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What is a dNFT and why it matters to you?

Date: 2022-09-14

Are you ready for the next utility revolution?

dNFT visual representation

Foto de GuerrillaBuzz Crypto PR en Unsplash

Utility is Crypto's path to success. However, up until now, Crypto has been a speculative industry where a few made millions while the many went into a losses death spiral.

But what if I told you utility is finally arriving in the space, with a new concept that can finally bridge the concepts of NFT and pragmatism?

Actual NFTs have little to no utility

Everyone knew that NFTs were in a bubble. After a crazy $59 billion run (according to JP Morgan), the NFT bubble popped, and soon thousands of investors were left with jpeg of rocks, monkeys, and robots that are as valuable as my dog's poop.

This is what happens when an asset accrues its value from mere speculation of buying with hopes of selling to another guy/gal for a higher price… for absolutely no reason at all.

Actual NFTs offer no value beyond their speculative price action.

Some people tried to create some utility-focused NFTs, like the BAYC monkeys, which started as straight useless and eventually merged into a ticket to a new Metaverse, the APE coin metaverse. The results were… putting it softly, mild.

NFTs' mediocre results when trying to achieve utility caused a frenzy of memes and disrespect towards NFTs, not only from the outside world but also inside the Crypto industry.

As Cobie, a really famous crypto influencer put it, NFTs are just "altcoins with pictures". It is certainly one way to put it right now.

But can we finally embrace NFTs as a new source of practical use cases for Crypto?

Wait no more.

Meet Dynamic NFTs, a product to disrupt enough industries to really make blockchain a key component of our future world.

So what are dynamic NFTs?

As you may probably know already, NFTs are blockchain tokens that, unlike cryptocurrencies, are unique.

They are the ultimate proof-of-ownership of an asset; if you own an NFT, the blockchain proves you own it, and with it the underlying asset/right linked to that NFT (if there's any).

Hence, Dynamic NFTs, as the proper name implies, are NFTs that can be modified throughout their existence, by reacting to external conditions.

As with any other by-product of blockchains, NFTs are defined using smart contracts. Not only you can prove the ownership of that token, this token will change its form or metadata while you still being able to prove it's yours.

Consequently, a Dynamic NFT, or dNFT, is created using a smart contract that, by connecting it to oracles (elements that bring external information into the blockchain), will modify the smart contract when conditions are met (these conditions have to be coded into the smart contract previously, of course).

Tech-detail: For those tech-head readers who are interested, this cursive section is a short explanation of oracles from a more technological standpoint.

Although anyone intending to invest in Crypto should understand them, in case you're not interested, jump to the visual representation of dNFTs to continue the article.

You're probably asking, "Oracles are essentially APIs for blockchain, aren't they? And the answer is yes, kind of. Oracles are the equivalent of APIs for the blockchain world. However, they aren't like normal APIs, because you can't use API calls for smart contract updates.

The reason is simple.

Blockchains are deterministic systems. That is, all nodes in the blockchain must arrive to the same state if they perform the same operations (transaction validation). If blockchains weren't deterministic, there is no possible way of obtaining consensus, as nodes would arrive to different outputs for the same executed operations. Let's see this with an example:

For a smart contract of a DeFi protocol that needs to update the prices of tokens, they need to obtain that data from off-chain sources. If they used API calls, depending on when nodes execute those API calls, the results received for each node could be potentially different. In that case, for any transaction derived from those prices, it's impossible to reach consensus for those nodes, as transactions will be different.

Oracles, on the other hand, introduce this information as a transaction, thereby eliminating the risk of asynchronous API calls with varying results. That's the power of oracles.

dNFTs are best explained with a visual example:

dNFT of a Tesla car

An example of dNFTs for Tesla cars. Source: ChainlinkTake for instance this car dNFT.

Take for instance this car dNFT.

When you first bought your Tesla, you received this dNFT that proved you owned the car. However, the underlying asset linked to this dNFT, the car, changes over time (mileage, maintenance, service record, and even transaction history).

With dNFTs, all this data is consistently added to the dNFT to portray a reliable image of the actual asset.ç

This example can easily be extrapolated to other cases, like gaming. In online gaming, you have the option to buy skins and other assets that can be adhered to or worn by your avatar (this also applies to the Metaverse).

With a dNFT of your character, you can easily append all these new assets, wearables, or skills to the metadata of your champ, all while leveraging blockchain's true power, the fact that you own, and can prove, the ownership of your character and everything related to it.

dNFTs and the upcoming Soulbound token wave

The dynamic concept can also be applied to Soulbound Tokens, also known as SBTs.

Soulbound Tokens are a new token type that is unique, much like NFTs, but with an important nuance, they are non-transferable. That is, they can't be sent from the owner of the token to another address, thereby becoming "attached", or soul bonded, to the address.

SBTs may be used to show additional information about an address, with that address deciding what information is actually publicly shared.

Thus, we can also see dSBTs, SBTs that are also non-transferable but can be updated.

For instance, if you have an outstanding loan for a value of $200,000, every time you make a payment to pay back that loan, you can update your SBT proving not only that your outstanding loans are decreasing, but you are also proving liquidity - capacity of payment - which is a metric that loan providers LOVE.

When do dNFTs actually make sense

As with all things related to blockchain, dNFTs will probably skyrocket in value over the upcoming months or years, as they bring actual utility to the NFT market.

However, we must avoid any speculative investments and we have to try to understand their actual potential. I'll be clear on this.

dNFTs only make sense in scenarios where proof-of-ownership is required and there is some security risk regarding asset stealing.

For instance, if you're playing an offline game and you buy a new skin for your character, it's absolutely pointless to use dNFTs, as it's an offline game with almost zero risk of stealing.

As I've said time and time again, blockchain's selling point is its security, the capacity of ensuring data is immutable, secure, and highly available.

In those scenarios where this is required, dNFTs are a tremendous solution to offset almost any cybersecurity risk. Using the above car example for the future secondary car market, if you're trying to buy a used car, knowing that this car has a dNFT with all its history of maintenance, services, and mileage is great because you have the attestation from the blockchain that this data hasn't been manipulated - this is considering the assumption that this data was inserted by a decentralized oracle, thereby reducing the risk of off-chain data tampering.

You are going to hear a lot about dNFTs in the following times, are you ready to capitalize on it?

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