Non-Fungible Tokens Masterclass

What are NFTs?

In the previous course, we focused on the value of stablecoins and how they transform the adoption of P2P transactions globally while impacting economies. They are less volatile than other coins and are pegged to a country’s fiat currency. And while we explored altcoins like stablecoins and identified tokens as one type of cryptocurrency, we didn’t investigate them for a deeper understanding.

Broken down most simply, NFTs (non-fungible tokens) are a digital representation of any real-world object. Most NFTs are in the form of art, music, in-game items, videos, and documents. When it comes to NFTs, the Ethereum network reigns king. Most users value it as a one-stop shop for buying and selling NFTs; it’s the most talked about and trafficked blockchain to date. In the coming years, we will see NFTs used to unlock entirely new use cases only made possible by crypto. *1

While the Ethereum ecosystem is where most NFT activity has taken place until recently, NFTs can exist on other smart- contract platforms. *2

Ethereum

The most popular blockchain for NFTs is currently Ethereum. It’s highly decentralized, and by operating using smart contracts, it cuts out the need for legal counsel or other intermediaries. It also houses some of the most popular NFT marketplaces, for example, OpenSea, NFT projects CryptoPunks and the Bored Ape Yacht Club, and NFT artists Pak and Beeple, which some would argue put NFTs on the map. *3

The biggest complaint and hurdle to using the Ethereum network are the high cost of gas fees. Unfortunately, it is one of the most expensive options and uses much energy. By Ethereum moving away from PoW to PoS, they’re hoping to reduce gas fees significantly, but other NFT marketplaces have been developed because of this.

However, thanks to its popularity, security, decentralization, and ease of use, you should consider this blockchain first when deciding where to mint. *3

Solana

Solana is one of the fastest programmable blockchains in the crypto space. Its unique combination of proof-of-history (PoH) and proof-of-stake (PoS) consensus mechanisms remove the need for such complex puzzles. This results in substantially reduced validation speeds and gas fees.

With PoS, users stake a specified amount of their cryptocurrency for the chance to be randomly chosen as a block validator. Validators earn the token SOL when they are selected. This incentivizes users to become stakers and rewards them for becoming stakers. PoH works in tandem with PoS and is used to verify the passage of time between two events cryptographically. The Solana blockchain ensures that transactions are in the proper order and found by the correct leader (validator). *3

Thanks to Solana’s PoS and PoH mechanisms, its transaction fees and times are about as low as possible. However, Solana isn’t as widely used as Ethereum, meaning fewer NFT marketplaces and fewer people are trading on the blockchain. *3

Tezos

As another alternative, people were able to leverage the Tezos blockchain. Tezos rose to popularity towards the beginning of 2021. One of the first marketplaces on the blockchain, it was heralded as an economical alternative to Ethereum-centric marketplaces until the platform shut down on November 14, 2021. *3

Flow

Flow is a high-performance blockchain explicitly geared towards creating NFTs, games, and decentralized apps (dApps). Unlike blockchains like Ethereum, Flow is built with scalability in mind. Billions of people could potentially interact with NFTs on the blockchain. *3

Initially launched in 2019, Flow quickly rose to prominence as the blockchain partner of the NBA. A product of Dapper labs (the team behind the legacy project CryptoKitties), Flow facilitated the launch and is the host of NBA Top Shot, making the blockchain an integral component in the popularization of non-fungible tokens. *3

Flow also uses a solely PoS consensus mechanism to verify transactions. Because of this, developers are working on creating a model to handle around 10,000 transactions per second. Transaction fees are also significantly low. *3

Aside from Blocktobay (a popular Flow-native NFT marketplace), Flow NFTs are tradeable via OpenSea, Raible, Foundation, and many other platforms. Flow has become a popular place for sporting NFTs. Organizations like the NBA, NFL, UFC, and more have launched their marketplaces on the blockchain. Yet, like Solana, Flow isn’t as widely used as Ethereum. *3

Worldwide Asset Exchange (WAX)
WAX is the leader when it comes to digital collectibles and virtual items. Of course, this encompasses NFTs, but in contrast to Ethereum (where digital art and avatar projects run the market), WAX is popular for digitalized versions of legacy collectibles like trading cards, figurines, memorabilia, etc. *3

Like other high-efficiency blockchains, Wax employs a PoS mechanism but also creates carbon offset NFTs and partners with Climate Care as part of a mission for sustainability. Like Flow, transaction fees are significantly low, and as a unique incentive to collectors, network fees on WAX are redistributed to the WAX community. *3

WAX marketplaces also host various influential brands, including baseball collectibles company Topps, racing giant NASCAR, toy company Hot Wheels and even a few cult-classic film franchises like Godzilla, The Princess Bride, and Spiderman.

Binance Smart Chain (BSC)

BSC is another good option if you’re looking for a sweet spot between fees and performance. The problem is that the high-speed transactions and the low fees come at the cost of decentralization. BSC is the most centralized of the options listed here. *3

Binance Smart Chain uses a consensus model called Proof of Staked Authority (PSA) which can support a short block time and low fees. Yet, the validators running transactions take turns to produce blocks — with the 21 validators needed to run the exchange switching out every 24 hours. According to some reports, 11 validators of the 21 control the Binance Chain and are all directly connected to the Binance Crypto Exchange. *3

While centralization is a turn-off to many within the crypto and NFT ecosystem, the BSC NFT market did begin to pick up some user adoption towards the end of 2021. Although the ecosystem is undoubtedly not even as robust as Ethereum, marketplaces like OpenBiSea, AirNFTs, JuggerWorld, and more are gaining popularity.

Why are NFTs interesting?

NFTs are powerful because, when combined with other financial building blocks on Ethereum, they allow anyone to issue, own, and trade them. This makes interacting with NFTs significantly more efficient than in traditional platforms. The same reason cryptocurrency is used in payments is more efficient than conventional payments is that it is borderless and significantly easier to transfer; the same applies to NFTs. For example, suppose you want to create tradable in-game items as a game developer. In that case, you can instantly have them be tradable through protocols that allow for the decentralized exchange of NFTs. You don’t have to create your marketplace or go through the onboarding process of a centralized platform to have the items be tradable. *1

NFT activity can go well past trading and include actions like being able to borrow and lend, support fractional ownership (e.g., NIFTEX), or use it as collateral in taking out a loan (e.g., NFTfi). The possibilities are endless when you can combine NFTs with Defi building blocks. For example, the game Aavegotchi combines Defi and NFT gaming, where each Aavegotchi character represents a user’s collateral that is deposited within the lending platform Aave. Still, you can battle the characters, level them up, and equip wearables that change their traits. *1

NFTs can cover a wide variety of areas, given they are digital representations of real-world assets, but there has been significant growth within art and gaming in particular. Note that many digital works of art and gaming items are a subset of a larger category of NFT collectibles. There is also the emerging space of social tokens, which sometimes fall into the NFT category. *1

Art

NFTs can make fractionalized ownership more accessible, so if there is a valuable item that otherwise wouldn’t
have been accessible for someone to own, now they can own a piece of it. Custody of a physical item still requires a trustworthy custodian, but being able to issue, hold, and trade it as a crypto asset unlocks more use cases. One can also craft an NFT such that the creator receives a percentage of all secondary sales completely automatedly. Artists typically don’t receive a cut of secondary deals in the traditional art world. *1

Programmable art is another interesting concept. A piece of artwork can incorporate on-chain data to update certain features or characteristics of the work dynamically. For example, one could create a piece of programmable art whose background changes if the price of ether goes above a particular dollar value. There are countless creative possibilities. *1

Async Art is a digital art marketplace known for programmable art. Artists on Async sell artwork where someone can own the “master” copy, which consists of several individual layers. Still, others can hold the separate layers and adjust their attributes over time. Imagine groups of people being able to own art collectively, where members of the group manage the characteristics of the work. *1

A common question about digital artwork is, what can you do with it? These works can be displayed in digital frames in a physical setting for people to enjoy. The digital artist Beeple sold physical tokens along with his digital NFTs and made $3.5 million from sales in an auction on the Nifty Gateway marketplace. *1 *2

Digital artwork can be displayed in online collections like a SuperRare profile and virtual worlds. There are several art galleries within Cryptovoxels, a virtual world where users can buy and sell land parcels as NFTs. As virtual reality spaces become more popular, having digital art to display will become more common. This wouldn’t be much different than someone spending money on video game items to customize a character’s appearance, which is already a multi-billion- dollar industry. *1

A common skepticism is that someone can take a screenshot of the image or get a digital file, so it’s not scarce. However, the same argument can apply to physical items as well. Anyone can take a photo of the Mona Lisa or create a replica, but it isn’t an authentic item from the artist. People are willing to pay a premium for the original work. Another exciting aspect of digital art or collectibles is that you can easily verify the item’s ownership history. Some digital things might be worth more depending on who previously owned them. *1

With NFTs, you can also prove that the item is authentic and tamper-proof. This is an issue in the physical collectibles space. For example, a T206 Honus Wagner baseball card was sold to Wayne Gretzky for $451k and sold again for several million dollars. One of the card sellers later admitted to trimming the card’s edges in court to make it look better. You can ensure NFT supply doesn’t change and there’s no counterfeit or continued printing. For example, many fake Black Lotus cards are in the popular game Magic: The Gathering. Standard verification methods include bending the card to ensure it doesn’t crease or going through centralized grading services whose rating significantly affects the card’s value. *1

Gaming

Steam, a popular video game platform, has a Community Market where in-game items can be bought and sold. Steam’s marketplace is centralized and collects a transaction fee of 5% for each item from the buyer. Games like Team Fortress 2 and Dota 2 take an additional fee of 10% for their items sold. *1 *2

Steam also restricts user wallet balances to $2,000 and the price of a single item to $1,800. While these cases are outliers, many in-game items can sell for significantly more significant amounts, such as the DotA 2 pink war dog courier for $38,000. There have also been high-priced sales within the crypto space, such as the $170,000 CryptoKitty. Similarly, Magic: The Gathering’s coveted Black Lotus card sold for $166,100. There is certainly demand for valuable in- game items. In decentralized marketplaces, there isn’t a limit on what game items can be sold or for what amount. *1

Decentralized marketplaces can significantly reduce transaction fees. Marketplaces can also improve overall user experience and increase interest. Hearthstone is a wildly popular digital collectible card game created by Blizzard Entertainment that had over 100 million players in 2018. Hearthstone opted not to have a marketplace for their cards, leaving an opportunity for other digital collectible card games that allow for an open marketplace. Gods Unchained and SkyWeaver are two trading card games (TCGs) that have freely tradable cards. You can also earn cards as you level up in the game. Players that did not purchase packs of cards will still be able to contribute to the community. It’s exciting

knowing that the earned cards have real-world value and can be sold or traded for other cards. Gods Unchained also lets users earn tokens when they win a match or refer their friend. The tokens themselves unlock rare in-game items and are also freely tradable. *1 *2

One of the most popular games in crypto is Axie Infinity. You battle with a team of pet Axis and level them up. There’s no aspect of the gameplay that feels like a blockchain game, but there is the added benefit of being able to trade Axis on NFT marketplaces such as OpenSea openly. The game has become popular in the Philippines, and earning tokens from the game has become a viable source of income for players, even beating the minimum wage in many countries. There is also a decentralized autonomous organization (DAO) called Yield Guild Games, which leases Axis to players that want to get started with the game but don’t have the funds to purchase them; several rare Axis’ was purchased for $159,000. *1

Social Tokens

The emerging area of social tokens grew significantly in 2020. Social tokens are a broad category of tokens issued by individuals and communities. This term encompasses similar terms like personal token, community token, and creator token. So far, there hasn’t been a standardized term, but we will use social tokens to refer to the broader category. Social tokens give creators and communities more ownership of what they are building. *1

Early experiments of social tokens involved people tokenizing their time. For example, Reuben Ramanathan, who previously worked on legal and product at Coinbase, tokenized his time, where 1 $CSNL token equaled 1 hour of his time and was freely traded. We also saw people attempting to tokenize part of their future income. Platforms like Roll and Coinvise make it easier for people to issue their tokens. *1

One prominent example of a social token is $RAC, a community token by the Grammy award-winning recording artist RAC, issued through Zora. Token holders get access to a private Discord group and receive early access to merch drops with more perks to be added in the future. The token was retroactively distributed to his supporters, including Bandcamp and Patreon supporters, people who had bought merch and will eventually be distributed to all Twitch supporters. This allows creators to interact directly with and reward their early supporters. *1

One of the tools that enabled a new wave of social tokens was Collab. Land built a Telegram and Discord bot that connects to an Ethereum wallet to verify token balance before joining a chat group. This allowed for the creation of token-permissioned groups, such as $JAMM and $KARMA, with their native tokens, which helped ensure that those joining the group had a certain level of skin in the game. *1 *4

Another feature of Collab Land is a leaderboard that keeps track of who has contributed the most to the chat group. You could imagine token rewards distributed to those with the highest amounts of participation to reward engagement. Another useful social token tool is Unite Community which allows creators to efficiently distribute their tokens to followers through their social media channels and reward engagement. *2

The exciting part about social tokens is that they can represent anything from a person’s time to specialized access to collective ownership of a community. There is a lot of potential for social tokens, and we expect more creators to issue them in the future. *1

Future

These are just a few possible use cases that have gotten some traction. There will likely be a significant increase in NFT adoption over the next several years. Traditional assets like equity getting tokenized seems has arrived.

Here are the top 12 NFT Real Estate sites:

• Decentraland
• Polka City
• SuperWorld
• Cryptovoxels
• Upland
• Somnium Space
• The Sandbox
• Omni-PSI
• Fraction
• Property
• RealT
• Vesta Equity

Fractional NFTs Versus Traditional NFTs in Real Estate

NFTs are broadly categorized into two types: fractional NFTs and traditional NFTs. Fractional NFTs, called F-NFTs, are those that represent only a fraction of an asset, while traditional NFTs represent the tangible asset.

NFT fractionalization can be reversed, meaning F-NFTs can be turned back into traditional NFTs. Typically, there is a buyout option in the smart contract where an F-NFT owner can purchase all the fractions, unlocking the original NFT.

A few aspects of the user experience need to be improved for NFTs to become more accessible. We need to strengthen scaling since transaction fees can make some transactions very expensive or infeasible. Scaling research is already in the works. Many teams focused on Ethereum are actively working on scaling solutions, and we are seeing other blockchains being built that are specifically catered specifically for this use case. Another friction point with NFTs is that holders must self-custody them. However, this complexity can be abstracted with user-friendly wallets that make it easy to onboard and support features such as PIN, biometrics, and social account recovery. The masses are optimistic that these will get built out over time, and we will see a massive wave of creativity and experimentation in the NFT space.