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What is an NFT and how could they impact the real world with examples.
An NFT (Non-Fungible Token) is a unique digital asset stored on the blockchain that represents ownership or proof of authenticity of a digital or physical item.
NFTs are different from crypto assets such as Bitcoin (BTC) and Ethereum (ETH) in that these assets are fungible i.e. swapping 1 ETH for another 1 ETH has no impact. To better explain this, let’s take an example from the real world. When paying for my morning coffee, I could hand over any £5 note to the barista. All £5 notes hold the same value and are interchangeable. Neither I nor the barista care which specific £5 note I am handing over so long as that £5 is legitimate. In this analog, BTC and ETH are the crypto versions of the £5 note. NFTs on the other hand are non-fungible i.e. each one is unique and CANNOT be interchanged for another identical version because there is no identical version.
You may have seen or heard about NFTs such as Bored Apes (pictured above). The gain in popularity and price in many of these NFTs has led to many critics to mislabel and misunderstand the wider technological innovation. The current floor price i.e. minimum price a Bored Ape can be purchased for currently stands at 71.95 ETH ($118, 280).
How can you pay $118,280 for a picture of a digital ape?
Why can’t I just copy paste the image and now I own it?
While the subjective value the market ascribes to art is beyond the scope of this article, an NFT cannot be owned just because I have copied and pasted the image. Much like I can buy an exact replica of the Mona Lisa and hang it on my wall, does this mean I own the original and it can be sold as such? absolutely not! As explained earlier, an NFT represents ownership or proof of authenticity and as such I would not be able to prove ownership or sell the NFT without owning it within my digital wallet.
How could this impact the real world?
While expensive pictures of digital apes might leave you scratching your head about NFTs, the potential applications across a variety of industries from music, gaming, real estate and more is extremely exciting.
Music
Those lucky enough to get a record deal often have up to 80% of royalties taken by their music label. Out of approximately 8 million artists on Spotify, only 42,100 artists (0.53%) made over $10k for the year; just 13,400 (0.17%) made over $50k.
The famous DJ Steve Aoki Says he’s made more money with NFTs than from 10 years of music advances. Unless you are playing live gigs or on tour, the music industry is an extremely tough business even for the most famous of artists. While NFTs are still very much in the experimental stage, they offer some exciting opportunities for artists to take back control over the content they create.
The famous DJ and music producer Diplo was one of the early artists to experiment with NFTs using the crypto music platform https://royal.io/ allowing fans to invest in his song ‘Don’t forget my love’.
Diplo sold 2000, 100 and 10 NFTs across three respective rarities with each one offering different benefits to its holder. The image below shows the platinum rarity NFT (10 total) priced at $9,999.
As well as benefits such as first access to tickets and discord access to chat personally with Diplo, the NFT afforded fans a 0.7% royalty payout for the song. As can be seen below, the song actually did 150m streams, significantly more than estimated amount paying out over $2k to fans. That’s a 20% return on your investment and that’s not to mention the other benefits available to NFT holders.
While music NFTs are still very much in their infancy and the benefits and business models are still being understood, it is clear they have the potential to improve the music experience for both artists and fans alike.
Real Estate
Returning to the definition of an NFT:
An NFT (Non-Fungible Token) is a unique digital asset stored on the blockchain that represents ownership or proof of authenticity of a digital or physical item.
While music is an example of a digital item, NFTs equally allow for the representation of physical items such as the ownership of a home.
As anyone who has bought/sold a home before can tell you, it’s an arduous process involving middle men from banks, lawyers and real estate professionals. With NFTs, it’s possible to tokenise real estate assets and represent ownership of a property on the blockchain. The benefits of this could include:
- Efficiency benefits and therefore reduced costs gained through disintermediating middle men meaning real estate transactions can take seconds instead of months.
- Increased liquidity gained through improved simplicity to buy and sell NFTs.
- Composability with DeFi protocols enabling NFT owners to use their real estate as collateral to borrow against all on-chain.
- Transparency allowing ownership history and other relevant data all recorded on-chain.
- Fractionalisation opportunities enabling investors to own and claim rental income on part of an asset.
- Elimination of fraud given a clear ownership record of data.
While NFTs representing physical real estate have lots of potential, many of the benefits above involve a number of different market participants (many of whom will not benefit from the evolution of the industry). NFTs are early in their journey but hopefully using the examples above it is clear that they have the possibility to disrupt and improve a number of industries.
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