Consider a world in which all of the digital items you own are non-fungible tokens (NFTs). In this world, you are the undisputed owner of all of the songs you’ve bought from Bandcamp, all of the games you’ve bought on Steam, and all of the in-game items you’ve bought from your favorite online game.
Using a movie you bought from Apple as an example, I’d like to demonstrate the power and game changing nature of NFTs. Instead of buying the viewing or streaming rights to that movie, what you actually end up owning is a digital copy of the movie. Importantly, when that copy is an NFT you can sell or pass that copy on to someone else. This is essentially exactly the same thing as you might have done with DVDs years ago — buying them and then selling them on eBay, or giving them to your friends to watch (or CDs, mini discs and tapes if you’re old enough).
This definitive, concrete ownership of digital goods is made possible by the fact that NFTs provide almost unhackable proof of ownership. In a nutshell, NFTs are digital items with a public record of who the current owner is, and who’s owned them in the past. But since authenticity and the ownership can be instantly verified, NFTs can include lots of extra utility. For example, owning the Guardians of the Galaxy Vol. 1 and Vol. 2 as NFTs, what if you get the tickets to the Vol. 3 premier for free? This would be easy to do with NFTs!
The above examples may feel far-fetched especially since the film industry benefits from the fact that the consumer cannot transfer the viewing rights but instead everyone has to purchase their own “copy”. But with the European Union showing their support for consumers with the introduction of GDPR and ‘right to repair’ directives, in the next five to ten years it’s well within the realms of possibility that NFTs will be at the centre of legislation that aims to protect consumer rights in an ever-increasingly digital world. And it benefits the consumer if you are able to actually own everything digital you buy.
And let’s not forget that the NFT issuer can get royalties from the aftermarket sales. This fact alone can create new business opportunities and business strategies. It may end up being more lucrative to release items as NFTs and first monetize the sales of the NFTs and then receive the cut from the aftermarket as well.
Alongside NFTs, cryptocurrencies are at the center of ‘Web 3.0’, a phrase used to describe what many think is the next stage in the evolution of the Internet. Cryptocurrencies facilitate monetary transactions: you can send money to anyone, anywhere in the world. All with minimal latency, fees, and most of the time without interference from governments or banking institutions.
Most significantly, cryptocurrency and NFT data is stored in a decentralised blockchain. Decentralisation is crucial as it ensures no one actually owns the data — it’s not located on a single database, it’s distributed widely across the Internet.
An example to illustrate this decentralisation could be in-game items. If you own items in a game that exist as NFTs, those items are in effect decentralised because they exist on a blockchain outside of the game. You would still have access to those NFT items, regardless of whether or not you still have your game account. You can lose your account, be banned, or just leave the game — you’d still actually own the items in your crypto wallet because they don’t exist on the game’s servers. All that exists as an in-game representation of that NFT.
This also means that the audience for the in-game items would be bigger than just the active users of the game. Investors and game’s old players may want to own some of the ultra rare items from their favorite games for nostalgic value. Regardless of the reason, having more people interested in items is good both for the game and for the players.
Current criticism of NFTs
One of the reasons why I wanted to write this blog post is because I keep seeing tweets and articles about how NFTs are intrinsically bad, a tool for scammers, or ‘dead’. For example, recently Stephen Diehl tweeted about how “NFTs are a giant scam”. I agree with many of the things he says in his thread but the common reason why many, Stephen Diehl included, see NFTs in this way is because all you are doing is “buying a digitally signed URL to the image”. This may be true with some of the NFTs people have been buying but this argument fails to see the forest from the trees.
Owning a scarce bit of digital art, or a profile picture for Twitter is a very small part of what NFTs are. Or especially, what they can be in the future. When criticising NFTs based on a bad profile picture NFT is like saying that all combustion engines are garbage because one car manufacturer made a bad car. NFTs are not just jpegs or bits of digital art; they are a technology to track ownership of digital items.
So why is this so important, and why do NFTs have the ability to change the world, exactly? I already described a couple of cases at the beginning of this blog, but consider what happens if everything you buy digitally actually belongs to you.
From games to movies, from in-game items to plain tickets. Regardless of what digital products you purchase, everything would be stored in a blockchain. And this would mean you can collect them, sell them, give them for free or just throw them away. For example, imagine you would have your family’s plane tickets as NFTs. If you have to cancel the trip, you could simply just sell them or give them away.
And what if the airline understands NFTs and has implemented their air miles reward program with the NFT aftermarket in mind? The airline would get their royalty cut from the aftermarket ticket sales and the customers would be able to sell their used tickets to travelers who are looking to upgrade their ticket or want to get access to the airport lounge.
Regardless of the feasibility of this idea, the key takeaway here is that NFTs are a lot more than a link written into a blockchain — it is the ownership of digital items. Next time you buy something that is digital — an ebook, concert ticket, movie ticket, a game, whatever — think what you could do with the thing you just bought if you actually owned it. What are things you, as the customer, would like to happen after you have used that ticket and have the “stub”? Or when you have watched the movie, played the game or read the book?
What kind of reactivation or engagement could you envision? Maybe you’d get a free ticket to a really, really oversubscribed concert by your favorite band if you’d collected 10 of their previous concert tickets. Or maybe you’d get closed beta access to your favorite game if you own the previous one. My point is that there could be a completely new industry built around utilizing these ‘NFT stubs’ — or ‘used digital items’.
So, in answer to the critics: NFTs aren’t just jpegs that sell for ridiculous prices. NFTs are a bit of technology that can give power to the consumer. But, not just for consumers — artists and companies who release NFTs also benefit from technology in the form of royalties. This is already part of the technology: the entity that released the NFT can get a cut from the aftermarket sales which provides a steady stream of income to the creator of the NFT.
NFTs and the environment
This is again a popular criticism. Also, I agree that when talking about Ethereum blockchain in particular, this is an issue. However, I don’t see it as something that will ‘kill’ NFTs. I see it more as an issue that is caused by the infancy of the technology as opposed to the issue of the idea of NFTs itself — especially digital ownership.
Using the combustion engine / car analogy from earlier, consider cars as they existed thirty years ago: leaded fuel combustion engines that were bad for the environment and bad for the health. Lead got removed from the fuel, engines became more and more efficient and now we are moving towards hybrid and electric cars.
I see the same happening with NFTs. The public demands cleaner NFTs and there are technologies that already provide that — look at Cardano and Polkadot. Even Ethereum is moving toward cleaner ‘proof of stake’ blockchain technology. It’s only a matter of time until the environmental impact of NFTs becomes much less of an issue. In the meanwhile, many projects are donating some of their proceeds to offset their carbon footprint. For example, Offsetra makes it easy to calculate your carbon footprint and to support pro-climate projects to offset that footprint.
NFTs and their utility
To me, the most important thing about NFTs on the market right now is their utility. The question I ask, and one that I’d encourage others to ask before purchasing an NFT is: “what else do I get when I buy that NFT?”
A common criticism of NFTs is that “Why do I need that picture? I can just go and download it for free.” But this argument only applies when the NFT doesn’t have any other utility than being a picture — some NFTs have way more utility. Look at it like this: would you be able to get a gym membership if you took a picture of your friend’s membership card? No, of course not. You need to own the card, which makes the picture on the card more or less irrelevant.
You can screenshot every single jpeg on the Internet but this wouldn’t unlock the utility those NFTs have. But what exactly is the utility associated with NFTs? That is up to the creators of the NFTs. Currently, the projects that “are not going to make it (ngmi)” offer no utility, or the utility isn’t perceived as valuable.
In most cases, the developers and the project itself offer the utility. However, often the community — that is the NFT owners — are the ones that actually create the utility. CryptoPunks is an excellent example of utility that comes from the community: you get bragging rights. You are looked up to in the community if you own one. Bored Apes is another with similar utility but BAYC took it further: they have an actual roadmap that aims to give utility to the holders within the community. They give additional NFTs for free, they give you access to the “members only” area, they have exclusive merchandise, and they have many other things planned for the future.
Not all current profile picture (PFP) NFT projects give great utility and to be honest, it is difficult to come up with anything new anymore. But there are many other types of NFTs currently available, some of which don’t rely on the art at all. A great example is Metakey: they aim to give you benefits across multiple platforms. In some games you get an avatar, while in another you get access to a members-only area. Since the ownership of that virtual item is known, it is easy to implement benefits for the owners everywhere in the metaverse.
The utility doesn’t have to be anything concrete. It could be just great art from a talented artist. It could be that you can show your amazing ArtBlocks pieces on a screen at your home. It is enough that you know that you own that great piece and love to look at it. Who can really say that you shouldn’t enjoy that?
And then there is the metaverse: virtual spaces in the Internet, like social MMOs, where people can meet up and chat. One great utility of NFT ownership will be the ability to access “NFT only” areas in the metaverse, or the ability to create your own virtual galleries where you can showcase your NFT collection. Or, you can take your avatar/profile picture NFT from one metaverse to another and use it as your digital identity. These would not be possible without the proof of ownership, or just by “downloading the jpeg” as these virtual spaces check your wallet to see that you indeed own the asset.
NFTs and games — moving ‘free to play’ towards ‘play to earn’
This brings us to games. There have been many nice blog posts about why blockchain will change the gaming industry. For example, in the Deconstructor of Fun blog, Ethan Levy listed five reasons why he is bullish on blockchain gaming. Another excellent read is the IronSource LevelUp blog by Khaled Alroumi where he explains the Play to Earn business model. These are excellent reads and I encourage anyone interested to read them in order to get some good insight into the reasoning about why games will move towards blockchain, and how blockchain may change game design.
I personally see the gaming industry being one of the biggest winners when it comes to blockchain technology. Free to play games have become a microtransaction fest where to keep players paying you need to provide content all the time. The games need to push out more and more powerful items to keep the players buying. And, when this happens, the old items players spent tens to thousands of dollars for become useless and worthless.
I personally have played a lot of games and spent thousands of dollars on in-game items. If I could have sold the items I actually probably wouldn’t have dropped from the game as I would have been making money. Or, at the very least, I would have had the chance to make some of my money back.
With NFTs, this will be possible. Getting maximum utility from the blockchain will be a challenge for game designers. But, at least to me, this is an interesting challenge. For example, if an item becomes obsolete because there are now stronger items, you might still be able to use that “obsolete” item as a key to access specific areas in the game: new players would need this item so the item would still hold value. Game design challenge then becomes how to keep the old items relevant to keep the aftermarket active and at the same time how to release new items to keep old players interested.
The term ‘play to earn’ has been used a lot when talking about blockchain gaming. The idea with play to earn is to give players something with value just for playing the game. In my view, there are two types of play to earn games (and as the industry matures I’m predicting there will be many more): those that focus the earning on both crypto tokens (tokenomics) and NFTs, and those with just NFTs where the ‘income’ comes from in-game items stored in blockchain. The common theme in both is that players can earn by playing. The most successful example at the moment of a play to earn game is Axie Infinity.
Using crypto currency tokens as an in-game currency is intriguing to me. It has its own challenges in terms of complying with regulations. It would also need to be done carefully to ensure there are no legal issues. But on a more conceptual level and from a pure game design perspective, having an in-game currency you can buy and sell outside the game would be ideal for the players. At the very least, owning the things you buy in-game and earning NFTs by playing could be the core of gaming in the future.
When focusing the earnings solely on NFTs, the more active and engaged players should be rewarded for the time spent in the game. And especially the players who are good at the game need to be able to earn more than others. Players who are good at creating content for others, players who are the best at player vs. player play, and the players who are the pillars of the community are the ones who should get the best rewards.
When you can own, and sell, your in-game content you are more engaged and you feel rewarded. It takes your playing experience to the next level when you have a stake in the game: if I win I can get that ultra rare hammer that I actually own and can sell for a profit.
Disliking the side effects of NFTs — especially the scams — is absolutely fine and called for. However, disliking the idea of digital ownership that is the very core of NFTs makes less sense to me. Since NFTs can provide massive utility to their owners, instead of thinking of NFTs as jpegs, I’d encourage people to think of NFTs as membership cards. In order to unlock the membership or the utility you need to own that NFT, or jpeg. When the general public gets their head around this, the whole argument that “I can just download the jpeg” becomes much more nonsensical.