You may have heard about these curious little things called “NFTs” that have popped into the mainstream culture over the last few years. If not, welcome back from Mars; how was your trip?
NFTs are everywhere, and few things have ever seemed so simple yet completely baffling. What is an NFT? A picture of an ape? A pixelated person? A sham? How does it work and why is it valuable? What makes an NFT unique?
Whether or not you understand what it is, the NFT market has skyrocketed. The news articles, the numbers posted of prices and demand, and the murmurings of a “bubble” all bring to mind similar trends. Beanie Babies, Dot Com domains, even going all the way back to the tulip mania of 1637. This uncertainty is casting new light on the multi-million dollar 8-bit graphic you may have invested in…
Then again, can we so easily compare the NFT craze to any other fad, bubble, or hype? Even with hindsight, everyone seems to have a different opinion, with some claiming that NFTs are overhyped, while others claim the NFT market is still a massive win for the creator industry. Still, others would say that we are missing the point altogether and that NFTs are much more complex than we realize. Let’s explore this last argument to see why NFTs have a utility far more profound than the art industry and their ability to change industries is inevitable.
NFTs Are A Technology
The key to unravelling the “hype vs. utility” of the NFT is that NFTs aren’t just pieces of art. They aren’t just a receipt. And they aren’t meant to all be worth millions. An NFT is a technology that solves some pretty major problems in a variety of industries.
While you may hear phrases like “value-added” and “utility”, it doesn’t paint a full picture of what exactly an NFT can do if applied correctly. First we need to understand those unique attributes of NFTs, and then we can start to uncover the many forms of innovative utility they can offer.
Let’s start with the name: Non-Fungible Token. This means a unique item of value. Because the NFT is recorded on the blockchain, it is immutable, and can’t be secretly changed. This transparency and proof is incredibly powerful. In addition to this, each NFT contains metadata, also protected and unchangeable.
For common applications, this means that a piece of art, whether digital or physical, has an NFT that represents ownership. This is similar to a receipt, or like a title registration of a car. The difference from a receipt is that it is verifiable (whereas a receipt can be faked); and the difference from a title is that it doesn’t require an official government body to manage the creation, distribution, and acceptance that it is authentic. So far so good?
If we take this a step further and look at some of the biggest challenges in decentralized finance, we have the challenge of authenticity and compliance for P2P transactions. How can you prove that a transaction took place with given terms (and without having to write its smart contract)? How does an individual comply with Know-Your-Customer/Anti-Money-Laundering (KYC/AML) regulations required by governments? These are essentially show-stoppers to a fully decentralized, P2P financial economy.
Finance Engines and Crowdfunding Platforms
If you could develop a way to inject compliance measures into the creation of an NFT, it could change the game. Thankfully, this is happening now with platforms like AllianceBlock, who, along with other innovators, are seeing that in order to provide true P2P DeFi that is still fully compliant, we need the right tools. Their solution is a finance engine that creates NFTs to represent key financial objects (convertible loans, tokenized shares, etc.) that contain the necessary KYC/AML information as metadata with the NFT itself. This creates an on-chain representation of investment that is both liquid and fully compliant.
Another key use of this strategy comes from AllianceBlock’s Fundrs program. This is a community-based crowdfunding marketplace for Web3 ventures, where promising startups can share their vision and plans, and then connect with communities who want to back the venture. Instead of purchasing a piece of art, these investors are finding early-stage projects they want to back, be a part of, and in some cases help guide as part of a DAO. In each of these cases, the investment is represented by an NFT held by those who have backed the project. This, too, keeps the investment liquid, and compliant, while maintaining a decentralized approach.
An Evolution of Utility
By looking at those key attributes held by NFTs, we can move far beyond the hype, instead creating an ecosystem with far more sustained potential than digitized cartoons (though as art there might always be a market for that too).
This however, is likely just the beginning. As NFTs mature and Web3 continues to grow and evolve, we will certainly find new use cases, opportunities, and even industries that can make use of their important attributes.
Art-based NFTs probably aren’t going away, and that’s great. The market may cool, and it may rise and fall, but a traditional, robust fine art market still thrives today. However, NFT is much bigger than art (cartoons and fine art alike). It is a technology that has already begun to change the world.