We often use acronyms without ever stopping to think about what they mean. With the excitement surrounding web3, we keep hearing the term "NFT" being thrown around without a proper accompanying definition.
To some, NFTs are the 21st-century version of the tulip mania, where irrational buyers are paying thousands of dollars for a JPEG. To others, NFTs are a revolutionary concept that unlocks possibilities that were unimaginable up to this point in time.
In this post, I hope to expose what I find so interesting about NFTs and why I think that solving the problem of digital ownership was an important step moving forward.
Fungibility
The key concept that is important here is fungibility.
Fungibility is related to interchangeability. If you have a $10 bill and I have another $10 bill, we can exchange one for the other and it makes no difference at all. Dollar bills are fungible, their value is indistinguishable. On the other hand, if I have a hand-crafted ring that was passed from generation to generation in my family, making it unique, I can’t simply exchange it for a ring that can be bought at the local jewelry store. My family’s ring is non-fungible, it is scarce.
In the digital realm, we don’t have dollars and rings, we have tokens, which represent things that we can own online. BTC and ETH are fungible tokens. Scarce digital goods are non-fungible tokens (NFTs).
Digital ownership
In the real world, ownership is trivial: once you buy a physical good, you can do whatever you want with it (within legal boundaries). No one can take it from you or charge you again for it.
Online, we didn't have true ownership until very recently, because we always had to rely on a platform, a central authority. Blockchain technology allows us to truly own things online, much like when we buy goods in the real world. This means that if you buy an NFT, it’s yours forever unless you decide to sell it.
This is very different from what we have nowadays with centralized systems. For example, if you decide to buy a digital good in a game (say Fortnite or CS:GO), you pay for it and you have the impression that you own it, but in fact, you don’t. The platform owns it.
Maybe the platform (the game, in this example) will change its policy and say that you can only have so many digital goods in your inventory. Maybe the platform will say that your ownership eventually expires. Maybe it will say that to keep owning those goods, you have to pay an amount per month and keep playing the game.
Notice that this is very different from true ownership. These rules that can be enforced are arbitrary and can change at any point in time according to the platform controller's will. It is as if you bought something in the real world, but couldn’t take it out of the store.
Next steps
So the question is: what becomes possible now?
To be honest, no one knows yet, nevertheless, it is impressive how many doors open once you solve the problem of digital ownership.
The first use case is in virtual realities, like video games. People already pay to have unique digital goods online, however, as I said previously, they do not have true ownership when they rely on a central authority. At first sight, not much changes in terms of gaming experience when comparing the centralized and the decentralized alternatives, except for the fact that with the latter, you have true ownership.
It starts to get more interesting once we manage to get platform-agnostic digital goods, i.e., once we can use the same digital goods in multiple games. This becomes possible because the ownership relationship is registered on the blockchain, which is external to the games. Therefore, the same ownership information could be accessed from different gaming platforms. Of course, you would need game developers to prepare the gaming platforms for that, but if that’s what users want, I don’t see why it wouldn't become a reality.
The second one is for creators. In web3, there will still be marketplace platforms and they will still have fees. The fees from web3 platforms could be a bit lower than their web2 counterparts because in crypto, payment is already embedded and you don’t have to stack a bunch of fees for the middlemen.
I don’t believe the fees are the most important aspect. What would be great is to free creators from earning only through platforms that pay a very small amount to them per thousands of views/listens. Creators could mint NFTs from their creations, sell them directly to some of their fans and maybe grant some privileges to those who hold them.
The third one is related to the previous one and consists of granting some rights to the holders of certain NFTs. For instance, to join a DAO (decentralized autonomous organization), it could be required that you hold a specific NFT. This would be the digital equivalent of something like a club membership card. Maybe in the future, we can even use an NFT as proof that we have certain rights in the real world.
I’m certain there are many other directions I’m not even aware of. Trying to predict all the use cases for NFTs is like trying to foresee Uber and Instagram right after the iPhone launch. We are still very early.