Non-Fungible Tokens (NFTs) are the latest craze sweeping through the cryptocurrency world. Although the current interest is centred around the use of NFTs for tokenising the ownership of digital artwork or in-game items, there are serious real-life use cases which could transform the concepts of ownership and trading of real-world assets.
What is Fungibility?
A Fungible asset is an asset that that can swapped for another asset of the same type whilst remaining identical in functionality and value. As an example, a 10-Euro note can be swapped with any other 10-Euro note with no loss in value or function.
A Non-Fungible asset is an asset where two objects, whilst being superficially similar in type, are not identical. An example of this would be a house; houses are fundamentally different in value and function despite being of the same asset class.
Many of the cryptocurrencies that serve as a store-of-value (such as Bitcoin or Ethereum) are classed as fungible. One Bitcoin is functionally identical to every other Bitcoin. However, there are a class of tokens (represented by the ERC-721 or the upgraded ERC-1155 standards on Ethereum) which are representations of distinct digital assets. These tokens are Non-Fungible, as the assets that they represent are unique and non-interchangeable. Most modern wallets such as Trust Wallet support the storage and trading of NFTs across a number of blockchains.
Current use cases
CryptoKitties and Gaming
NFTs shot to attention during the CryptoKitties hype of 2018 which threatened to bring Ethereum to a halt due to overwhelming demand for transactions. ERC-721 tokens were used to represent unique CryptoKitties with a associated appearance and genotypes. These CryptoKitties could be bred with other CryptoKitties to sire new kittens. Each cat in your collection was a unique asset that you had complete ownership over via your Ethereum wallet, free to hold or trade as you wished.
Collectable NFTs were one of the first examples of unique digital assets. Previously, digital goods were fungible and there was no concept of "ownership" of these goods. You could not sell them on a second-hand market and they were infinitely reproducible at zero marginal cost.
Recently, online card battlers such as Splinterlands and Gods Unchained have used NFTs to represent cards in a player's collection. This gives players true ownership of the cards purchased and earnt whilst playing the game. Combined with limited runs of cards, this enables thriving marketplaces of card trading similar to physical card trading.
Digital Artwork Ownership
Marketplaces for digital artworks (Rarible and OpenSea) started getting widespread public traction in 2020. These marketplaces allow users to upload digital art, attach ownership of the artwork to an ERC-1155 token and then sell the ownership rights of the artwork. This has the additional benefit of being able to channel royalties from further sales back to the creator of the artwork, something that is impossible to do with current digital sales.
In principle, the owner of the artwork would have property rights and claims on fees if the artwork is used, whilst the creator would be credited with a royalty fee as coded by the original creation smart contract. However, this is not yet enforceable as the digital artwork can be copied easily and there is no entity that has committed to enforcing this form of ownership yet.
Future Use Cases
NFTs for gaming and digital artworks are definitely interesting but they are a niche use case. However, you would be mistaken if you thought that NFTs could not be applied to more "serious" applications.
Tokenizing Real-World Assets
An important future use case for NFTs would be the ability to tokenise real-world assets such as real estate. Currently, land registries are recorded in centralised digital or paper archives (deeds). This makes ownership details opaque, difficult to access and susceptible to accidental destruction. In addition, changes in details can be cumbersome.
Tokenising real-world assets would benefit from recording ownership data onto a public blockchain. This would make the transfer of ownership relatively seamless and transparent whilst the registry would be resilient due to the decentralised storage of the data.
Of course, real estate is only one example of tokenised ownership. It could also apply to vehicles, commodities and rare art as well.
Fractional Ownership is a concept where more than one person would have ownership rights for an asset such as a artwork or real estate. In our current model of contracts, it is difficult to represent this form of ownership and even more difficult change the structure after it has been set up.
Small investors would have the ability to share the total cost of purchasing large investments, and share the returns in an equitable and transparent manner. They could also recoup their initial investment by selling their ownership stake directly to a third party, without requiring additional consent and contracts to be drawn up.
Identity would be an example of non-transferable NFT. Currently, to prove identity, we would need to show examples of birth certificates, passports or driving licences. However, in doing so, we often reveal more information than is required. These proofs are also easily lost and are difficult to verify in real-time.
Encasing your identity as a NFT would mean that queries could be done in real time over a public blockchain without revealing extraneous information, resilience would be provided by the decentralised network and "lost" identities could be revoked and destroyed easily by the issuer.
Although the current usage of NFTs appear to be trivial in nature (gaming and digital art tokenisation), the idea of a digital representation of ownership has far-reaching consequences. The ability to easily and trustlessly transfer ownership of real-world assets would make for highly efficient marketplace, whilst allowing for transparency of ownership and resilience of record keeping.
It only requires the adoption of governments and regulators who are willing to issue and recognise NFTs attached to real-world assets as legitimate proof of ownership.