What will be the full form of an NFT in the future?
What is the full form of NFTs we should expect in the future?
NFTs have been all the craze in the Crypto space these past two years. In fact, they have been the main catalysts of the bull run.
For that reason, they were the first that got hit hard when the bull run abruptly ended.
Now, with NFT-focused platforms like OpenSea at a 90% drop in trading traffic since the peak, many are completely disenchanted with the NFT space.
In my opinion, there are two reasons why this occurred:
- The NFT market was (and still is) speculation-based.
- NFTs are still far away from their final, really powerful, form.
Let's address both reasons.
Let's be real. The majority of NFTs - I would as far as saying more than 99% - of them, are basically useless.
Simple, because actual NFTs are all focused on the concept of digital art. That is, using NFTs' intrinsic capabilities to prove provenance and ownership, as outlined in this post here, you can attest the rightfulness to that asset.
However, there was a fatal flaw in all of that. Digital Art is valuable because of the underlying messages the art piece can make a person feel when looking at it.
Although the artist's prestige is also of sheer importance when valuing the piece, the art itself is what really drives value. I address the "NFTs are digital art, bro" movement in this article.
On the other hand, with actual NFTs their price was determined by two things:
- The underlying technology, the blockchain
- The hope of being able to sell it for profit to future buyers
The "art" in itself was the least important thing; everyone become obsessed with the fact that the ownership of the digital asset was provable and that was all that mattered.
As the lack of intrinsic value was evident even to the most hardcore NFT fans, the answers when people asked why NFTs were valuable was always the same:
"You simply don't understand NFTs, bro."
But don't get me wrong, being able to prove the provenance and ownership of a digital asset is a ground-breaking discovery; I have no doubt in my mind about the potential of NFTs to protect digital asset markets of the future.
Nonetheless, in spite of how important that feature is when it comes to digital assets to fight counterfeits, the metadata of an asset can't determine its value forever.
Consequently, the value of the asset was purely subjective to the market's sentiment toward not only that particular NFT project, but to the whole market itself.
Therefore, the value of your NFT was not only dependent on pure speculation, it was even worse; its lack of intrinsic value made it extremely correlated toward the sentiment with regards to the WHOLE NFT market, which is something you simply don't want.
Why is that?
Simple, no NFT project, besides one or two examples, truly differentiated itself from other NFT projects, which is a receipt for doom.
As with start-ups, the lack of being capable of differentiating yourself from others makes you absolutely vulnerable to market sentiment. Thus, the death of +99% of projects was certain the moment things went south with markets.
As how it happened with the Terra/Luna collapse, you should never rely on the markets for the survival of your system or project, and not having intrinsic value is the easiest way to such reliance, which almost always means that your asset is a speculative one.
At this point, many could point out that assets like commodities are also extremely dependent to markets, and that is true.
However, they have something that - actual - NFTs don't have, they provide an actual value to society.
Consequently, for NFTs to have value, for NFTs to stop being speculative-based, thus they need to have utility. In case you want to read more about that, you can check my article on NFT utility here
However, apart from utility, there are other things that NFTs must figure out.
NFTs final form
NFTs have the undeniable power to change everything, not only for blockchains, but for the digital world as a whole.
Being the guarantors of ownership of original digital assets in a multi-world, potentially multi-chain, uber-complex digital world.
They will be the key elements that will enable us to move our digital assets through the digital world, fantasied as the Metaverse, in a way that ensures that our digital assets are protected and secured.
Are we there yet?
No. Actually, we are still really, really far away.
Well, in simple terms, there's a huge bottleneck we still haven't figured out, and that is on-chain storage.
But what does that mean?
The concept of connection between NFT and asset
For an NFT to have true power as a blockchain feature, it needs to be inseparable from the underlying asset. Sadly, in the actual state of NFTs, the majority are simply useless (besides the fact discussed earlier, that they don't have intrinsic value) but because they don't guarantee the security of the asset.
In other words, while they ensure proof of provenance and proof of ownership, they don't ensure proof of integrity of the asset… because the assets are almost never stored on-chain.
The actual media files that are tokenized by means of the NFT are stored off-chain, in places like the cloud or IPFS.
With file stored in the cloud, the "owner" of the file is in reality just the owner of the metadata of said file in the blockchain, but not the rightful owner of the file, as that files is stored in centralized servers that could easily delete the file if they wish.
With IPFS you have certainty of what the file is as IPFS, contrary to TCP/IP, is a resource-focused network system, but the item could also be deleted.
Consequently, for NFTs to truly be what they claim to be, they need their assets to also be stored on-chain, making the file and the metadata completely inseparable.
Another element that needs to be addressed is smart contracts.
NFT project smart contracts
We need some sort of regulation to protect consumers from poorly written smart contracts. Because that is indeed a thing.
Depending on how the smart contract is written, it can have plenty of bugs that hackers can exploit and steal NFTs from users.
Another thing that smart contracts should include is protection against rug pulls. Rug-pulls occur when founders of NFT projects (this also happens in cryptocurrencies), once the project is sold out and while it's still pretty liquid (it can be easily sold), they suddenly sell all of their NFTs, using their supporters as exit liquidity.
This all-too-common situation in the Crypto world automatically makes the NFT project go to zero as investors - or should I say, speculators - lose confidence in the project.
In a matter of days, hours, or even minutes, your investment becomes worthless (probably was worthless in the first place).
And how could smart contracts protect consumers from rug pulls?
It surely could be done in many ways, but one that comes to mind quickly is enforcing a vesting schedule upon the founders' NFTs. That is, they can't sell their NFT projects until a certain time period passes.
This prevents any temptation from founders to rug in the early stages of the project and gives consumers a bigger window to decide if a project is worthwhile.
Conclusively, a certain degree of audit has to be enforced on smart contracts as a whole, to prevent vulnerabilities or rug-pulls, to make NFTs be true to what they promise.
Undeniably, having a true connection between NFT and asset, and a better security for smart contracts are super important elements. Nonetheless, as we mentioned earlier, NFTs also need utility to become intrinsically valuable.
And how can we do that?
Although many other ways will surely proliferate over the years, two ways that this can be done is with two concepts known as dNFTs and SBTs.
dNFTs unite physical assets with NFTs
I'm pretty sure that all NFTs related to physical assets in the future will be dynamic. dNFTs, as the name implies, are dynamic NFTs whose underlying smart contract allows the NFT to evolve over time as the asset also evolves.
For instance, with a car, as the car undergoes maintenance, repairs, or modifications, these events must be updated on the NFT, so that the NFT portrays a true image of the tokenized asset.
For more information of how dNFTs work, you can check this article.
Apart from dNFTs, another very powerful element are SBTs.
SBTs are another essential application
Soulbound tokens are NFTs that have a unique particularity, they are non-transferable, which means that once your wallet receives an SBT, this SBT is soul-bounded to your wallet, becoming an intrinsic part of the wallet.
This opens a whole new spectrum of possibilities, as many assets in the real world aren't meant to be transferred. Finding it hard to understand what I mean? Look at the example of university degrees.
If you tokenized a university degree as an ordinary degree that degree could be easily sold, generating a fraudulent university degree market.
University degree certificates are meant to be issued to you and only to you, being part of you until the day you die. SBTs are meant to address exactly this, offering a whole new range of possibilities for asset tokenization.
NFTs exciting path ahead
After reading this article, you should be convinced of two things:
NFTs are the real deal… and that they still need a long road ahead to become what they claim to be.
One way or another, having some sort of exposure to NFTs (doesn't have to be investing, I don't own NFTs to date) but at least having some sort of exposure to the events occurring in this market.
If you do so, you are probably miles ahead of many other investors when it comes to eventually profit from this market, a market that has the potential to disrupt the whole digital industry, and that's a multiple trillion opportunity if you think about it.
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