Non-fungible tokens, or NFTs, have exploded in popularity recently, with their total market valuation growing from just $41 million in 2017 to over $17 billion in 2021. But what exactly are NFTs, and why are they built on Ethereum?
In simple terms, NFTs are unique digital assets that represent ownership of a specific item, such as a piece of digital art, music, video, or even real-world assets like real estate. Unlike cryptocurrencies like Bitcoin that are fungible (meaning 1 BTC is equal to any other 1 BTC), each NFT is completely unique and not interchangeable.
NFTs are minted on blockchain networks like Ethereum, which allows them to leverage the inherent advantages of blockchain technology:
- Decentralization - no single entity controls the network
- Transparency - all transactions are visible on the public ledger
- Security - cryptographic encryption protects against fraud
Most NFTs today are built on Ethereum, which has emerged as the leading blockchain for NFT projects. There are several key reasons why Ethereum is well-suited for NFTs:
Flexibility of Ethereum's standards
Ethereum has flexible standards like ERC-721 and ERC-1155 that allow for the creation of both unique and fungible tokens on its network. These standards provide a basic framework for attributes like ownership tracking, transfers, metadata, and more. Developers can build customized NFTs on top of these standards.
Smart contract functionality
Ethereum allows complex logic and interactions to be programmed into NFTs through smart contracts. For example, smart contracts enable royalties to be paid out automatically each time an NFT is sold or traded.
Ethereum has the most developed ecosystem around NFTs, including marketplaces like OpenSea, shared standards, developer tools, infrastructure, and more. This vibrant ecosystem makes it easier for artists and creators to launch NFT projects.
Liquidity and network effects
As the dominant NFT blockchain, Ethereum benefits from the network effect - buyers and sellers go where other buyers and sellers are. This increases liquidity and makes it easier to find counter-parties for transactions.
"Building our NFT drop on Ethereum was a no-brainer given its vibrant community and strong technical foundations. It's the blockchain that offers creators the most options for innovating with emerging technologies like NFTs," says Steve, co-founder of an independent NFT project.
Some key benefits that NFTs on Ethereum offer include:
- Verifiable scarcity - Unlike most digital items which can be endlessly reproduced, each NFT is cryptographically unique with a finite supply, even if the underlying media is reproducible. This creates verifiable scarcity.
- Programmability - NFTs can be augmented with additional logic and functionality through smart contracts. For example, a ticket NFT could self-activate on the event date.
- Interoperability - Data like ownership rights, royalties, etc. can travel with the NFT across different platforms and marketplaces.
- Access - NFTs can unlock special privileges like access to a community, content, experiences, etc.
- New business models - NFTs enable creators to tap into digital ownership models not possible before. Musicians can link royalties to NFT songs, artists can sell limited edition digital art prints, etc.
NFTs represent a fundamental shift in how we assign value and rights in a digital context. While still in its infancy, NFT technology built on Ethereum has the potential to transform many industries including art, gaming, entertainment, intellectual property, fashion, sports, and more. It introduces digital scarcity and verifiable ownership to spaces that struggled with controlling copying and piracy before.
How are NFTs setting higher standards for artists and creators?
NFTs built on Ethereum are empowering artists and creators by allowing them to directly monetize their work on their terms, while engaging with fans in new ways. Some of the key benefits NFTs offer artists and creators include:
- Direct monetization without middlemen - Artists can sell their work directly to collectors without needing galleries or agents. This means higher earnings.
- Ongoing royalty payments - Smart contracts allow artists to earn a percentage every time their NFT is sold or changes hands on secondary markets. This provides ongoing passive income.
- Maintaining copyright ownership - When selling an NFT, artists only transfer ownership rights to that NFT, not the underlying intellectual property or copyright.
- Unlocking digital-only value streams - NFTs allow artists to monetize purely digital art, music, videos, etc. in ways not possible before.
- Direct fan engagement - Artists can unlock exclusive experiences, content, or utilities for NFT holders, fostering stronger connections with fans.
- Funding future work - The upfront earnings from NFT drops can fund artists to create more work.
NFTs represent a shift in power and value from platforms back to the creators. Artists are embracing this technology to gain more control over their work and livelihood. It is setting higher standards across creative industries by showing what's possible when creators leverage blockchain technology.
What possibilities could NFTs unlock for businesses and brands?
NFTs built on Ethereum offer exciting possibilities for businesses and brands looking to drive engagement, create new revenue streams, or augment physical products and experiences:
- Loyalty and Membership Programs - NFTs can represent membership in a brand community with built-in utilities like exclusive access, discounts, voting rights, etc. This creates ongoing engagement.
- Gaming and Metaverse Integrations - Brand mascots and avatars could become NFTs that travel with users across different virtual worlds. NFTs also enable play-to-earn models.
- Digital Collectibles - From sports teams to entertainment properties, brands can release limited edition serialized NFT collectibles to engage fans.
- Authenticated Physical Items - NFTs can be paired with real-world items like luxury goods to validate authenticity and track provenance and ownership.
- Experiential Marketing - NFTs can unlock VIP brand experiences from backstage passes to events to one-on-one virtual interactions.
- Decentralized Fundraising - Brands can raise funds by selling branded NFTs with supporters. This provides upfront capital and ongoing royalties.
As virtual and augmented reality become more pervasive, NFTs offer the opportunity for persistent digital ownership and identity across immersive environments. Adoption is still early, but the possibilities are endless for creative minds to explore.
In conclusion, NFTs built on Ethereum offer the ideal mix of trust, flexibility, and community to allow creators, artists, businesses, and brands to experiment with new digital ownership and engagement models. While NFTs are powering a new creator economy today, they have the potential to also transform gaming, social media, entertainment, enterprise, and the broader metaverse in the years to come. Backed by blockchain, NFTs establish digital scarcity, authenticity and programmable utilities in the virtual world. The next decade promises to be an exciting one as adoption spreads across industries and use cases.
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