-generation blockchain is called “Extensive”, it includes solutions for scalability and network interoperability, as well as specialized blockchains, such as, for example, the Flow blockchain, created for hosting and collecting NFTs.
Blockchain is still on the way to mass adoption. According to Accenture, an application of the diffusion of innovations theory suggests that blockchains attained a 13.5% adoption rate within financial services in 2016, therefore reaching the early adopters' phase that year. It has been seen as an emerging technology that enhances decentralized computation in 2018. In 2020, research and advisory firm Gartner listed blockchain as one of the top ten strategic technologies. In 2022, interest from market leaders contributes to the adoption of DLT technology, especially to the development and widespread of NFT-related solutions from 2021.
Smart contracts were originally introduced in the early 1990s by a computer scientist, legal scholar, and cryptographer Nick Szabo as he aimed to accelerate, verify or execute digital negotiation. He defined smart contracts as computerized transaction protocols that execute the terms of a contract.
Ethereum developers further implemented smart contracts in their blockchain system. Blockchain-based smart contracts adopt Turing-complete scripting languages to achieve complicated functionalities and execute thorough state transition replication over consensus algorithms to realize final consistency. The objectives are to reduce the need for trusted intermediates, arbitrations and enforcement costs, fraud losses, as well as the reduction of malicious and accidental exceptions. Smart contracts technology enables decentralized participants to conduct fair exchanges without a third party and further propose a unified method to build applications across a wide range of fields.
These applications operating on top of smart contracts are based on state-transition mechanisms. The states that contain the instructions and parameters are shared by all the participants, thus guaranteeing transparency of the execution of these instructions. Also, the positions between states have to stay the same across distributed nodes, which is important for consistency. Most NFT solutions rely on smart contract-based blockchain platforms to ensure their order-sensitive executions.
Basically, a token standard defines the smart contract and features that the token issued by it has. Today, there is a diversity of standards created on different blockchains.
Ethereum has gained more and more popularity and now most NFTs are issued on this blockchain. Its token standards start with the abbreviation ‘ERC’ (Ethereum Request for Comments).
The Main Ethereum standard is ERC-20. It refers to fungible tokens that function as regular cryptocurrency. ERC-20 tokens are smart contracts that provide great flexibility and functionality and can act as a financial asset, utility asset, or currency. Also, ERC denotes a set of rules that help developers improve the process of creating a standard Ethereum-based token, while ‘20’ is the unique identification number for the proposal. The main difference between ERC-20 and other cryptocurrency standards is that it is tied to Ethereum and can only be used within this network.
The NFTs phenomenon evolved from the Ethereum ERC-721 standard, developed by some of the people responsible for the smart contract with the same name. ERC-721 tokens are non-fungible. Each ERC-721 token is unique and cannot be duplicated. ERC-721 can be priced independently, this is why out-and-outer rare assets such as a digital art piece or a song can be represented by such token and stored offchain. ERC-721 defines the minimum interface — ownership details, security, and metadata — required for the exchange and distribution of tokens. Today ERC-721 is the most commonly used token standard.
Other notable non-fungible standards on Ethereum which aren’t as widely used as the ERC-721 standard are the ERC-998 and the ERC-1155 token standards.
ERC-998 tokens are ‘composable’ which means that assets within this type of token can be composed or organized into complex positions and traded using a single transfer of ownership. ERC-998 tokens are similar to ERC-721 as they are both non-fungible. Moreover, they can uniform fungible tokens such as the ERC-20.
The ERC-1155 standard takes the concept further by reducing the transaction and storage costs required for NFTs and batching multiple types of non-fungible tokens into a single contract. It allows users to register fungible and non-fungible tokens using the same smart contract and address. This standard was developed with games in mind where fungible tokens could represent a transactional currency in a game and the non-fungible items could represent in-game collectibles and in-game exchangeable assets.
ERC-721 — non-fungible tokens.
ERC-223 — much like ERC-20 but with a feature that ensures the tokens are only sent to compatible addresses. This prevents loss of access to the tokens since they cannot be retrieved from incompatible addresses.
ERC-827 — allows the approval of fungible token transfers so the tokens can be spent by an on-chain third party.
ERC-777 — an improvement on ERC-20. Users can send tokens on behalf of different addresses.
ERC-1155 — a smart contract that allows users to manage Ethereum tokens of many types. It can contain ERC-20 or ERC-721 tokens and it works for all types of assets: fungible and non-fungible.
ERC-1137 — a token standard designed for recurring payments. It works well for subscriptions requiring payments at certain intervals.
ERC-998 — a smart contract that allows users to merge several NFTs into one NFT.
ERC-875 — a smart contract that allows users to transfer several NFTs in a single transaction.
Flow is a decentralized, and developer-friendly blockchain, designed as the foundation for a new generation of games, apps, and the digital assets that power them. It is based on a unique, multi-role architecture, and designed to scale without sharding, allowing for massive improvements in speed and throughput while preserving a developer-friendly, ACID-compliant environment. It is a special blockchain designed specifically for collectibles.
To understand Flow genesis and main features we need to start with Cryptokitties, an NFT-based game that allows users to buy, sell, collect and breed digital cats. It was launched using ERC-721 tokens at the end of 2017. The game was so intuitively simple it became so immensely popular that it clogged the Ethereum blockchain network as it accounted for about 25% of the traffic on the entire network shortly after launch.
Frustrated with Ethereum, Dapper Labs — the team behind the game — set out to solve the technical problems they encountered. In the process, they created a new Flow blockchain designed specifically for applications like the ones that they had helped popularize. Dapper Labs also created NBA Top Shot, an extremely popular NFT-based digital collectibles platform.
Smart contracts on the Flow blockchain are written in Flow’s native language, Cadence. A unique feature of the Flow is that developers can release their Dapps in beta while updating the code as problems arise since Flow allows for ‘Upgradeable Smart Contracts’ development. Such smart contracts can be deployed in a ‘beta state’ and then be incrementally updated by the original authors until they are satisfied. Users will be notified that this smart contract isn’t finalized yet and can choose to wait until it is completed before trusting it. Once the original authors of the smart contract are satisfied with their code they can irrevocably release control and it becomes immutable from that point forward.
BNB Smart Chain (previously Binance Smart Chain) is a set of consensus layers with hubs to multi-chains. It has a built-in Ethereum Virtual Machine, which makes it interoperable with Ethereum. BNB Chain is comprised of BNB Beacon Chain (previously Binance Chain) and BNB Chain Governance (that includes staking, and voting mechanisms).
BNB Chain has its own token standards that are quite similar to Ethereum ones.
Created in 2014, Tezos is an open-source platform for assets and applications that can evolve by upgrading itself. Its decentralized blockchain can execute peer-to-peer transactions and serve as a platform for deploying smart contracts.
FA2 (TZIP-12) is standard for a unified token contract interface, supporting a wide range of token types and implementations such as fungible, non-fungible, non-transferable as well as multi-asset contracts. Therefore, FA2 contracts can be designed to support a single token type (like ERC-20 or ERC-721) or multiple token types (ERC-1155) to optimize batch transfers and atomic swaps of the tokens. It gives developers a lot of flexibility to define and invent new token types which can support complex token interactions while maintaining a standard API for external applications and wallets. These token structures can include NFTs and contain numerous different gaming items with interactive and transmutable features.
FA1.2 (TZIP-7) is an ERC-20-like fungible token standard for Tezos. At its core, FA1.2 contains a ledger which maps identities to token balances, providing a standard API for token transfer operations, as well as providing approval to external contracts (e.g. an auction) or accounts to transfer a user’s tokens.
TZIP-16 is a standard for accessing contract metadata in JSON format in on-chain storage or off-chain using IPFS or HTTP(S).
Kusama / Polkadot
Kusama cannot harbor NFTs. Unlike Ethereum, its blockchain lacks smart contracts on the chain. RMRK (pronounced ‘remark’) is an NFT protocol dedicated to establishing a standard NFT cross-chain infrastructure on the Kusama and Polkadot ecosystems. RMRK introduces the ‘system remark’ function, allowing users to create their own NFTs, users can now attach information alongside a block.
‘The rules for how to interpret this are called specifications or standards, and RMRK is one such set of rules. RMRK deals with applying rules to remarks, which is what we call blockchain graffiti on Substrate-based blockchains like Kusama or Polkadot.’ — RMRK Docs
The beauty of NFTs built on RMRK is that they are not the usual still images you find as NFTs. These NFTs come with extra functionalities, and users can interact with them, and they allow the creation of highly customizable protocols.
Other NFTs standards
Last year, the Cardano team introduced native tokens that enable the creation of NFTs without smart contracts. The Solana blockchain also supports non-fungible tokens. Blockchains like Cosmos, NEAR, and Ceramic Network, to name a few, are developing their non-Ethereum standards.
NFTs’ potential use cases include prominent ones like digital art, collectibles within gaming, music, fashion, sports, decentralized finance (DeFi), tokenization of real-world objects, domain name ownership, licenses and certifications, and others. Furthermore, NFTs could be used to track metadata, improve event ticketing and even transform real estate.
This section discusses 20 main NFTs areas of use. A summarized version of the NFTs use cases is given in Figure 3.
Intellectual property and patents
NFTs allow users to prove their rights to any piece of content, which is not possible with traditional intellectual property rights protection tools such as trademarks and copyrights. Ownership of an NFT can be distinguished, especially by timestamps, throughout the history of the NFT. Blockchain is immutable, meaning that the owners of the NFT can prove that they are the original creators of a particular piece of work at any given time.
Similar benefits apply to patents. NFTs can be used to protect and prove ownership of innovations or inventions. NFTs can also provide the necessary data for verification, thus creating a public ledger in which all transactions related to patents are documented and stored.
Art is the most common use case for NFTs. Sensational high-profile auctions of NFTs linked to digital art have received considerable public attention recently. The most expensive sales hit the headlines as they fetched millions. In 2022, the most expensive art NFT with a price of about $92 million was the work ‘Merge’ by the pseudonymous digital artist named Pak. Beeple’s ‘Everydays’ is now the second most expensive NFT with a price of $69 million.
Like its counterpart, physical art, digital art can be sold by artists and bought by art collectors and enthusiasts. However, it is also subject to counterfeiting or theft. The NFTs technology can help track the originality of a specific piece and reduce or completely eradicate counterfeit artwork in circulation no matter if it is a physical or digital artwork.
NFTs address the long-standing digital art scarcity issues on how to keep virtual artworks rare if they can be copied digitally. The use of NFTs in this regard gives each piece of art a unique hash that allows it to be differentiated. Artists of original artworks can include their signature in NFTs, thereby reinforcing the authenticity of the content created. While it is possible to make copies of digital art, NFTs ensure that each copy is solely owned by the purchaser so that it is not interchangeable with another copy, increasing the art’s appeal to amateur collectors and speculators. Subsequently, users could view the entire history of the artwork, including the previous prices at which it was purchased and ownership.
Tokenization of digital art by means of NFTs has enabled the artists to not only gain more profits from the sales of their work but also receive a royalty each time their artwork is transferred to a new owner. The concept of royalty was previously impractical, especially in the case of physical art, as it was difficult to trace its ownership. The incorporation of NFTs has enabled novel monetization opportunities for artists to be compensated for their craft.
The most visited and used platform for hosting NFTs is OpenSea mass marketplace, a universal platform that allows users to trade NFTs, create them, view data on them, and check statistics. One of the reasons it is so popular is that it is self-service based, and not curated like for example Nifty Gateway or SuperRare. It is worth noting that physical art can be turned into an NFT, and NFTs can be turned into physical art as well. This May SuperRare, the pioneering NFT marketplace, will debut its first-ever pop-up gallery in New York City, dedicated to showcasing a rotating program of curated NFT artwork exhibitions and programs.
Music NFTs also have a large devoted community and are on the way to adoption. Like a JPEG or a video, users can attach audio to an NFT to create a collectible piece of music. Thus, music NFTs can be seen in terms of a digital ‘first edition’ of a record. They let anyone listen to tracks but also confer ownership over that file through an NFT. Unless specified, music NFTs give buyers no royalty or copyright claims — just as art NFTs don’t either by default.
It is worth noting that music-related NFTs are not the music files or images themselves. WAVs, JPGs, and so forth — don’t live directly on a blockchain. They often live on the websites, on Bandcamp, or on a blockchain-adjacent storage service like IPFS or Arweave.
For decades, musicians have not been equitably compensated for their music. This has been particularly apparent in the music industry lately. As reported by Fortune, the typical total revenue split is 50/50 — with only 50% of revenue going to the entertainer and the rest shared among agents, lawyers, and distributors. The reality is even grimmer when it comes to musicians who distribute their content via streaming services. Most of Spotify’s top 0.8% of artists earn less than $50,000 in streaming revenue. Competing with Spotify, Amazon Music or Youtube for streaming services is difficult for small blockchain projects. Even when a giant like Spotify purchased a blockchain royalties solution called MediaChain in 2017, there were no real benefits for artists. However, with NFTs, there are now at least two possible ways to achieve a balanced outcome: blockchain-based streaming platforms and blockchain royalty tracking.
The largest NFT marketplace OpenSea has a dedicated catalog for music NFTs, most artists prefer to launch on music-specific marketplaces. One of the biggest decentralized music platforms is Audius with about a dozen million monthly users. Catalog is the primary marketplace for single-edition music NFTs, a category known as 1/1 in the NFT world. It’s built on the Zora protocol, which also powers the OpenSea competitor marketplace by the same name. Other solutions that let artists mint 1/1s include Foundation, Arpeggi, and FormFunction. For limited editions, e.g. 10 NFTs tied to one track, as opposed to 1/1s, a popular option is Sound.xyz.
Moreover, music NFT-platforms specialize in different genres. Groovetime caters to dance music NFTs, and HEAT is another platform that’s yet to launch. Beat Foundry enables minting generative music, a genre involving collaborations between humans and computers.
As for the notable news, most recently, Snoop Dogg announced that Death Row Records, his former label — which he acquired in February — will be an NFTs label. Warner Music Group invested in Dapper Labs — the company behind CryptoKitties, and as part of its partnership with WMG, the startup has teamed with Muse to create two crypto-collectibles, including a limited edition Kitty ‘signed’ by the band. Kings of Leon became the first band to announce the release of an NFT album, with three types of tokens that include special artwork and perks. Daft Punk issued several collectibles on the Rarible platform before announcing they broke up. One of the biggest music-based NFT sales happened when a rare Whitney Houston demo recording . Madonna and Grimes have all dipped into NFTs, discovering new ways to both monetize and engage with fans.
Spotify is testing a way for artists to display their NFT collections. The music streaming platform has rolled out the test for some users on Android in the US and currently includes NFT previews for artists like Steve Aoki and The Wombats.
Crypto collectibles are a significant entrant among non-fungible token use cases. They are designed in most cases to be bought, sold, and traded as one would with a baseball card. Such collectibles are tied to unique identifiers, which makes them scarce and feeds into the entertainment value associated with purchasing and swapping them — they are truly one of a kind, or at least limited to a defined number.
In fact, collectibles were one of the very first ways that introduced the idea of NFTs to the general public through Cryptokitties. The popularity of Cryptokitties gained prominence in 2017 as they congested the Ethereum network. Furthermore, this use case hit the mainstream with the introduction of NBA NFT collectible trading cards NBA Top Shot.
Massive demand for digital collectibles remains in 2022. Whether it’s a PancakeSwap Bunny or a Binance Anniversary NFT. Along with digital NFT art, these non-fungible tokens make up a significant proportion of sales on NFT marketplaces like Opensea, BakerySwap, and Treasureland. There’s a lot of crossover with crypto art, and sometimes an NFT can be both a collectible and an art piece.
Jack Dorsey’s first tweet is an excellent example of an NFT collectible. While a CryptoPunk is collectible and visually artistic, Dorsey’s NFT has value purely for its collectibility. Dorsey sold the NFT using Valuables, a platform that tokenizes tweets. You can place an offer on any tweet. Anyone can swoop in with a counter-offer and outbid you. Then, it’s up to the tweet author to accept or reject an offer. If they accept, the tweet will be minted on the blockchain, creating a 1-of-1 NFT with their autograph. Each NFT is signed by its verified creator’s Twitter handle, meaning that only the original creator can mint their tweets as NFTs. This process creates a digital, rare collectible to trade or keep. The concept of selling a tweet can be a bit tricky to grasp, but it’s a great example of how NFTs create collectibility. It’s essentially the digital version of a signed autograph.
There is a huge demand in gaming for unique items that can be sold and bought. Their rarity directly affects their price, and gamers are already familiar with the idea of valuable digital items. Microtransactions and in-game purchases have created a multi-billion dollar gaming industry that can leverage NFT and blockchain technology. There is also an exciting area in terms of what NFTs are. Video game tokens combine the elements of art, collectibles, and player utility. However, when it comes to high-budget video games, NFTs are still a long way off.
In 2021, NFTs gained significant attention from the gaming community and developers as they provide an opportunity to own data for in-game items, fuel in-game economic systems, and provide many other perks to facilitate the players. Many standardized games allow players to purchase various inventory items and objects. However, if the purchased item is an NFT, the player can claim a refund by selling the item when they no longer need it. The player can even make a profit if the value of the said item increases over time. This process is beneficial not only for gamers but also for developers in many ways. Every time an NFT is sold on the market, the developers also receive royalties. This leads to a more interdependent profitable business environment in which both players and developers profit from the NFT intermediate market. This also indicates that if the developers stop supporting the game, the items accumulated by the players remain their property.
The new game model advertised by crypto enthusiasts is named “play to earn”. Players play games to earn NFTs that can be sold on marketplaces for higher prices. These items can often be used to achieve higher performance in the game. One of the most prominent examples of this model is Axie Infinity, where players in this game can earn a Smooth Love Potion (SLP) that can be sold for 15 cents per SLP. The popularity of the game has skyrocketed in the Philippines, with people quitting their jobs to play the game full-time, and merchants now accepting SLP as currency. Every day >2 million people play with the little blobs of Axie Infinity, which has a valuation of $3 billion. Also, each Axie pet has value when traded that depends on its set of abilities for battling. In the same way, each CryptoKitty can be extremely valuable just for its desirable breeding attributes. Determining the value of each pet depends on a combination of rare looks, features, and utility.
F1 Delta Time, a blockchain game licensed by Formula 1, and developed and published by Animoca Brands consists of a collectible element based on NFTs as well as different racing game modes, such as Time Trial and Grand Prix™ Mode, utilizing those NFTs.
“Gaming is really exciting, as you already have billions of people who are buying digital goods inside of games,” said Devin Finzer, CEO of OpenSea. The reason we haven’t yet seen an even wider adoption, said Finzer, is that “the development cycle is a little longer with games than with simpler arts and collectible projects. There’s a little more of a delay.”
To summarise, NFTs give game developers another way to expand their brand and create another revenue stream, while gamers are given more incentive to keep playing a game if they already own characters or items within it. Needless to say, NFTs can be integrated into gaming worlds by allowing NFT cross-platform playability.
The concept of NFTs seems natural in the sports sector as well, where it gained popularity and became a profitable venture in a short amount of time. Basketball, baseball, and boxing are among the sports that have the most expensive NFTs. Golden State Warriors released their own NFTs, making them the first U.S. sports team to do so. In addition, the National Basketball Association (NBA) has launched a blockchain-based trading card system called NBA Top Shot, which allows basketball fans to buy, sell and trade officially licensed game moments as videos with their favorite players. Selling for $387K, one of the most expensive Top Shot was a clip of a LeBron James highlight where he emulates a famous Kobe Bryant dunk. Likewise, Autograph, a Tom Brady-backed startup, is an up-and-coming NFT platform that has partnered with big names in sports, such as Tiger Woods, Naomi Osaka, and Simone Biles.
NFTs are completely transparent which is a great benefit for users. For example, NBA cards use a rating system, and the original owner has no idea about their location or the value of the card. With NFTs, the value of these NBA cards can be tracked digitally. Since the NFT has introduced a new way to generate income, it is more beneficial for athletes and fans than traditional ways such as advertising. It is also a new approach to connecting with fans and providing them with a unique experience. As more athletes and celebrities get involved in the NFT space, there is a growing number of things that can be tokenized and traded as NFTs like digital autographs, avatars, stickers, and animations.
Blockchain is serving as the perfect alternative for resolving such crucial issues plaguing the sports industry as counterfeit tickets and merchandise without any complications. The immutable nature of blockchain technology helps in preventing it.
The use of NFTs in fashion is still a relatively new concept, in the pandemic, due to the closure of physical stores, the fashion industry is trying to expand its perspective by venturing into fashion technology. Companies have already begun incorporating new technologies such as AR, VR, and NFTs into physical items to distinguish ownership and maintain exclusivity. NFTs as a blockchain technology have been able to fit seamlessly into the fashion world, guaranteeing benefits for all participants in the supply chain. Consumers could easily verify the ownership information of their products and accessories digitally, thereby reducing the risk of counterfeit fraud. Users could simply scan a QR code on the price tags with apparel and accessories that are in the form of NFTs.
In this way, consumers could get a clear view of details such as the location where the asset was created. In addition, consumers could know details about the people who owned the asset before the buyer bought it. The introduction of blockchain into the fashion world has played a pivotal role in reducing carbon emissions. As a result, they can improve the well-being of employees along with customer protection. Thus, NFTs could create a new type of blockchain for the supply chain in the fashion world.
Luxury fashion brands are taking advantage of the unique ownership, permanence, and royalty benefits of the NFTs solutions. Many fashion brands are using their online presence to expand but still remain economically out of reach of the masses, who support the demand for counterfeit and replicated goods. Businesses are losing large sums of money due to counterfeits of their brands, the consequences of which can be prevented by NFTs, if not completely eradicated.
In September, Dolce & Gabbana sold its inaugural nine-piece collection of NFTs, called ‘Collezione Genesi,’ a surreal mix of high fashion and blockchain, for $5.6 million. The set included both physical items — like women’s dresses — and their digital companions as NFTs.
Just two weeks earlier, at London Fashion Week, a new brand called Auroboros, which describes itself as “the first fashion house to merge science and technology with physical couture,” unveiled a line of digital apparel that you “wear” using augmented reality (AR).
Jacob & Co., a luxury goods brand, auctioned a digital watch which was sold to the highest bidder for $100K. RTFKT, a virtual fashion brand, sold a jacket for a price of more than $125K. The high valuation of fashion-based NFTs indicates the presence of demand for virtual clothing articles. Since the fashion industry relies on the sales of physical goods, it is unlikely that NFTs will completely replace the same but it provides a lucrative opportunity for luxury fashion businesses to utilize it as an extension.
NFTs have even made their entry into the apparel space — Uniswap socks, for instance, are NFTs on the Ethereum blockchain that can be traded like normal NFTs, save for the fact that they can also be redeemed for a real pair. Because these NFTs are tied to redeemable objects, they are trading for more reasonable prices — $100k for a pair of Uniswap socks or $16k for a Mango Markets cap. Cryptocurrency exchange FTX is also participating in redeemable clothing, with offerings like redeemable sweatpants and condoms. The advantage offered by these NFTs is that the pristine condition of the product is guaranteed.
Gucci was one of the first luxury fashion houses to enter the NFT world. To celebrate its landmark 100-year anniversary, Gucci created an NFT-film inspired by its Aria collection. The four-minute short film was auctioned at Christie’s and was sold for $25,000 — the proceeds were donated to UNICEF to aid in COVID-19 relief efforts.
In 2019, Nike was granted a patent that calls for a “system and method for providing cryptographically secured digital assets.” The patent includes digital assets for articles of footwear. Recently, the sportswear giant announced the launch of a digital offering called CryptoKicks. Sneaker brand Flowers for Society made its first product drop available through pre-order, linking each product with an NFT. The Spanish global fashion giant Zara partnered with the South Korean label Ader Error to launch its first NFT project. LVMH is another luxury group with an anti-counterfeit blockchain AURA blockchain that is used to track brands such as Louis Vuitton and Parfums Christian Dior to fight against fake versions.
Currently, the ticketing system is devoid of memories, which serve as a reminder of the memorable occasions of previous events. NFTs introduced the new functionality and memorability of tickets. The paper ticket can be lost or get wet and damaged. In addition, traveling with a paper ticket is difficult due to the possibility of losing it. Also, organizers do not get enough protection with paper tickets, which are easy to forge. QR codes proved to be a viable option for organizers but proved to be inefficient in terms of attendees purchasing them.
The NFTs ticketing scheme is quite simple. Event organizers can mint the appropriate amount of NFT tickets using their preferred blockchain platform in the ticketing system. They can code the NFTs to establish a sale price or conduct the sale as an auction in which participants can begin bidding for tickets. Customers then purchase NFT tickets and save them in their mobile wallets. They generate NFTs upon their visit to the event.
There are a lot of advantages of utilizing NFT-ticketing, since they have the ability to improve both the attendee and organizer experience when purchasing tickets.
First of all, such a system prevents forgeries and frauds. Blockchain technology establishes a single point of truth for both ticket holders and organizers. The movement of NFTs from the original sale to resale is immutably recorded on the blockchain, allowing all parties to independently verify the ticket’s legitimacy. In situations where the resale of tickets is prohibited, NFTs can be created as non-transferrable, and unable to be physically transferred to another customer.
Also, compared to the old ticketing system, the expenses involved with selling and minting NFTs are minimal. You may obtain an unforgeable ticket at a lower manufacturing cost, allowing customers and organizers to verify the validity of each ticket in the chain and monitor its ownership history.
Because programmable NFTs can include built-in rules for merchandise, content, resales, and royalty splits, the organizer can analyze profit sharing percentages for future resales or creative content on secondary markets and collect funds with the assurance that they will not be altered within the NFT’s coding.
NFT-based tickets serve as programmable money, creating an infinite number of new revenue streams. For instance, reselling NFT tickets as collectibles, utilizing NFT tickets to offer food and beverage discounts, and rewarding fans who have amassed a large number of event tickets.
Moreover, it is very time savvy. In less than a minute an NFT may be minted and ready to be sold. NFTs could be emblazoned with artwork and serve as concert memorabilia. Or maybe visitors will even make money by attending the show.
Coachella Collectibles became a first-of-its-kind opportunity to own lifetime festival passes, and unlock unique on-site experiences, physical items, and digital collectibles. To create them the festival organizers partnered with FTX US, an environmentally friendly marketplace on Solana.
In May 2022, in France, eternal passes to music festivals and nightclubs in the form of NFTs went on sale. Clubbing TV, a French channel dedicated to the culture of electronic music, launched The List NFT collection of 7,777 tokens. All of them provide access to a variety of club events around the world. The list of partners includes Amnesia Ibiza (Spain), World Club Dome (Germany), Supersonic (India), We Are Fstvl (England), Caprices (Switzerland), Rampage Open Air (Belgium), Barcelona Beach Festival (Spain), and others. NFT looks like a bracelet, the tokens have 130 attributes (color, style, inscription, etc.). To create them the artists used generative 3D rendering.
Domain NFT (also known as decentralized domain, crypto domain, or blockchain domain) is a unique domain represented by a single NFT.
A domain NFT offers several exceptional advantages to traditional domains. First of all, they are usually one-time purchases, in comparison to the annual renewal fee-based traditional Web2 domain business models. NFT domains are also 100% user-owned, meaning a centralized entity such as GoDaddy or Google Domains can’t censor or repossess your domain at their will. What makes domain NFTs so interesting is that they can also function as cryptocurrency public addresses, meaning that the domain can send and receive other compatible cryptocurrencies and tokens as payment.
To sum up, they are domains that live on public blockchains and give users complete ownership of their stored data with the benefits of owning one and simplifying crypto transactions by replacing wallet addresses with the domain name and easily creating and hosting websites on Web3.
Popular solutions like Ethereum Name Service and Unstoppable Domains present crypto addresses as NFTs. With them, users can change their addresses from a long complicated string of numbers to any desirable length domains resulting in a more welcoming and user-friendly process. Some of the notable examples of non-fungible token applications refer to myname.crypto or myname.eth. The crypto address of a user is similar to the Twitter or Instagram handle, with each name being unique.
Ethereum Name Service (ENS) domains enable users to represent traditional addresses such as wallet addresses, hashes, website URLs, etc. with a simpler format having the .eth alias. ENS domain names can be bought and minted directly from the ENS platform or through secondary trading on exchange platforms like OpenSea.
The number of newly registered .eth domains has seen a tremendous increase this month. According to Dune Analytics, about 260K addresses have been registered in May 2022 which is a significant increase even in comparison with the 163K addresses registered in April.
.eth monthly new addresses also remain on a constantly high level this year with about 36K in May.
In April 2022, three numeric Ethereum Name Service (ENS) domain dubbed ‘555.eth’ was sold for 55.5 ETH worth over $160K. It joins the leaderboard as one of the most expensive ENS domains ever sold. The domain, 555.eth, was reportedly bought by a Chinese collector who claims to have bought the domain for fun amid an ongoing rush for numeric ENS domains.
Previously, Unstoppable Domains sold off its ‘win.crypto’ blockchain domain NFT for a record $100K. The sale — which occurred on March 3, 2021, was the first big deal that highlighted the growing interest in the NFT phenomenon beyond digital art.
The metaverse refers to a simulated digital environment that combines multiple elements of technology, such as AR, VR, MR, and blockchain, along with social media concepts to create spaces that enrich users’ interaction by mimicking the real world.
It is a theoretical concept of a digital 3D world that users can enter via VR headsets. In this virtual world, they have a “body” (avatar) that they can customize, a home to fill with the stuff they like, and hundreds of spaces to visit. In metaverses, users can interact with others, do work, play games, and basically perform most of the activities that they do in everyday life.
According to none other than JP Morgan, the metaverse represents a $1 trillion market, and a wide range of companies have announced their intention to explore the opportunities it presents. Bloomberg estimates that the metaverse market could be worth $800 billion by 2024.
The metaverse is where a quarter of us will be working, studying, shopping, and socializing for at least an hour a day by 2026, a new study says. About 30% of the world’s organizations will have metaverse products and services by then, too, says technology research specialist Gartner.
In the proposed NFT-based metaverse, users can own things like avatars, land, digital clothing, and other items and move them between platforms through their crypto wallets. Interoperability is key for crypto startups pushing the technology: it’s not just about being tied to one platform from Facebook, Google, or any other tech giant.
Items of popular NFT collections like the Bored Ape Yacht Club and CryptoPunks could be transformed into 3D avatars that owners can bring into metaverse worlds. These virtual assets can also be traded, customized and even monetized.
Furthermore, proponents of the metaverse believe that it will open additional economic opportunities for both users and creators, whether through play-to-earn video games — such as Axie Infinity, — content creation, and items that others can purchase as NFTs, or even design games and places that users can explore and enjoy for a fee. An NFT-based metaverse can better democratize the Internet and bring significant value to users, not just platform operators.
Blockchains behind the top metaverses:
Ethereum — is the most popular blockchain with the ability to create third-party projects.
Decentraland is a metaverse-style game experience. The game lets users purchase plots of land — which are sold as NFT assets — in the shared world and then build on top of it, creating things like NFT artwork galleries and other interactive experiences. Decentraland is primitive compared to Facebook’s vision, but it’s up and running now and has been live for a couple of years, with companies including Samsung and JP Morgan opening virtual spaces.
The Sandbox is a game with a similar approach, sporting a Minecraft-esque visual design and the ability to monetize land plots by creating premium experiences. Landowners can even rent out their plots for a fee. The Sandbox has recruited an array of celebrities and brands into its world — from Snoop Dogg to Adidas and The Walking Dead — and adjacent plots have often sold for a premium over other land chunks. Thus, in December 2021, someone paid nearly $450,000 worth of crypto to buy a land plot in The Sandbox near Snoop Dogg’s villa. about the news, “That’s a bargain.”
Cardano is a public blockchain platform with consensus achieved using proof of stake. It was founded in 2015 by Ethereum co-founder Charles Hoskinson.
Metaverses: ADA has a Pavia metaverse with a minimal carbon footprint and lower gas fees.
Solana is an open-source scalable and energy-efficient blockchain that has become wildly popular in 2021. In terms of development, Solana is very different from others, it uses the Rust programming language.
Metaverses: The space metaverse / P2E Star Atlas.
Polygon is a decentralized Ethereum scaling platform that enables developers to build scalable user-friendly dApps with low transaction fees without ever sacrificing security.
BNB Chain is a blockchain that was developed by the team of the largest crypto exchange Binance.
Metaverses: In the Ultiverse metaverse users can import their own NFTs as well as use an artificial intelligence engine.
The metaverse concept has been one of the hottest trends in the tech space lately, especially after Facebook’s announcement that it was rebranding to Meta, and giant companies like Microsoft, Google, and Sony dived into the metaverse with their unique platforms or started investing. Elsewhere, brands as diverse as Walmart and Disney have revealed plans to extend their offerings into the metaverse.
Decentralized finance (DeFi)
DeFi Decentralized finance (abbreviated as DeFi) is an umbrella word that refers to peer-to-peer financial services provided on public blockchains. Most of the things that banks allow you to do — earn interest, borrow, and lend; buy insurance; trade derivatives; trade assets; and more — are available to you through DeFi. Plus is far faster and does not necessitate the involvement of third parties.
Since NFTs depict the financialization of digital products and services, NFT setups and marketplaces have come to be an undeniable thriving sector of DeFi. Like Ethereum has employed ERC-20s to embody digital assets, NFTs can be comprehended as provable ownership rights for digital art. NFTs enable asset tokenization, and DeFi provides decentralized access to financial services.
Since 2020, an advantage to combining the pros of NFT technology with the functionality of DeFi has appeared. For example, in the Aavegotchi game, each character is the user’s collateral stored on the Aave lending platform, on NIFTEX it is possible to borrow and lend NFTs, to maintain fractional ownership. Launched in June 2020 NFTfi is a marketplace for NFT mortgages. It allows users to deposit NFTs as collateral to borrow crypto assets such as ETH or WDAI.
reNFT is a leasing platform in which NFT assets holders can lease out their assets and receive rental revenue over the lease period of the assets. From the NFTs borrowers’ point of view, if there is a temporary need for some particular NFT assets, instead of buying they are able to rent out suitable NFT assets through this platform. IQ Protocol is a DeFi tool introduced by PARSIQ whose main role is to provide the framework that enables controlled rentals of assets in the form of Time-limited wrapping.
Rarible, a non-financial-transaction NFT marketplace that is solely focused on creators, also has the required procedures for regulation under the aegis of a Decentralized Autonomous Organization (DAO), which is represented by the governance token known as RARI (DAO).
The holders of RARI tokens, which include producers and collectors, are able to vote on platform enhancements while also actively participating in the moderating of the marketplace itself. RARI has also included a non-profit trust index, which serves as a portfolio for non-profit trusts to assist all collectors in seeing the artworks and selecting the most appropriate one for investment.
JustLiquidity offers an NFT staking model. A user can stake a pair of tokens in a pool for a certain period and receive an NFT to access the next pool. The NFT acts like an entrance ticket and is destroyed once you participate in the new pool. This model creates a secondary market for these NFTs based on the access they provide.
Another example is BakerySwap’s NFT food combos that provide increased staking rewards for holders. By contributing BAKE, users receive an NFT combo that provides a variable amount of staking power. Users speculate on these combos, sell them on the secondary market, or use them for staking. This combination of NFTs with gamification and DeFi creates another interesting use case for non-fungible tokens.
Moreover, GameFi projects like Axie Infinity combine NFTs with DeFi, successfully bringing the brand-new economic model of play-to-earn to the mainstream market.
Blockchain technology can be useful in logistics, particularly because of its immutability and transparency. These aspects ensure that supply chain data remains authentic and reliable. With food, commodities, and other perishable goods, it’s important to know where they have been and for how long.
NFTs work for supply chain purposes because companies are particularly concerned with maintaining trustworthy digital data related to their physical world assets. Therefore, companies can benefit by using NFTs to represent their physical assets digitally. Some ways in which NFTs address supply chain needs are in the areas of tracing products through supply chains, identifying product origin and authenticating ownership, and verifying product certifications.
Product origin and authentication
NFTs can be used to verify the authenticity of the product users are purchasing. Since the blockchain can permanently store product information, rarity and authenticity checks became relevant for physical products as well. NFTs can also be used to store information about the manufacturing process, ensuring everything is fair trade.
For instance, the luxury watch brand, Breitling, introduced an NFT passport for each of its watches, which allows customers to receive the physical watch along with a digital version of the watch. Customers can then use the digital passport to verify the authenticity of their Breitling watch, prove their ownership of their Breitling watch, and transfer ownership of them upon resale. Breitling has also tied the digital passport to its warranty program, allowing owners to track repairs to their watches.
One of the crucial problems is fake food products such as supplements and drugs. NFTs can help solve this problem by tracking and tracing food products. Imagine that you simply scan the QR code of a nutritional supplement you bought online and see its entire journey from production to shipment. In this case, products that erroneously claim to have been made and sourced in a particular country will end up being debunked because the track record is transparent.
Product traceability and provenance is a popular use case of blockchain technology. In many industries, blockchain and tokenization are applied to track products such as food, medicines, or fashion items. Tokens are used to track the exchange and movement of goods throughout a supply chain. By creating NFTs for products or product batches, a unique digital twin can be created that is linked to unique identifiers of the physical products.
Because NFTs can represent real-world objects, supply chains can use NFTs to track a variety of products and materials. To track physical world objects via NFTs, the owner must create a digital representation of the physical object on the blockchain so that transactions related to the physical object can be safely stored and tracked.
NFTs have already been used to simplify real estate transactions, as well as to facilitate fractional investments by creating unique revenue-generating assets characterized by an NFT. Factory machinery is also revenue-generating asset that could be financed in other ways through tokenization.
Business documents such as certifications, invoices, and sales orders always contain a unique identifier. These types of documents can also be represented by NFTs.
The modern-day consumer is selective about product certifications. As a result, providing consumers with trusted certifications such as ‘organic’ or ‘fair trade’ can increase sales. To accomplish this, third-party certifiers for product standards or labor safety requirements could mint an NFT with the appropriate certification onto the blockchain, which supply chain members would pass downstream until it reaches the end-user in the supply chain who can ultimately access the certification via a web link.
Decentralized autonomous organizations or DAOs are built on the focal concept of decentralization, introducing organizations run by groups of people with no typical business hierarchy. In DAOs, the rules and transactions of the group are recorded and managed on the blockchain, removing the requirement for central entities.
There are many different kinds of DAOs already in place today.
Social DAOs: A collaborative platform for social networking in the crypto landscape, often involving a number of members with a common interest.
Investment DAOs: Venture or investment DAOs allow people to come together to raise money for a variety of DeFi activities. These organizations are ideal for attracting younger investors in search of transparent money-making opportunities.
Collector DAOs: Collector DAOs are specifically focused on the NFT landscape. These allow members to fractionally own various high-priced digital assets as a group.
Grant DAOs: One of the primary functions of DAOs, grant DAOs allow users to collect funds in a central pool and allocate those finances based on community votes.
Protocol DAOs: Protocol DAOs involve using various smart contracts to provide decentralized financial services.
All these types of DAOs can benefit from the connection with NFTs.
One of the ways NFTs and DAOs are closely connected is in the form of collector DAOs, a kind of decentralized organization specifically focused on the collective ownership and the development of NFT communities.
There are several NFT DAOs already on the market today, including the APE DAO, one of the better-known groups in the landscape, created by an NFT collector known as Kylo Eth. The APE DAO fractionalized many Bored Ape Yacht Club NFTs and helped to ensure everyone can own parts of highly sought-after digital assets. PleasrDAO is a collective of “DeFi leaders, early NFT collectors, and digital artists” that collects funds for highly valuable NFTs.
The second case here is community governance with NFTs.
DAOs operate on specific sets of rules established using smart contracts in a blockchain. Through smart contracts, these groups can create transparency in their operations. No central authority can override or make changes to the smart contract, as changes are only made with a community vote.
Users usually need tokens to participate in DAOs, and token ownership usually comes with various voting and governance rights to ensure users can influence decisions in the wider group. As a result, NFTs naturally play an important part in how DAOs generally operate. NFTs could be something a member of a DAO will need to have access to in order to make meaningful changes in the organization.
In contrast, DAOs can also help NFT communities in community governance. Several NFT projects have already established their own DAOs. Top collectible, Gutter Cat Gang, for instance, has the Gutter Cat Gang DAO. The organization, as per its website, aims to take the Gang “beyond that of your standard NFT community or club”. In some cases, the community creates DAOs and not the project itself. A typical example is MeebitsDAO set up by community members of Larva Labs’ Meebits NFT project. Via the DAO, the community aims to build a metaverse for the avatars. There’s also the YGG DAO community, which focuses on delivering in-game assets from blockchain and NFT games to people in the ecosystem. The YGG Token holders in the community can vote on decisions related to the business and governance of the business.
Blockchain technology has introduced a new chapter to the world of identity management and cybersecurity through a decentralized system of data protection. The intention is to keep the sensitive information of individuals and organizations safe from malicious attacks by a third party or hacker. It can also be used to track the identities of individuals and items. Its security innovations revolve around: decentralized technology, security through blocks, private and public blockchain, and smart contracts.
Self-sovereign identity (SSID) has long been one of the most intriguing applications of blockchain technology, and NFTs could be the key that unlocks the door. NFT-secured virtual selves may in many ways become more secure than identities in everyday life. Passwords can be stolen, biometrics hacked, and passports forged. Identity secured in the blockchain is more difficult to fake and steal. From a privacy standpoint, NFTs could spell the end to online anonymity, but there are a fair amount of benefits to having a completely verified network, including a reduction of fraud, crime, and maybe even nasty comments.
In April 2022, a new start-up Pfpid launched its service, and start using NFTs as a form of identity verification for web3 interactions. Some exchange platforms have started verifying the identities of new users during onboarding in an effort to prevent fraud.
Furthermore, an identity validation-dependent process such as voting could be integrated with NFTs. It is known that in many countries, voters are required to bring a photo ID and proof of residence with them when going to polling booths to vote. However, many are being disenfranchised as they do not have copies of their IDs or any form of documentation that will prove where they live, or if they are even registered to vote. NFTs can help solve this problem since they would provide a digital identity for people without physical documentation that proves who they are and where they reside in the country. This will also help eliminate cheating and voter fraud as NFTs will serve as an official record of those who voted and their votes.
There is a lot of malpractice going on in the pharma industry. For example, a report from ABC News (Australia) claims that many were given harmless saline injections instead of the COVID19 vaccine. The NFT technology can help eradicate most of the malpractices carried out worldwide as the customers have visibility of the entire supply chain journey, the name of the producer/owner, storage locations, and the product’s viability. Similar to how NFTs have disrupted the art world, they could positively disrupt the digital health landscape by giving patients unprecedented control over their medical information.
NFT-ledgers can store an individual’s medical records without compromising confidentiality or risking tampering from external sources since NFT transactions are validated on multiple nodes before being added to the blockchain permanently — ensuring that every record is accurate and secure from malicious attempts at manipulation.
NFT applications have been designed specifically to aid healthcare professionals as well — one such example is NFT Birth Certificates that can be issued to newborns by healthcare providers. Issuing one of these NFTs for each child can be an effective way to quickly create a lifelong identity on the blockchain that’s linked to their birth certificate — which is then verified with NFT verification apps.
NFT ledgers also provide safer methods of storing sensitive medical data while still allowing authorized healthcare providers access when required. Narrowly-defined NFT use cases have emerged in recent years where hospitals, health insurance companies, and other organizations are beginning to explore how blockchains could help improve hospital operations by verifying patient identities and recording medical procedures performed without compromising patient confidentiality.
NFTs could actually create social good, argues a recent publication out of Baylor College of Medicine — specifically, within the healthcare industry. In the journal Science, a multidisciplinary team of bioethics, law, and informatics scholars write that NFTs, as a digital contract of ownership, could help citizens track and control who accesses their personal health records. The health record-keeping system as it exists today is an organizational jumble — an issue in and of itself — but it also disenfranchises the individual, who essentially loses all power to decide who can view their personal data once the clipboard leaves their hands. After that, the information is transcribed into an electronic record, which can then be commercialized and distributed in unforeseen ways.
More importantly, that information is valuable. “In the era of big data, health information is its own currency; it has become commodified and profitable,” says Dr. Amy McGuire, a senior author of the paper. Ownership of it, via the NFT blockchain ledger, could let individuals track the sale of their data — or stop it, or even cash in. “Using NFTs for health data is the perfect storm between a huge market place that’s evolving and the popularity of cryptocurrency”.
There are some startups that are exploring this potential. One such company is Aimedis, which has a medical NFT marketplace where patients can participate in transactions involving their health data. The health monitoring app Go!, developed by Enjin and Health Hero, can collect individual activity and wellness data from popular apps like Apple Health, Google Fit, and Fitbit. In doing so, it creates Well-being NFTs, or W-NFTs, imbued with the scarcity of the users’ health data assets. These can even be traded on the open market.
Memberships and community development
NFTs are the best way of producing and maintaining membership proof for clubs, events, or communities. Since they are blockchain-backed, they can be used as digital tickets to various events as well as exclusive clubs. They may even be used to access limited edition articles and items that are out of reach for many.
An example here is a LobsterDAO community — one of the most active and engaged DeFi communities, and a resource where engineers, developers, founders, and builders can discuss, among other things, open source DeFi and programmable money code. The group describes its purpose as “first and foremost a crypto community for technical and economic research and discussion, with a strong focus on DeFi.” Their 10b57e6da0 NFT drop became a commemorative art event for the community in the form of NFTs. Possession of a pair of claws or a shrimp became an essential attribute of a community member and brings privileges.
Also, with increasing exposure to social media, users and fans are spending more and more time online. These influencer-loyal / celebrity-loyal folks can be offered limited edition NFTs of their favorite entity along with special benefits. The privileges could range from entry to meet-and-greet events to restricted-access merchandise or even access to live events. Brands that are able to identify their die-hard followers can drop some limited edition NFTs in the market and reward them with some enhanced offerings to expand the community of fans.
NFTs have a lot of potential over and above their highly secure protocol. The possible applications of the technology are plentiful and could be harnessed to unlock all sorts of possibilities even if the buzz around them dies down.
Licenses and certifications
NFTs use cases can also lend profound benefits for license and certificate validation. Assigned to individual licenses and certificates, NFTs can minimize the time and effort that companies have to expend on reviewing critical documentation, in this way improving administrative operations.
Certification and licensing agencies can eliminate the workload of record checking, record keeping, and verification as each document has a unique NFT that can be checked for authenticity. The issuance of the licenses and certificates on the blockchain makes them resistant to forgery, which reduces the likelihood of detecting fraudulent documents.
An example of this use case of NFT is Zastrin, an education company that sells online programming courses. The company uses NFTs to purchase course licenses and issue course completion certificates.
NFTs are also a good way to represent academic credentials. NFTs can provide proof of attendance, degree earned, and other important information which will be stored on the NFT chain that cannot be altered or hacked into. NFTs can create immutable records for courses taken by issuing tokens for each course completed along with verifying any degrees earned through smart contract verification systems.
In the future, issuing a paper certificate will no longer be a thing. NFTs will be used as a record of academic achievement and NFT education tokens can be transferred to other individuals, giving them proof that the person holding it earned such an NFT.
Real estate is also one of the profound entries among use cases of non-fungible tokens, and today its industry is one of the most NFT-ready sectors.
One of the downsides of investing in it is the hassle of transferring property ownership. It currently takes a tremendous amount of paperwork to buy a property or open an equity line. With an NFT, the transaction process is streamlined, allowing a buyer to assume ownership of a piece of real estate within minutes. In this way, NFTs could be used to transfer land deeds, provide proof of ownership and even keep track of changes in property value over time using timestamped NFTs.
NFTs can simplify and speed up transactions, enable smart contracts for properties — allowing automatic payments — and create decentralized home rental services — all while protecting sensitive data like credit card details.
Beyond virtual real estate, physical real estate opportunities are taking shape via NFTs and encouraging a new frontier for property ownership — trustless property titles.
Connecting an NFT with a physical property allows for straightforward usage and easy collateral, an idea Europe-based start-up, Propy, is already exploring. Propy offers a transaction platform with which each NFT comes with access to ownership transferred paperwork. The first Propy-hosted NFT auction sold an apartment for 36 ETH, or $93K at the time of sale. In addition, in February, a house in Gulfport was auctioned off as a non-fungible token sold for $654,310, or about 210 ETH.
In another instance, a real estate development firm, Prometheus, completed the sale of two luxury homes in Portugal through cryptocurrency. In addition, the firm also ensured the availability of ownership through NFTs.
Real-world asset NFTs
Linking real assets with NFTs could digitize the way people prove ownership. For instance, in real estate, they usually deal with physical property deeds. The creation of tokenized digital assets of these deeds can result in the movement of highly illiquid items such as a house or land onto the blockchain. When it comes to this promising case, there is still not much support from regulators so far. It’s in development, but it is worth looking into in the future.
In April 2021, Shane Dulgeroff created an NFT representing real estate for sale in California. A work of crypto art is also attached to the token. A collector who won the auction received the NFT and ownership of the house. However, the exact legal situation of the sale and the rights of the buyer or seller are unclear.
rwaNFTs are a universal file format for uploading physical goods to the Internet. Mattereum in partnership with Lohko Wallet launched gold-backed rwaNFTs represented with appropriate digital art. Additionally, dozens of rwaNFTs paired with collectible physical items released by legendary actor William Shatner’s Third Millennia have been minted and are available to trade.
Another example is a Mumbai-based decentralized finance startup Bru Finance lends money to farmers against the value of their produce. However, unlike traditional lenders, the company uses NFTs to maintain electronic records of these loans.
When it comes to small items such as for example jewelry, NFTs can help prove legal ownership in resale. Thus, a real ethical diamond usually comes with a certificate of authenticity. This certificate is also a way to prove the ownership rights. Anyone attempting to resell an item without a certificate cannot verify its authenticity and may run into trouble convincing buyers that they are the rightful owner.
The same concept is possible with NFTs. By having an NFT associated with an item, owning an NFT can become as important as owning an asset. Users can even embed an NFT into an item with a physical cold storage wallet. And as the Internet of Things develops, more NFTs being used to represent real assets will be likely to see.
And many more…
Over the past two years, the NFT landscape evolved from a miniature ecosystem with a few hundred million in sales volume to a multi-chain ecosystem with several layers that can be distinguished. Each layer has specific characteristics and goals, performs certain functions, and has a number of projects specializing in this area.
To date, the NFT landscape has been dominated by Ethereum, Flow, and to a lesser extent Wax. It’s likely that most NFT applications will need to transition from Ethereum mainnet onto a Layer 2 solution or sidechain while relying on Ethereum for the settlement layer. The exception to the rule may be for high-end digital art or blue-chip collectibles that require more robust censorship resistance. Other base layers like Solana are actively building out their NFT infrastructure.
Most consumer-centric applications of NFTs have experienced turbulence on Ethereum. After building CryptoKitties Dapper Labs decided that Ethereum would never provide the robust scalability that the gaming studio required and opted to build Flow. Unwilling to rely on another third party, Axie Infinity took the path of building their own sidechain, Ronin, which to date has been very effective at reducing gas costs and increasing user adoption. Australian Immutable X is a Layer 2 scaling solution for NFTs on Ethereum as well as other scaling solutions like Optimism and Polygon are here to rescue.
Blockchain Layer 1s are often limited in the amount of on-chain storage capacity, therefore not all NFTs are stored on this level and require another storage solution. IPFS or Arweave can offer permanent storage for NFTs while Filecion can also offer cheaper real-time storage. Moreover, individuals can use services like Filebase or Pinata which provide clean interfaces and enterprise desired services like S3 Compatible Object Storage and service-level agreements (SLAs) for companies that want to use IPFS or other storage layers but have formal and legal agreements in place.
The application layer is one potential interface for the issuance of these tokens. Virtual worlds like Decentraland and Cryptovoxels have slowly grown over time as individuals enter the worlds for conferences, art galleries, casinos, and upcoming use cases.
Composability ensures that other developers can build atop existing applications and protocols. Decentraland and other virtual worlds have various applications within their ecosystems such as the online casino, Decentral Games. Additionally, Sorare has created a partnership with Ubisoft which is developing its own fantasy league — One Shot League — utilizing existing Sorare cards. The composability of this layer means that applications or protocols that facilitate third-party application development will have the opportunity to capture more value.
NFT issuance platforms and marketplaces currently make up one of the largest categories of non-fungible tokens protocols and are one of the more obvious market opportunities given the business model.
Within the NFT sector, there are really only two primary aggregators — OpenSea and Rarible. Both marketplaces aggregate supply by integrating various smart contracts and eventually blockchains. Since Rarible has only recently integrated the ability to buy and sell non-Rarible tokens on its platform, OpenSea has been the de-facto aggregator in the space.
According to the information from the Block, the largest in terms of volume are OpenSea and LooksRare marketplaces. The LooksRare platform was launched in January 2022 and has already managed to win the interest of the NFT community, overtaking OpenSea’s volume.
Here is the list of the significant NFT industry players divided by categories.
📒 Mass-marketplaces 🛍️
🧓 Curated art platforms 🎨
🆓 Permissionless art platforms 🎨
🖌️ Non-Ethereum art platforms 🎨
🤖 Generative/programmable art 🎨
🎶 Music platforms 🎧
“By basing the OPUS Player [on] the Ethereum blockchain and storing all the tracks on IPFS, there is no central server and so the storage costs are drastically reduced. This allows for more of the revenue to go directly to the artist, in a more secure, transparent way than ever before,” they said.
🎼 Non-Ethereum music platforms 🎧
🎮 Games 🎲
🌍 Virtual worlds 🕹️
🔡 Domains 💻
👥 DAOs 🙋♂️
📈 Finance 💰
🎨 NFTs + DeFi 💸
👗 Fashion 👠
🖼️ Collectibles 🎨
In 2021, NFTs experienced explosive growth as the ecosystem and the market grew at an unprecedented rate. This growth was intertwined with a number of factors, including the hype created by massive sales and celebrities’ involvement. The early days of 2022 mark a new era for NFTs, with many changes to the market. However, analysts predict that the global NFTs market will continue to accrue. It is expected to grow from $14 billion in 2021 to $21 billion in 2022 at a compound annual growth rate of 52%:
With nearly $8 billion traded in the first quarter of 2022, the market reached some form of stabilization, in line with the last quarter of 2021. The general public seems to be losing interest in NFTs since the beginning of the year if the search volume on Google is to be believed. Nevertheless, search interest remains approximately at the same level.
Interestingly, the peak of interest over the past 5 years was in 2022, despite the apparent hype in 2021. It took place in mid-January. At that time, OpenSea, the world’s largest NFT market, reported record-breaking sales, and NFT trading on the Ethereum blockchain surpassed the $3.5 billion mark only about halfway through the month, according to data from Dune Analytics.
Despite the fact that mass interest is maintained at a stable level, NFTs could still be five years from mainstream adoption, according to the most recent Gartner’s Hype Cycle for Emerging Technologies. In the 2021 Hype Cycle report, the research firm has ranked NFTs at “Peak of Inflated Expectations.”
The Cycle is displayed as a graph that places the tools into categories based on where they are in their lifecycle.
Innovation Trigger: Potential breakthroughs start to capture the public imagination and media interest.
Peak of Inflated Expectations: Early successes — and failures — see interest ramp up.
Trough of Disillusionment: Initial interest wanes. At this point, investment only continues if surviving providers improve to the satisfaction of early adopters.
Slope of Enlightenment: Benefits become more widely understood. New product generations appear some potential users stay cautious.
Plateau of Productivity: Mainstream adoption takes hold.
The current NFTs market activity is also quite indicative. Let’s take a quick look at it in detail.
Since the beginning of 2021, NFT activity — mainly transaction volume — has notably grown, but this growth was not consistent but fluctuated. Furthermore, in 2022 NFT activity has been rising and falling month by month.
According to The Wall Street Journal, daily NFT sales have dipped 92% from 225K in September of last year to just 19K as of May 3rd. The number of active NFT wallets is also on the decline, from about 119K in November to 14K toward the end of April.
The value sent to NFT platforms continued to rise in January 2021, started to decline in February, and then began to recover in April. Overall, the volume of sales fell by nearly 50%, with a very marked slowdown in the volume of buyers and sellers in comparison with 2021 activity.
According to the Chainalysis report, collectors have sent over $37 billion to NFT marketplaces in 2022 as of May, putting them on pace to beat the total of $40 billion sent in 2021. Since the end of summer 2021, NFTs transaction growth has been erratic, with activity largely flat except for two big spikes: one in late August, which was likely driven by the release of the Mutant Ape Yacht Club collection, and one from late January, which was apparently related to the launch of the LooksRare NFT trading platform. Following that spike, NFTs transaction activity declined essentially starting in mid-February, falling from $3.9 billion to $964 million in the week of mid-March, the lowest weekly level since August 2021. The NFT market, however, began to recover in mid-April and is currently approaching the weekly volumes it hit earlier this year, probably due to the recent launch of the Bored Ape Yacht Club metaverse project. Despite these fluctuations in transaction volume, the number of active NFT collectors continues to grow.
In Q1 2022, 950K unique addresses bought or sold NFTs, up from 627K in Q4 2021. Overall, the number of active NFT buyers and sellers has increased every quarter since Q2 2020. In Q2 2022 as of May, about 500K addresses have transacted with NFTs, putting the NFT market on pace to continue its quarterly growth trend in a number of participants.
The number of active NFT collections on OpenSea — meaning those with any transaction activity in a given week — has also grown consistently since March 2021, and currently sits above 4K.
The Chainalysis study of web traffic on popular NFT platforms reveals that the asset class attracts users from all over the globe.
Central and Southern Asia leads the way, followed by North America and Western Europe.
While some regions are certainly lagging behind, the fact that no region has accounted for more than 40% of all web traffic since the start of 2021 suggests that NFTs already captured a global audience.
Analysis of NFTs transaction sizes also tells us a lot about who is investing and collecting.
The vast majority of NFT transactions are at the retail size — below $10K worth of cryptocurrency. NFT collector-sized transactions — between $10K and $100K — grew significantly as a share of all transfers between January and September of 2021, but since then have stayed flat. This suggests that, for the time being, the addition of new retail NFT investors is keeping pace with the addition of bigger NFT investors.
However, when looking at the cost of a transaction rather than at the number of transfers, it is obvious that NFT buyers make up the bulk of the activity. Institutional investors were on their heels and even made up most of the activity in certain weeks when extremely large purchases have been made. For example, during the week of October 31, 2021, institutional transfers accounted for 73% of all activity, mainly due to the purchase of several NFTs from the Mutant Ape Yacht Club collection. More institutional-sized transfers followed in the following weeks, and since then, institutional transfers have accounted for 33% of all activity.
However, the growth of institution-sized NFT transactions has not been consistently sustainable, as with the NFTs market as a whole.
Between late November and mid-February, institutional NFT purchasing grew each week, reaching about 2K transactions. After that, NFT institutional activity plummeted, dropping to 473 transactions in the week of February 20. As of May 2022, the institutional activity of the NFT has not yet reached the level that it was in the winter of 2021. This period of decline in institutional activity also roughly coincides with the general decline in interest in NFTs in general.
It is known that opinions on NFTs are polarizing. To answer the question of how people feel about NFTs, the CoinGecko team conducted . They take a deeper look at the demographic of NFT owners, their behavior, motivation, tendencies, preferences, knowledge, and perception related to NFTs. The results seem not very representative of the community and platform chosen. Nevertheless, we believe this is enough to trace the general trends in the space.
This section explores the opportunities of NFTs. Furthermore, several typical fields that may benefit from the proliferation of the NFT technology are discussed.
Digital art scarcity issue solvation
NFTs address long-standing digital art scarcity issues of how to keep virtual artworks rare if they can be copied digitally. The use of NFTs in this regard gives each piece of art a unique hash that allows it to be differentiated. If in the traditional art world the original and the copies are the same, each NFT is unique or limited in quantity as well as not replaceable with similar items. Artists of original artworks can include their signature in NFTs, thereby reinforcing the authenticity of the content created. While it is possible to make copies of digital art, NFTs ensure that each copy is solely owned by the purchaser so that it is not interchangeable with another copy, increasing the art’s appeal to amateur collectors and speculators.
Direct communication without the mediation of third parties
NFTs have created the possibility to eliminate intermediaries from the communication process, allowing content creators to connect directly to their audience. There are no more third parties in the face of labels, large distributors, or art portals, restricting the rights of creators of digital goods. Artists just upload their content to the NFT platform, mint non-fungible tokens, and choose the selling method. It could be a fixed price option at auction (English, Timed, or Dutch).
Transparency and authenticity
If in the traditional art industry ownership records are stored on servers controlled by centralized institutions, with NFTs ownership records stored on the blockchains, every NFT has an owner and this is of public record. Subsequently, users could view the entire history of the artwork, including the previous prices at which it was purchased and owned.
Traditional art collectors must be aware of the risks of transacting artwork. Before making a purchase, they have to study the provenance of the piece and take additional security measures to ensure the transaction goes smoothly. In contrast, NFTs can be traded in a most secure and transparent way. NFTs function as immutable digital signatures, delivering unprecedented confidence to collectors.
This confidence extends to the future legacy of art, as well. Digital works stored on the blockchain are immune from censorship and physical decay — but must still be stored properly. Blockchain technology also allows people to move assets of massive value globally, securely, and in full public view. Just as blockchain technology established a protocol of trust enabling the formation of digital currency, NFTs now guarantee authenticity, uniqueness, and ownership of unique assets.
With NFTs artists now have an opportunity to honestly monetize their work, as it is now possible to automatically and directly pay royalties, fairly distributed in accordance with the contribution to the creative process of each of the participants.
Due to the blockchain technology, each actor can now see the exact time of the creation of each digital object and the number of interactions with it, what income it brings, and who gets what percentage, which makes communication across industries direct and potentially fair.
New monetization opportunities for artists and collectors
NFTs open up new monetization opportunities for artists. If in the traditional art world, content creators usually did not receive a percentage of secondary sales, thanks to NFTs, today a digital artist can receive them in a fully automated way.
What’s more, blockchain platforms are designed to make the experience interactive and profitable not only for artists but for the audience as well, by offering all kinds of incentives, for example for compiling personalized collections, contributing to increasing the database of artists, venues, or events.
Anyone can create in NFTs regardless of age, geographic location, etc. All that is required is the registration on the NFT platform of interest. Several NFT platforms (e.g. Mintbase, Mintable, etc) have even established tools to support ordinary people to create their own NFT works easily.
Investing in tokenized assets is also accessible to everyone. Asset ownership that is tokenized into an NFT can more easily and efficiently be transferred among people anywhere in the world.
Global market access
In the traditional art world artists usually rely on the infrastructure and geographical restrictions of the distribution of the platforms they use as well as on the rules and standards of labels to which they belong and galleries where they exhibit. With NFTs, content creators can access global markets, and easily reach the collectors and the community of like-minded artists. From here, creators across all content channels can build around their NFTs and expand their digital fan clubs.
Possibility of fractionalizing ownership of physical assets
Today, it’s difficult to fractionalize ownership of certain assets, including real estate, artwork, and fine jewelry. It is much easier to divide a digitized version of a building among multiple owners than a physical one. The same goes for a prized piece of jewelry or a rare case of wine.
Through digitization, the market for certain assets can be greatly expanded, leading to greater liquidity and higher prices. On an individual level, it can enhance the way financial portfolios are constructed, allowing for greater diversification and more precise position sizing.
Boosting creative industries
NFT has great potential in the creative industries which involve the generation or use of knowledge and information and include art, design, music, film, fashion, etc.
NFTs change the way people share ideas. In this digital age, the ability to verify actions, authenticity, and origin is priceless. Beyond that, NFTs empower creators to capture and share their digital expressions on their own terms. The walls between artists, galleries, and buyers are crumbling in light of the boundless possibilities presented by the blockchain. NFTs let creators easily mint and copyright their work, listing it for sale on open marketplaces. All of these transactions are unchangeable. This means over time, tokens can gain value, increasing rarity and driving even more demand for creativity.
Back in 2008, the music industry experienced a crash like no other, introducing music piracy .mp3 platforms like Napster. To say that artists were losing a lot of money is putting it lightly. In many ways, the music industry still hasn’t recovered from the practice of illegal downloads. Next came the heavy-hitters: Spotify, iTunes, and YouTube. These platforms made accessibility convenient for fans but took away the value of scarcity and creativity. NFTs have reintroduced the concept of scarcity into the digital realm while giving creators a new way to monetize from their supporters. This holds for any tokenized assets from gaming to music, photography to art, and anything else one can dream up.
Flourishing virtual events
Traditional online events rely on centralized companies that provide trust and technology. NFTs greatly extend the scope of blockchain applications with the help of their additional properties like uniqueness, ownership, and liquidity. This enables each individual to link to a specific event just like the patterns in real life. For instance, the ticketing event. When buying tickets in a traditional event ticket market, consumers must trust the third party. Therefore, there is a risk of buying fraudulent or invalid tickets, which are counterfeit or possibly counterfeit or might be canceled. The same ticket may be sold many times or obtained by extracting from ticket images posted online. An NFT-ticket is issued by the blockchain to demonstrate entitlement to access to any event such as culture or sports. It is unique and scarce, meaning that the ticket holder cannot resell the ticket after it is sold. Consumers can buy and sell the crypto ticket from the smart contract rather than rely on third parties in an efficient and reliable way.
Inspiring the Metaverse
Metaverse is a collective virtual shared space that allows all types of digital activities. Generally, it covers a set of techniques like augmented reality, virtual reality, and blockchain to establish the virtual world. Participants under these blockchain-fueled alternative realities can have many types of intriguing use cases like enjoying games, displaying self-made arts, trading assets, and virtual properties (arts, land parcels, names, video shots, wearables), etc. In addition, users also have opportunities to get profits from the virtual economy. They can lease the buildings to others to earn the bond or raise rare pets and sell them to get the rewards. In fact, the metaverse ecosystem covers nearly all aforementioned NFTs use cases. The advantages of blockchain, cryptocurrencies, and NFTs will be offered directly within the Metaverse, removing barriers to entry.
Expanding horizons and accelerating adoption
NFTs could introduce millions of people to cryptocurrencies for the very first time. Investors can become more knowledgeable about blockchain, while diversifying their portfolios, by allocating a small sum to tokenized assets, as well as the artists while utilizing blockchain-based applications. This leads to a more diverse industry and accelerates the adoption of technology and innovation.
Despite the apparent advantages of NFT solutions, it is difficult not to pay attention to several problems. In this paragraph some challenges are discussed from the perspectives of authenticity and ownership, usability, security and privacy, storage, extensibility, etc, covering both the system level issues caused by blockchain-based platforms and human factors such as governance and community.
Owning NFTs doesn’t necessarily mean owning the underlying digital asset. Сollectors are not buying original content itself, as they probably won’t own the copyright to it. Due to the technology, the content creator retains the copyright and the majority of NFT platforms provide the opportunity for them to claim royalties in the future when the object is sold again. Rather, when purchasing NFTs, collectors buy tokens connecting their name with the content creator’s art on the blockchain, which is the most valuable thing. In fact, anyone else can download a copy of that digital asset, and there is hardly anything that the NFT owner can do beyond protesting. Thus, buying NFTs allows collectors to own original items recorded on the blockchain that serves as proof of ownership.
Similar to the situations of most cryptocurrencies, NFTs also confront the barriers like strict management from the governance. On the other hand, how properly regulating this nascent technology with the corresponding market is also a challenge.
There are still no official public registers of copyright, and no global standards of licenses since different rules apply in different regions. NFTs confront legal and policy issues across a wide range of areas. Potential concerned areas cover commodities, cross-border transactions, KYC (Know Your Customer) data, etc. It is important to understand the related regulatory scrutiny and litigation before moving into the NFT tracks. In some countries, such as India and China, the legal situation is strict for cryptocurrencies, and also for NFT sales. Exchanging, trading, selling, or buying NFTs have to overcome the difficulties of governance. Legally, users can only trade derivatives on authorized exchanges such as stocks and commodities or exchange tokens with someone person-to-person. Several countries, such as Malta and France, are trying to implement suitable laws with the aim to regulate the service of digital assets. Elsewhere, issues are resolved by using existing laws. They require buyers to follow complex or even contradictory terms. Therefore, undertaking due diligence is a necessity before investing serious tokens in NFTs.
Taxable property issues
IP-related products (including arts, books, domain names, etc.) are treated as taxable property under the current legal framework. However, NFT-based sales stay out of this scope. Although few countries, such as the U.S. (internal revenue service, IRS), tax cryptocurrencies as property, most areas worldwide have not yet considered it. This may greatly increase the financial crimes under cover of NFT trading. The governments would love to make the sale of NFTs reliable with tax consequences. Specifically, the individual participants should have tax liability on any capital gains that are related to NFT properties. Also, NFT-for-NFT, NFT-for-IP, and Eth-for-NFT (or vice versa) exchanges should be taxed. Furthermore, for high-profit properties, or collectibles, a higher tax bracket should be applied. Thus, NFT-related trades are suggested to seek more advice from professional tax departments after the profound discussions.
Difficulty in finding the original owner of the NFT as well as difficulty in assessing the uniqueness and understanding how many copies exist still remain. Copyright protection issues are arising more and more often. When uploading content to an open non-curated NFT-platform, never stop wondering that absolutely any media file can be sold on your behalf (no matter if it is a selfie taken a few seconds ago, a picture found on the Internet, or the masterpiece of a well-known artist).
A number of artists have recently reported discovering their work for sale as NFTs on online marketplaces — without their or copyright holders' consent. A case in point was the recent incident with an NFT drawing by Jean-Michel Basquiat, which was put up for auction and removed two days later after discovering that the sellers did not own it. This obviously violates the intent of utilizing NFTs to facilitate the sale of art. The value proposition of an NFT is that it authenticates a physical work of art with a unique token, assuring the person who owns the token that they also own the original work of art. A serious problem arises if someone creates an electronic image of the original work, attaches a token to it, and puts it up for sale on a virtual marketplace. Here, there is no link to the original work. The token is linked to a fraudulent reproduction.
One of the great issues that are linked with authentication is cyber security and fraud risk. The growth of the digital world, as well as the number of NFT transactions, has resulted in a significant increase in them. Malicious actors can imitate well-known NFT artists and sell counterfeit NFTs in their names. Copyright theft, copying of popular NFTs or false airdrops, and NFT giveaways are some of the other major non-fungible token threats and issues in terms of cybersecurity and fraud. The advancement of technology not only allows for greater efficiency in the trade of digital assets but also introduces unwelcome danger, notably in the area of cyber security.
Blockchain Layer 1s are often limited in the amount of on-chain storage capacity, therefore not all NFTs are stored on this level and require another storage solution. Furthermore, it is expensive to store NFTs on a blockchain. Therefore, NFTs are usually stored in distributed file systems such as IPFS or Arweave or even in centralized ones, so any NFT can be potentially manipulated.
Security and privacy
The data from users is the first priority of any system. However, the data (stored off-chain but relates to on-chain tags) confronts the risk of losing linkage or being misused by malicious parties.
NFT data inaccessibility
In the majority of NFT projects a cryptographic “hash” as the identifier, instead of a copy of the file, is tagged with the token and then recorded on the blockchain to save the gas consumption. This makes the user lose confidence in the NFT because the original file might be lost or damaged. Several NFT projects integrate their system with a specialized file storage system such as IPFS in which IPFS addresses allow users to find a piece of content so long as someone somewhere on the IPFS network is hosting it. Still, such systems have inevitable flaws. When the users upload NFT metadata to IPFS nodes, there is no guarantee that their data will be replicated among all the nodes. The data may become unavailable if the asset is stored on IPFS and the only node storing it is disconnected from the network. Also, an NFT might point to an erroneous file address. If that is the case, a user cannot prove that s/he actually owns the NFT. In a word, Relying on an external system as the core storage component for an NFT system is vulnerable.
In the current stage, the anonymity and privacy of NFTs are still understudied. Most NFT transactions rely on their underlying Ethereum platform, which only provides pseudo-anonymity rather than strict anonymity or privacy. Users can partially hide their identities if the links between their real identities and corresponding addresses are known by the public. Otherwise, all the activities of users under the exposed address are observable. Existing privacy-preserving solutions (e.g. homomorphic encryption, zero-knowledge proof, ring signature, multi-party computation) have not been yet applied to the NFT-related schemes due to their complicated cryptographic primitives and security assumptions. Similar to other types of blockchain-based systems, decreasing expensive computation costs becomes the key to implementing privacy-promised schemes.
The risk of smart contracts and NFT maintenance is a prominent one currently prevailing in the NFT market. There are several scenarios where hackers attack DeFi networks and steal a large amount of crypto. The reason behind that theft was that smart contract security wasn’t adequate. If smart contracts have even a tiny flaw, NFT holders cannot expect complete security.
Hackers recently targeted the Poly Network protocol, which provides cross-chain interoperability. The NFT theft, which resulted in a loss of nearly $600 million, puts a focus on serious flaws in smart contract security. In late March, Ronin, an Ethereum sidechain built for the popular play-to-earn non-fungible token game Axie Infinity, was hacked for over 173,600 Ether and 25.5 million USDC for a combined value of over $600 million. There are still no clear security standards with industry-wide validation.
Usability is to measure the users’ effectiveness, efficiency, and satisfaction when testing a specific product or design. Most NFT schemes are built on top of Ethereum. Therefore, it is obvious that the main drawbacks of Ethereum are inherited. The two major challenges that have direct impacts on the user experience are:
High gas prices
High gas prices have become a major problem for all Ethereum-based NFT-marketplaces, especially when minting the NFTs at a large scale that requires uploading the metadata to the blockchain network. Every NFT-related transaction is more expensive than a simple transfer transaction because smart contracts involve computational resources and storage to be processed. Expensive fees caused by complex operations and high congestion greatly limit the NFTs' wide adoption.
NFTs usually send the transactions to the smart contract to achieve reliable and transparent management such as mint, sell, or exchange. However, current NFT systems are closely coupled with their underlying blockchain platforms, which makes them suffer from low performance (Bitcoin reaches merely 7 TPS while Ethereum is still capable of only 30 TPS). This results in extremely slow confirmation of NFTs. Conquering this issue requires a redesign of the blockchain topology, optimization of its structure, or improvement of the consensus mechanisms. Existing blockchain systems cannot yet fulfill such requirements.
The extensibility of NFT schemes is two-fold. The first is to stress whether a system can interact with other ecosystems. The second focuses on whether NFT-systems can obtain updates when the current version is left behind.
The majority of existing NFT ecosystems are isolated from each other. Users who have selected one type of product can only sell/buy/trade them within the same network. This is due to the disconnected underlying blockchain platform. Interoperability and cross-chain communication are always the handicaps for the wide adoption of DApps. Fortunately, most of the NFT-related projects adopt Ethereum as their underlying platform. This indicates that they share a similar data structure and can exchange under the same rules.
Transitional blockchain updates its protocols through the soft forks (minor modifications that are compatible forwards) and hardforks (significant modifications that may conflict with previous protocols). Despite the generic model, the new blockchain still has strict requirements such as tolerating specific adversarial behavior and staying online during the update process. NFT schemes closely rely on their underlying platforms and keep consistent with them. Although the data are often stored in separate components (such as the IPFS file system), the most important logic is still recorded on-chain. Properly updating the system with improvements will be a necessity.
Moreover, there is a low-level issue with the updatability of the NFTs themselves since they are recorded on the blockchain and the information they bring cannot be modified thereafter.
While a secondary issue, there has been increased concern around energy consumption related to NFTs and energy-intensive operating proof-of-work blockchains that could pose additional roadblocks to the widespread adoption of NFTs.
Most NFTs are currently supported by the Ethereum blockchain, which still uses Proof of Work. A single NFT transaction requires as much electricity as the average home for about a day and a half. Furthermore, Ethereum is recently estimated to use 44.94 terawatt-hours of electricity per year, which is nearly equivalent to the annual power consumption of countries such as Qatar and Hungary. The total amount of electricity usage for the mining of bitcoins is easily comparable to the electricity usage of countries like Malaysia and Sweden. According to recent studies, if blockchain-based technologies become as widely adopted as other new technologies, it could push the Earth’s temperature 2 degrees Celsius above historical levels. Crypto miners have already been held responsible for power shortages in Iran, and a recent study showed that the energy consumption from blockchain-based technology in China exceeds the Czech Republic’s and Qatar’s total annual greenhouse gas emissions.
On the other hand, blockchain enthusiasts argue that an offsetting reduction in pollution is underway as NFTs transform global marketplaces, reducing the need for travel and office space utilization.
The difficulty in determining the value of the NFT is one of the issues. There are considerable fluctuations in the prices of NFT because there is no fixed standard for any particular type of NFT. The price of any NFT may depend on the creativity, uniqueness, scarcity of the buyers and owners, and a lot more. People can’t determine the factors that might drive the price of NFT. Due to this, the fluctuations in prices remain constant, and evaluation of NFT becomes a big challenge. Moreover, the quality of many works is rather doubtful since anyone can mint an NFT without having any creative skills.
In any market, prices reach a steady equilibrium because demand matches supply. Create millions more SKUs for a product than there is demand, and prices are likely to crash. Today, the barriers to creating NFTs are so low that anything and everything is being NFT-ied — , Charmin’s digital toilet paper with flowers, and the digital NFT stick for a dog, which can be delivered to your puppy via email. Thus, while there is only one unique NFT for each digital asset, the entire universe of NFTs is very large, effectively leading to an oversupply.
Also, for the audience and consumers, it is still more common to use familiar major services as well as for the majority of non-techy artists. Much more simplification is needed so NFTs are easy to use for people who know nothing about blockchain.
All these problems still exist, and researchers and engineers are puzzling over their solutions.
NFTs renaissance continues to spread despite the volatility and undeveloped nature of the cryptocurrency market as a whole and the high level of uncertainty about NFTs valuations in particular.
The 2021 NFT boom aftermath showed the community the NFT technology’s pronounced advantages as well as revealed many shortcomings of the solutions that have to be addressed ASAP. No matter what, the ecosystem continues to flourish, many new projects are born, and every day we are witnessing how major players are showing interest in the area accelerating adoption.
One thing remains clear, the once-seemingly niche ecosystem of NFTs has forever emerged from the underground of small crypto communities, becoming an equal player in the world of finance, art, gaming, and the wide scope of leading creative industries.