What is NFT and its use Cases?
What is NFT?
NFT is a blockchain standard that is used to represent a unique item. Ownership of an NFT represents ownership of the item. Owning an NFT is similar to owning a stamp, deed or title. NFTs can represent any type of physical or digital ownership. Each NFT has a unique ID and metadata; relevant information of the item is stored on the blockchain. The item or the digital certificate of the item can be stored in a decentralized storage system with reference to the metadata. Each blockchain has its own standards defined for NFTs. The process of creating an NFT is called ‘minting’. Once created, NFTs can be traded through marketplaces; one does not need to know the buyer/seller personally to trade NFTs (trustless transactions), making NFTs more liquid than other collections. The primary use case of NFTs today is for content (art, music and even writing). An NFT, on the other hand, can represent any unique item that changes ownership. If the item is physical, a digital representation (similar to a certificate) can be done with NFT making ownership transfer transparent and easy.
NFT standards
The most common NFT standard is ERC 721. Each ERC 721 token has a unit256 (uint256 is a non-negative integer up to 256 bits) ID and metadata. As per the ERC721 standard, “The pair (contract address, uint256 tokenID) will then be a globally unique and fully-qualified identifier for a specific asset on an Ethereum chain.” Most NFTs also contain ‘metadata’ which provides further details of the NFT. This includes a URL to a permanent file storage system such as IPFS or Arweave (as storing files on blockchain is too expensive)and objective attributes of the NFT(ex: Background color). Once a file is uploaded on IPFS or a permanent storage system with a ‘Content Identifier’(CID), its contents cannot be changed without changing the CID. NFT platforms also provide an interface to create a CID and save files on IPFS with an option to Freeze Metadata.
The Ethereum community conducted a survey and finalized the term ‘NFT’ to represent standards for unique digital assets.
NFT USE CASES
While the use cases for NFTs are evolving, these are the most common ones seen till March 2022:
- NFTs for causes: A lot of problems in today’s society cannot be solved by businesses and get left out because a business either needs immediate profits or needs a valuation based on a projection of a discounted future cash flow in order to take off. NFTs are increasingly appearing as the preferred mode of gathering a community behind and/or funding such initiatives. NFTs for causes are better than donations because while the funds can be put to work on the ground similar to a donation, the donor can cash out in a liquid market(if the project is popular) when he/she is in need of liquidity.
- A Forbes article explains how some NFTs create social value.
- METKAT is an NFT project on WazirX in which the artist donates 25% of the proceeds to the cause of stray animals.
- Hungry Human is an NFT project on WazirX in which the artist gives out a bonus NFT in return for the collectors donating the price of one NFT to a fellow human in need.
- Digital Charity Art features NFT projects for charity, including ocean conservation
- A whole new field called ‘Regenerative crypto economics’ is emerging which involves working directly and primarily towards positive outcomes in societies through web 3.
- The Greatest LARP by an Ethereum ecosystem builder GitcoinDAO used NFTs for fundraising for public good projects.
2. Collectible: Similar to a stamp collection. There were rare stamps that we as kids were ready to trade for multiple common ones. Also similar to paintings hanging on your walls or decorative on your shelves- depending on one’s willingness to spend, one may buy paintings/crafts ranging from a few hundred rupees to millions of rupees. Most people who buy these collectibles do not part with them till they are bored, but there is always a liquid market for them to sell in case they get bored. Some risk-loving collectors can have an eye for valuable collectibles and turn this into an investment. And yeah, these guys spend most of their time online and have multiple galleries to show off their collection.
- This project features multiple collectibles, including Indian Bollywood star Amitabh Bachan’s NFTs, Indian Astronaut and the first woman of Indian origin to go to space Late Kalpana Chawla’s NFTs.
- First-Ever Marvel Digital Comic Collectibles Arrive on VeVe.
3. Club membership: Similar to Lions club, Rotary club, Toastmasters. People with NFTs get access to the club. Some clubs work for a cause while others work in a specific sector such as fashion, movies and building a brand. Club membership is usually limited to 10k globally. The club almost always has a roadmap that includes investing x% of all NFT transactions on a social cause, y% to NFT holders, z% for development(in most cases a metaverse application) which makes the NFT (club) more useful and valuable. If the club takes off, more people would want to enter, and with the memberships being limited the NFT price increases. NFT holders (Club members) also get access to multiple airdrops (which is a free or low-cost distribution of new tokens).
- CSS club is one such club for movie buffs. The club plans to build an application in the Sandbox metaverse to simulate the life of a movie star. The club may build utilities, rope in offers and even celebrities from the movie industry.
- The hug is an accelerator for women-led crypto projects. The genesis NFTs give access to the accelerators membership pass and token earning opportunities.
- Bored Ape Yacht club is one of the most successful NFT clubs.
4. PFP: Profile photo; with people spending most of their time online, instead of shopping for fancy apparel to wear, they shop for fancy profile photos. Ask the gamers who buy vests, hats in-game.
5. Pseudonymous identity: Some NFT holders have a sizable following on social media for their NFT profiles. No one knows who they actually are, very few care.
6. Brand: Brands build deep-rooted relationships with a savvy NFT customer base. Investing in NFT projects is also (i) A hedge against the movement in consumption from the physical to digital world, especially for fashion and luxury brands (ii) Free customer acquisition amongst the NFT community without paying media — the community then takes care of marketing in social media.
Report: How Adidas plans to rule the metaverse
7. Investment in artists: Some people just buy to encourage artists.
8. Fractional ownership of any physical/digital asset: Real estate, equipment, movie, albums, farms, forests, games or even companies (DAO).
Projects:
9. Proof of attendance protocol (POAP): POAPs are akin to participation certificates or badges. Some POAPs are used to collect/receive airdrops of rewards in the future and some may just serve as a resume point to prove one’s skill or commitment to a cause.
10. In-game utilities: Axie infinity is one of the most successful pay-to-earn (P2E) games so far. The NFT marketplace features multiple items to play and progress in the game or to cash out the NFTs in any currency including USD. Each marketplace trade entails a 5% fee that goes to the community treasury.
Elegant Elephant Society is an early-stage P2E being built on Minecraft through a partnership with a game-building platform on Minecraft NFT Worlds.
Typical monetization methods today:
- Founders/artists/developers monetize with a percentage of the initial sales and royalties from the secondary sales(when buyers exchange hands).
- Collectors monetize through access to utilities built by the project, airdrops of crypto tokens in some cases, airdrops of derivative NFTs and through sales if the NFT value appreciates.
References:
1. https://ethereum.org/en/developers/docs/standards/tokens/erc-721/
2. https://github.com/ethereum/EIPs/blob/master/EIPS/eip-721.md
3. https://docs.opensea.io/docs/metadata-standards
4. https://docs.ipfs.io/concepts/immutability/
5. https://support.opensea.io/hc/en-us/articles/1500012270982-What-is-Freezing-Metadata-
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About the Author(s):
Harshakaranth has been in the energy and e-commerce industries before he came across web 3.0. He is enthusiastic about building impact projects on web 3, particularly in the environment, animal care and education sectors. You can follow him on Twitter
Shuwam Rana is a Technical Analyst, Digital marketer and SEO expert with a passion to help businesses grow. He also has an engineering background. You can follow him on Twitter
