If you’ve read the last 2 issues of WYODC WEEKLY, then you should be moderately open to the possibility that NFTs can indeed be a revolutionary innovation.
In this issue, we’ll dive into the technical skeleton of what makes NFT unprecedented and different.
Going back to basics, an NFT is briefly a bunch of data stored on the blockchain
A blockchain is a global decentralized ledger that records some basic information about who owns a specific digital asset.
I’ll just explain how NFT works from a brief technical standpoint.
The first iteration of NFTs existed in the form of Cryptopunks and CryptoKitties in 2017.
2017 was a huge year because it was the year Ethereum came into the spotlight.
The reason why Ether saw a bull run in 2017 was that it pioneered the application of Smart Contracts.
Smart Contracts were useful for recording immutable transactions between different parties in a fully transparent and fair manner.
This allows transactions to be carried out without having to rely on trusting a third-party intermediary like a bank or association.
Ethereum was the first blockchain to harness the power of Smart Contracts which was disruptive and that was why Ether mooned.
To put it simply, you can imagine Ethereum to be a super mega computer that can record every computation and transaction executed on it.
Case in point:
If you were to buy an NFT (e.g. Cryptopunk #1), you can immediately see who previously owned that NFT you bought, how much they bought it for.
And not just that, you can also see the transaction history of the previous owners of that NFT and how much they traded at relative to other NFTs in the same collection.
If you were to compare this to buying another asset like property or art you can never be certain of whether the information presented to you is distorted because other forms of asset do not enjoy this level of transparency.
The blockchain acts like a state machine where this computer records all the data that presently stands together with respect to a time stamp.
To put it simply, if we were to look at the Ethereum blockchain, this state machine records the current state of Ether everyone in the world owns.
When Alice decides to send 1 Ether to Bobby, the state machine changes from its previous state where Alice had say, 10E and Bobby had 5E, based on the input transaction received from Alice to its new state where Alice now has 9E and Bobby has 6E.
The true power of Blockchain is its immutability (inability to be manipulated) and transparency because every single financial transaction or trade can be recorded down on code.
With Ethereum, Smart Contracts and NFTs, this is taken to a whole new level because you can record down a bunch of things in this world apart from money – Such as legal documents, asset ownership even political agreements.
Going deeper, NFTs are defined and created by a smart contract, which is just a piece of code that resides on a blockchain (Such as Ethereum or Solana)
This is where we can imagine the state machine magic of a blockchain (Let’s say Ethereum):
- Imagine you write up a piece of code allowing someone to mint 1 of 1,000 different NFTs that represent unique images of cyborgs. (Let’s just call it CryptoBorgs).
- When you choose a function to “mint” this project that anyone in the world can call, this function will check a global counter variable to ensure that there are less than 1,000 cats been minted.
- In a case if there is already been 1,000 cyborgs minted, the mint function will return an error to the user who invoked it.
- If less than 1,000 cyborgs are minted, then the mint function will go ahead and create a new NFT representing a new unique cyborg and transfer this new NFT token to the address of the user.
- The Ethereum blockchain acts as a state machine that records all the activities and changes to all the NFTs in the collection CryptoBorgs.
- Let’s say Alice has 888 Eth prior to the minting and the cost of minting a Cyberborg NFT is 0.1 Eth, Alice would have (888E – 0.1E) 887.9 Eth after the minting. This will be recorded on the Ethereum Blockchain.
- Now say Alice decides to sell her CryptoBorg NFT to Bob for 100 Eth. The Ethereum blockchain now transitions again to a new state as a result of this transaction.
- It records the fact that Alice has 987.9 Eth and no CryptoBorg NFT and also that Bob now has 100 less Eth but one more CryptoBorg NFT.
This allows anyone in the world to transact with anyone else to do literally anything in a fair, transparent and honest manner.
That’s in a nutshell how Blockchain, NFTs and Smart Contracts work.
Eliminating Forgeries and Faked Goods
A huge side benefit of NFT technology is that you can easily verify branded goods like LV or Rolex, eliminating the problem of faked goods and forgeries.
Let’s say that there’s a unique NFT minted for every bag in a new LV collection, then this unique NFT will give this bag legitimacy because it offers a reliable source of truth stating that this bag is indeed purchased from a reliable distributor.
Increasing benefits for Artists and Creators
NFT technology gives artists and creators more opportunities to make a living from their talents.
In the traditional physical art market, there are too many “gatekeepers” who undercut the original creators – Dealers, agents, galleries, auction houses, salespeople.
Not to mention that there are often cases of collectors who buy their work directly from artists at dirt-cheap prices.
These collectors can sell the same piece of art for 100x or more a few years later and none of the profits go to the creator.
E.g. A painting by Cy Twombly, purchased for $750, went for $40,000. Jasper John’s Double White Map, bought in 1965 for around $10,000 sold for $240,000.
With NFT, it’s possible to program secondary sales royalties to benefit the artist or creator. This has already been done in Opensea.
Conversely in the traditional art market, the artist or creator receive little or even no upside because the transaction costs are astronomically high due to all the mouths that need to be fed to keep the market functioning – The galleries (which act as an art exchange), salesperson, auction houses (such as Christie’s and Sotheby’s).
In the NFT world, artists can now sell directly to collectors on online platforms like Opensea, Rarible and LooksRare. There’s no need to have an agent represent you or work with a gallery to show your work.
In other words, the role of the middlemen is minimized or even eliminated which is a HUGE benefit for the creators.
High Permanence. Low Maintenance.
NFTs actually have more permanence and long term retention than physical assets. They don’t degrade and cost less to maintain.
Some of the most expensive artworks in the past have either been destroyed in things such as fires or wares. Or they have been stolen or even simply lost.
Even if they aren’t destroyed or lost, they can still degrade over time.
These factors affect the long term value of an artwork which investors have to consider when investing in art.
The same is true for physical assets like property. Let’s say if you buy a condominium or a bungalow, you’ll need to spend a hefty sum to renovate or maintain it.
And if you don’t, you will risk letting the property degrade and depreciate which will hit the valuation of your asset hard.
However, digital assets like NFTs don’t have this problem because…
The blockchain is permanent.
If you put something on the blockchain, it will stay on it the way it is forever.
I think that’s really important to understand because some investors underestimate the amount of work it takes to make their investments work. (E.g. Like those who buy into physical assets such as property, art or collectables).
NFTs are high permanence, low maintenance and best of all, they don’t take up a lot of space (which is super important for the majority of us who don’t own huge houses).
This means if you were to buy a Metaverse Land (Like Sandbox LAND or NFT Worlds) as opposed to a piece of physical land, it will not age the same way as its physical counterpart.
Moreover, you can rent the land out and not spend a single cent building or maintaining it.
This is in a nutshell why you should start looking at digital assets for the long haul (next 10-20 years).
I hope this issue has been helpful in giving you a macro view of the applications of NFTs =)
P.S: To put things into context, this isn’t an alpha call.
While I’m bullish on the NFT trend for the next 10-20 years, I can’t predict what will happen to the markets in the short term.
As of today, there are plenty of overhyped projects which I’d recommend you be wary of.
Always DYOR before you commit your hard-earned money to anything.