Crash course on NFT’s & their potential.
Back when I was around 8 years old, in Ukraine they released these cool TMNT (Teenage Mutant Ninja Turtles) cards. I was hooked in right away since I loved Ninja Turtles. The cards were divided into 4 different categories. 1- Common, 2- Rare, 3- Super Rare, 4- Ultra rare. From collecting these cards I learned how valuable collectibles can become.
Every day at recess the whole school had their own TMNT Cards Market place. Lunches would get exchanged, kids would go hungry for a card, money was traded, favours were granted, yelling was constant, somebody always had a card that somebody else wanted and it would create issues, friendships were ruined. It was brutal being an 8 year old.
One day, after an experience like that, walking into work a few years later, I saw that the Ethereum network had crashed because of a game which was meant for breeding and exchanging digital cats; “CryptoKitties”. This immediately struck a nerve and I remembered my old card collecting days.
CryptoKitties was launched on November 28, 2017, and it immediately gained lots of users from crypto enthusiasts. Such adoption continued to the point that the cat trading actually slowed down transactions on the Ethereum network.
As of December 1, 2018, there have been 481,000 sales of CryptoKitties totaling over $27 million.
The cool thing about CryptoKitties, and what had created such high demand, is that each cat is unique and is represented by an ERC-721 standard token.
First of all, what’s a token standard and how do they get created?
ERC stands for Ethereum Request for Comment, and they are just application-level conventions and standards that are approved by the Ethereum community. They do not need to be in the form of a token, instead they can be a registration name, URI schemes, library, packets, etc.
A simple example is the ERC-20 standard, were in order for the tokens created to be qualified as “ERC20” they need to follow 5 mandatory functions: totalSupply(), balanceOf(), transfer(), transferFrom(), approve(), allowance(). If these functions are written into the smart contract, than the tokens will be ERC20 standard compliant.
When you create an ERC-20 token, that token will be the exact same as the other ERC-20 tokens created with it and will be worth the exact same sum of value as the other ERC-20 tokens created with it. This characteristic is known as fungibility. Every dollar bill, is worth as much as any other dollar bill. They are fungible. But ERC-721’s are different.
Every ERC721 standard token is unique, they are non-fungible. Meaning that no ERC721 token is the same. Think of ERC721 tokens like snowflakes which are all different in design. Never the same.
What’s unique about CryptoKitties is that the cats are not only different in front end design (how they look), but also they have a one of a kind ERC721 tokens assigned to them. This allows for the person who owns it, to prove that they, alone, have ownership of it.
Every CryptoKitty has an ID, and it is through this ID that you are able to trace exact the ownership of that each Kitty.
You can also try it the other way around, copying any address on the CryptoKitties website, paste it into Etherscan and see the complete transaction history of that address to determine all of the CryptoKitties which that person owns.
Mik, the Chief Business Officer at CryptoKitties said in a conference that “We’ve never really owned our digital stuff.” But now with a tool like the ERC-721 tokens, we can assign unique ownership to any digital asset.
It’s cool to think about breeding and selling collectible digital cats for as high as $100,000’s of dollars, but what we don’t really think about is that over 5 billion people do not have proper proof of ownership of assets. Assets such as their own homes.
A prominent Peruvian economist and authority on blockchains and property assets titling, Hernando de Soto has research showing that citizens of poor countries are unable to develop plots of land or utilize them as collateral since they lack clear legal titles.
This causes many conflicts, one being that if there is some sort of social unrest in the nation, a corrupt entity may simply claim ownership and the people who have lived on the land have nothing to prove to the courts.
Another being that if the asset is not able to be represented, it loses it’s value and cannot be used by the owner for collateral on anything.
64% of all small businesses in the US were started using funds derived from home equity.
By not having a recorded ownership of the asset, individuals lack the process to represent their property and create capital.
They have houses but not titles; lands but not deeds; businesses but not statues of incorporation.
That’s a huge problem and giving people land titles in the form of NFT’s could empower them to take control of their assets and start living more stable lives. This really is possible, since many these people have access to mobile devices. In the words of Soto himself:
“We were somewhat surprised to discover that of 30 million Peruvians, 16 million have Facebook accounts.”
Hernando de Soto has won the Global Award for Entrepreneurial Research and is currently involved in a project with BitFury to build new land registries in countries like Georgia.
The power of NFT’s does not end there.
Other than digital collectibles, like CryptoKitties, or assigning ownership of assets in places like Georgia and Peru, NFT’s are also capable of changing the way we view negative value assets, such as loans, burdens or other responsibilities.
An invoice, for example could get its own assigned NFT and be trackable on the Ethereum blockchain. This could establish a single source of truth and provenance for each document. It also makes documents assignable and traceable. Centrifuge is working on making this a reality.
According to Centrifuge:
“One of the initial use-cases of turning invoices into NFTs will be the assignment of payment obligations as well as the ability to lend against those assets using existing lending platforms on Ethereum.”
If you read their technical paper, they are creating something unique called ‘privacy-enabled NFT’s which are “user-mineable tokens that represent an asset, where some or all of the asset’s attributes need to stay private, while a public, decentralized ledger tracks the asset ownership”.
It’s crazy to think that barely 2 years ago, on September 20th, 2017, Shirley, who is the original creator of the ERC721 standard, released a draft of the NFT. And now we are starting to see many amazing use-cases pop up. It is also crazy to think that the most prominent use-case we have is exchanging digital collectible cats!
In the future, when we think about NFT’s, I don’t believe we will have to think about ERC-721 as well. There could be a different, better standard developed by then.
For example, the ERC-1155 standard could be argued as a better standard for the creation of NFT’s since it could create both ERC20 & ERC721 simultaneously without needing to code separate contracts, and as a result save time and money (gas).
This technology could have incredible applications, and only a few are actually working on it.
It is pretty cool for us to trade and exchange cats for now, and maybe it could be cool for some 8 year olds to meet up during recess and trade cards which have unique NFT’s assigned to them. But we should focus on solving bigger and more important problems, such as giving people a way out of poverty by assigning titles to their homes.
Let’s tokenize the world for the better.