NON-FUNGIBLE TOKEN

NFTs are creating a billion-dollar market for tradable digital art. But new business models are also emerging that go far beyond art collectibles.

NFTs are special cryptographic tokens that represent a digital or physical asset in an indivisible, irreplaceable, and unique way on a blockchain.

With NFTs, uniquecollectibles become tradable quickly and easily. This is creating a multi-billion dollar market with trading venues for digital art, memes, global brands, e-sports, luxury goods, and items from online games.

The collage “Beeple” consists of 5,000 individual images and was auctioned as NFT for 69 million US dollars and revolutionized the art market. Characters of the online game “Axie Infinity” have already been traded for $4 billion.

With NFTs, a new kind of cultural and economic phenomenon is emerging. For example, the number of NFT buyers increased from 44,000 in 2019 to 2.3 million in 2021.

There are many potential applicationsfor NFTs. In addition to art, membership cards, tickets, lottery tickets, land register entries and quality certificates for products can also be mapped as NFTs.

Would you like support with your NFT project?
– Take advantage of our free initial consultation

NFT Are Unique Digital Collectibles

NFT digitally map values from art, sports, fashion, online gaming and luxury goods.

Bitcoins are “fungible” tokens – that is, all Bitcoin units are the same and it makes no difference which Bitcoin unit one owns. In contrast, NFTs are not interchangeable, i.e. non-fungible, and it makes a difference which token you own.

NFT are unique tokens that can represent, for example, a specific piece of art, video or game item. These items can be physical or digital.

In the case of physical items, an NFT creates a digital twin. In order for an NFT to become a digital proof of ownership, a legally secure agreement must be assigned to the token.

In the case of items, the tokens are linked to usage rights or licensing rights for the item.

Today, the economic relevance of NFTs is most evident in digital artworks ($2.8 billion in trade volume in 2021), collectibles ($8.5 billion), online games ($5.2 billion), and digital images of fashion and luxury goods. Thus, the items can also be used in peoples’ second, virtual life in the Metaverse ($514 million).

NFT is redefining the market for collectibles. It seems reasonably that NFTs will fundamentally change existing business structures.

Advantages of NFTs

One of the attractions of collectible NFTs for buyers is their appeal as a status symbol, for example, using an NFT image as a profile picture on social networks (e.g., CryptoPunk on Twitter). This results in an important distinguishing feature of the digital elite.

NFT Entwicklung
Number of NFTs as ERC-721 on Ethereum (green) and transfer volume (red).
(Figure by Coin Metrics: https://coinmetrics.io/the-rise-of-nfts/)

Sellersof NFTs benefit by means of a quick and cost-effective process for transferring NFTs to new owners.

NFT Gewinne
Cumulative gains on resale of collectible NFTs
(Source: https://nonfungible.com/reports/2021/en/yearly-nft-market-report-free/form)

Creators of collectibles can benefit from trading NFTs by receiving a percentage of the sale amount for each transfer.

Since the applications of NFTs go far beyond collectibles, there are also advantages in traditional business with customers, e.g., through a digital loyalty system that can issue rewards flexibly in the form of cryptocurrencies. One example is the rewards system of the “Choice” hotel chain with over 7,100 hotels. The digital reward points could be used for consumer spending through the Bakkt app or converted to bitcoin and transferred.

Product attributes such as quality and origin can be verified by tamper-proof NFTs. This kind of information is quickly retrievable and verifiable worldwide. Nike, for example, uses NFTs to prove the authenticity of shoes.

10,000 Small Pixel Graphics Marked NFTs Breakthrough In 2017 -
The History of NFTs

The so-called Cryptopunks were very significant for early NFT history. The Cryptopunks are a collection of 10,000 small pixel graphics with individual images of punks.

Cryptopunks came to market in 2017 and are mapped as NFTs on the Ethereum platform.

Some of these images have meanwhile been traded for several million euros.

The Bored Ape Yacht Club is a more recent and also famous collection of 10,000 NFT images.

The hype around “Bored Apes” was fueled by influencers and “Bored Apes” became a status symbol on social media.

CryptoKitties
CryptoKitties®: unique cat characters tradable as NFTs
(Image: Press Kit (c) Dapper Labs, Inc. https://www.cryptokitties.co/press)

Another milestone to popularize NFT was CryptoKitties – an online game to breed, collect and trade kittens using NFT on the Ethereum blockchain. A single kitten has already been sold for $140,000.

decentraland
Decentraland: Players can interact with avatars
(Image: (c) Decentraland Foundation, screenshot from https://play.decentraland.org/)

The use of NFTs in online games to represent ownership of in-game items or land gained momentum in 2018, including the Ethereum-based virtual reality platform Decentraland.

OpenSea NFT Marketplace
The largest NFT marketplace: OpenSea
(Image: (c) Ozone Networks, Inc., screenshot fromhttps://opensea.io/)

OpenSea is the largest marketplace for NFTs. In the fourth quarter of 2021, revenue was $8.2 billion.

Besides OpenSea, there are many other NFT marketplaces such as Binance NFT, Solanart, SuperRare or Rarible.

At the latest in the fourth quarter of 2021, demand for NFT increased sharply in connection with the “Metaverse” and Facebook’s renaming to Meta. Thus, NFT have entered the mainstream and the fungible tokens of NFT projects gained enormously in price.

Financing Situation of NFT Companies

260 NFT firms were funded with $7.4 billion in Q1 of 2022. Drilling down, US$2.9 billion were invested into games and US$1.5 billion in collectibles.

The largest financings in the games sector were for Forte, Animoca Brands, Axie Infinity, Mythical Games, The Sand Box and SolChicks.

Among collectibles, Sorare, Dapper Labs, Parallel, Dibbs and Radreceived the largest funding.

There Are Many Applications For NFTs

NFTs represent collectibles, quality credentials, membership cards or admission tickets

Collectibles

For example, major brands and celebrities are publishers of their own NFT collectibles. These include Marvel and standout moments from American Basketball League games, which are available in video form and bundled into sets for collectors.

Credentials For Products

The quality and origin of products in the supply chain can be mapped as NFT. This creates a “single source of truth” for participants in the supply chain, and those responsible for quality problems can be traced. “CattleProof”, for example, is an NFT-based proof of origin for cattle.
An NFT-based credential to a product can be used to prove authenticity and ownership. In addition, NFT-based credentials can be used to process warranty and insurance claims for a product. This opens up a wide range of possible applications for the industry.

Membership Cards

NFT can be used as numbered membership cards for virtual communities, benefit clubs for customers or associations. A prominent example is the “Bored Ape Yacht Club”. Loyalty points as NFT are also possible – e,g., Bakkt is a wallet app supporting NFT-based loyalty points. Any ticket to events (with a fixed seat) can be implemented as NFT.

Large Companies Use NFTs

NFT are status symbols, NFT generate billions in sales and NFT create awareness for brands

In 2021, $25 billion worth of “non-fungible tokens” were traded, and by 2025, they are predicted to be worth $80 billion.

The number of NFT buyers increased from 44,000 in 2019 to 2.3 million in 2021 and the total profit on NFT sales was $5.4 billion in 2021.

Basketball "Top Shots"

NBA Top Shots Collectibles
Basketball collectibles as NFT, (c) Dapper Labs, Inc, NBA Properties, Inc.
(Source: press kit: https://nbatopshot.com/press)

Outstanding moments from American Basketball League games, available as video, were combined into NFT-based sets and marketed.

Axie Infinity: $4 billion In Trade Volume With Game Characters

Axie Infinity
Axie Infinity - each game character is unique and a tradable NFT
(Image: Screenshot from https://axieinfinity.com/, (c) Axie Infinity Limited)

Axie Infinity is a major NFT-based online game. Players breed, collect and fight against each other with animal-like characters called “Axies”.

Every Axie is an NFT. Uniqueness is characterized by various features of the Axies that make them stand out in battle.

NFTs can eventually be traded for fiat money.

Christie's auctions NFT collage "The Beeple"

The sale of a digital collage of 5,000 individual images by Mike Winkelmann has been an important milestone for NFTs. Winkelmann had posted a new picture online every day for 13 years.

By adapting NFT, Christie’s positioned itself as an innovator.

Since the auction, NFT are finally taken seriously in the art world.

Global Brands Like Nike Use NFT as Product Badges

Nike is one of the global brands, adapting NFT for their products, which also generates additional attention.

Nike uses its own patented system to prove the authenticity of sneakers with NFT. Due to many fake products, the NFTs add value for customers.

Upon purchase of the shoes, called “CryptoKicks,” buyers will receive an NFT with a unique number for the shoe. When sold, the shoe and NFT change hands so that the chain of ownership can be traced.

How Are NFTs Implemented Technically?

Well-developed digital platform infrastructure and increasing standardization help with realization

Blockchain technology is used to implement Non Fungible Tokens. The blockchain organizes a database of token transfers mirrored across many computers.

Approximately ¾ of all NFTs are mapped to the Ethereum blochchain.

The ERC-20 standard that initially prevailed allowed for the issuance of custom tokens on the Ethereum blockchain. However, these are interchangeable like monetary units.

The established ERC-721 standard provides the foundation for NFT on the Ethereum blockchain. NFTs are issued, managed and made transferable through a smart contract. Each NFT instance is assigned a globally unique identifier.

The ERC-1155 standard also allows multi-tokens, mixing fungible and non-fungible token types.

Other blockchains besides Ethereum also allow the implementation of NFTs, e.g., Tron, Tezos, Cardano, and Solana.

Would you like support with your NFT project?
– Take advantage of our free initial consultation

What Is to Be Considered Legally?

NFT must be linked to real or digital values

Bringing to market NFTs should be secured by terms and conditions that link it to an asset or collectible and define the buyer’s rights. This includes warranties, revocation rights, handling of defective goods and return conditions.

If an NFT is about a digital collectible or intellectual property, subject to copyright law, an NFT can only grant certain rights of use, which must be contractually defined. These include, for example, local restrictions on use, certain types of use, or possibilities for sublicensing.

Finally, NFT publishers can make a profit on any resale by making appropriate arrangements and implementing them technically.

For more legal challenges of NFT, click here.

51nodes And NFTs

Get help from blockchain professionals with many years of experience

With NFTs, a new digital asset class has emerged in recent years that is now entrenched in numerous business sectors and in digital culture. This has given rise to new ways of creating, marketing, and using digital collectibles.

From the point of view of 51nodes, the disruptive development of NFTs will continue in the coming years. In our opinion, the exciting development will be the further digital integration of areas that are still separate today, such as the creator economy, brands, customer engagement and finance.

51nodes is happy to support you in the implementation of your NFT project with our own software and token engineers. We will also be happy to coordinate the entire process for you, including the necessary legal experts.