What are NFTs and how they are seeding web3
Artist Mike Winkelmann, also known as Beeple, sold his famous NFT – "Everydays: The first 5000days 2021", for $69Mil. Jack Dorsey’s first tweet as he built Twitter was sold for $2.9million (yes you can sell tweets), Nyan cat sold for $550K. Snoop Dogg to Paris Hilton to Cricketers to Bollywood starts are embracing NFTs. So, are NFTs a fad or worse still a scam? Well, let’s go down the rabbit hole, but not too deep to keep it simple.
NFT stands for non-fungible-tokens. Fungible is the property of a good/commodity whose individual unit is replaceable by another identical item. For example, a $10 bill can be replaced with any other $10bill and it would make no difference. Likewise, all crypto tokens are fungible. A bitcoin is easily replaced by another.
Conversely, non-fungible, is when the good/commodity cannot be replaced with another. So, in a way it is ‘unique’ and because it is ‘unique’ it’s ownership can be assigned and proven using blockchain technologies. Non-fungible items retain their value irrespective of how many copies or versions that might exist. You may have the image of Mona Lisa clicked from the original from your visit to the Louvre Museum, but Mona Lisa at the Louvre retains its value because it is non-fungible, unique. The NFT of Nyan cat can be verified on the blockchain even though a copy is on the cover of this article.
Every NFT is unique, and its ownership is verifiable on the public ledger that is immutable (cannot be changed). There is only one definitive original version of the ledger. The single source of truth. This opens a sea of possibilities and NFTs are not limited to digital assets. Property rights as captured on the deed can be tokenised and put on the blockchain. Anyone can then check its provenance and transact with confidence knowing that the one selling the asset is the actual owner. There is no longer the need for third party verifiers, enablers, and registrars.
How are NFTs created:
NFTs are born on the internet and are internet native. NFT is a simple code that captures details of ownership, asset and when it came into existence. NFTs are minted on the blockchain with a few lines of code, called smart contracts. Smart contracts auto execute once given conditions are met and complete the transaction without any third-party involvement.
Think of smart contracts as if, then statements. If the seller owns the asset and the buyer has the funds, then carry out the transaction (transfer the funds to seller and the property to the buyer). The transaction details are captured on a de-centralised public ledger and is verifiable by any one and is executed using the consensus protocol of the blockchain being used.
Once a consensus is achieved by the network on the authenticity of the transaction, a new block gets created with reference to the previous block and is baked into the blockchain. The community adopts this as the latest version of the blockchain and the process goes on. This data becomes the single source of truth with respect to the new ownership and transaction.
NFT and Web3.0
Web 2.0 was characterised by mobile, social and cloud. Internet evolved from html on desktop and got into our hands with rich content. Cloud turned devices into commodities as storage and computing shifted to the cloud. Much as we would like to believe that the internet is free and de-centralised, it is owned and managed by handful of tech giants. This is how web2.0 developed and made tremendous progress.
UGC (user generated content) is a huge part of the internet. Since 1990, we have uploaded trillions of pictures, videos, images, and other pieces of content, including a whole lot of cat memes! The internet runs on the fuel called ‘advertising’. The challenge is that the content creator rarely receives rewards commensurate with the value created. Lion's share of advertising revenue is retained by the distribution platforms. Copyrights, DRM services to protect content, have been difficult to implement. NFTs change that.
Once tokenised on the blockchain, NFTs establish ownership that is immutable
NFT are being used to tokenise art, music, images, photographs, stocks, property and more. Some art NFTs come with physical work as well. It is very difficult for writers, musicians to track royalties on their creations as they depend on publishing houses and distribution companies. NFTs make these services redundant. Royalties can be baked into smart contracts so that every time a piece of art, music, literary composition changes hands, its creator receives a percentage of sales as she decided when minting the NFT. No more fees, rejection by intermediaries or opaque deals. Every creator, big or small can take her creation directly to the market and receive payment. How cool it that!
Web3.0 is going to bring a paradigm shift and create a de-centralised economy that runs on open-source software and blockchain technologies supported by communities where members are unknown to each other. As the ecosystem evolves, it will enable billions to join in, contribute, and benefit.
The technology is truly innovative and with immense potential. As it advances and some of the current challenges around blockchain throughputs, processing costs and cross chain integrations are addressed, creator economy will open up, creators/buyers will have sovereign rights over their assets and transactions will execute instantaneously on trustless (no third party involvement), permissionless (no gatekeepers) networks.
Future is exciting.