Since Non-fungible Tokens (NFTs) exploded into the mainstream in late 2020 and early 2021, most people associate NFTs with pixelated Twitter avatars, squiggly lines, and jpegs of rocks. The most successful and best-known NFT projects created a market for digital art (CryptoPunks, Beeple’s Everydays, OpenSea). NFTs also brought collectibles and trading cards into the digital age (NBA Top Shots, Sorare, Parallel).
Someone plugged into the Crypto world might be familiar with NFTs representing digital items within video games and the Metaverse (Axie Infinity, Decentraland). However, the unique properties of NFTs (pun intended) hint at a myriad of fascinating future applications for this technology. Even though they are still in their infancy, we can already explore the opportunities NFTs create for various industries.
Let’s take a look at four emerging applications for NFTs and current projects in each space:
- NFTs representing digital objects
- NFTs representing physical objects
- NFTs representing identities
- NFTs representing financial claims
Representation of Digital Objects
The representation of digital objects in the Metaverse is most like the most popular application for NFTs: digital art and digital collectibles. Today’s NFTs are created and traded primarily for aesthetic and cultural value. On the other hand, future NFTs representing digital objects will have a commercial purpose.
Publishing & Entertainment
It is relatively easy to imagine the entertainment or publishing industries creating NFTs for movies, books, and other works of entertainment. Whenever a movie ticket is purchased, a song or film is streamed, or a textbook is resold, royalties could flow back to the creators and contributors. Classic digital literature and digital films would appreciate over time, enabling the digital collection of such works, much like collections of antique books or art today. And, if there were any ownership disputes, the blockchain’s records would eliminate any questions of provenance.
Journalism
NFTs became equally intriguing for journalists after Kevin Rose provided a proof of concept in the New York Times by minting an NFT of his article. Reporters and photojournalists could mint NFTs of their scoops and pictures on the spot to secure their copyright. In-depth reporting could also become an asset owned solely by the author, creating a future business model for talented journalists beyond bylines in legacy publications.
Disempowering such gatekeepers is just another example of decentralization.
Patent Law
Another avenue for tokenizing digital data is the patent system. Instead of filing an idea with a centralized platform and paying a high fee to a government agency, future inventors could record their patents in the blockchain and mint NFTs for patent licensees. These NFTs could have unique payment modalities attached to them. Under the current regime, innovators face prohibitive costs to protect their ideas by having to pay maintenance fees to uphold their patents. In the future, inventors could earn royalties from their work, sell it, or post it as collateral.
Representation of Physical Objects
Bringing physical objects into the digital realm is another possible future use of NFTs. For some, this is the most impactful implementation of NFTs because it most tightly binds together the physical world and the blockchain.
Real Estate
Real estate is an example of an industry where a central registry holds ownership records of physical objects. As a result, the sale and collateralization of a property incur high costs. A tokenized property title could be instantly bought and deposited as collateral for a mortgage or a DeFi loan with much less need for paperwork. Furthermore, owners would have the possibility to sell or pass on as inheritance partial ownership stakes of their property by burning the existing NFT and minting new ownership shares. These NFTs could also have different economic rights attached to them to differentiate the new owners. That way, transactions with physical real estate anywhere in the world would become as easy and fast as buying or selling land on Decentraland.
Supply Chains
Decentralized recordkeeping can also be very useful for managing efficient and secure supply chains by reliably and cheaply establishing the provenance and freshness of perishable foods, origin-specific delicacies, and medicines. An NFT representing a delivery could be automatically passed from wallet to wallet as it travels through the supply chain links, creating a fraud-proof record.
Physical Collectibles
Like digital collectibles, ownership of physical collectibles, sports memorabilia, and luxury items can be tokenized and securely recorded in the blockchain. Besides authentication, tokenization enables frictionless financialization of such objects. With the help of NFTs, they can be fractionalized, traded, and serve as loan collateral.
Representation of Identities
While putting digital and physical objects on-chain may seem obvious to someone familiar with NFTs, tokenizing identities may appear more abstract. However, unique identities and documents lend themselves well to be represented by unique tokens.
Certification
NFTs can serve as authenticated and forgery-proof diplomas, certificates, qualifications, and other academic and professional proofs of achievement. These tokens could contain unique smart contract characteristics, such as automatic payments of periodic membership fees, refresher course attendance checks, or expiration dates.
Personal Identity
Besides serving as tokenized certifications, NFTs can act as proof of personal identity itself. Imagine NFTs containing personal data, such as date and place of birth, serving as a digital ID within Web 3.0 applications. ID NFTs attached to a wallet could also help streamline know-your-client-processes (KYC), obliging providers of financial services to identify clients, and compliance checks while protecting their owners’ privacy by sharing data on a strict need-to-know basis.
Domain Names
An application of identity-NFTs, already familiar to most crypto natives, is the Ethereum Name Service (ENS), which encodes names as ERC-721 NFTs to represent Ethereum addresses and can be transferred just like any other NFT. Other services, like Unstoppable Domains, also offer decentralized domain names as ERC-721 NFTs. Besides creating an unfalsifiable identity, usable across the Web 3.0 ecosystem, domain-NFTs transform domains into assets. That opens them up to financial transactions, such as trading, collateralization, and fractionalization.
Representation of Financial Claims
Financial NFTs are probably the most futuristic use case for NFTs at the moment, but also one that has the most significant implications for the DeFi ecosystem. Representing financial claims with tokens turns them into financial building blocks, which can be combined into new financial products. This approach is a decentralized, trustless, and fully transparent reincarnation of asset-backed securities before the 2008 Financial Crisis.
Financial Engineering
Two examples of financial NFTs are Uniswap V3 Liquidity Pool NFTs and Solv protocol’s voucher smart contracts.
Uniswap introduced NFTs to replace V2’s LP tokens in May 2021. The main advantage of NFTs is their ability to represent unique characteristics of individual Liquidity Pool positions.
The Solv protocol blazes a trail to create so-called voucher NFTs (vNFTs) to stand in for locked-up portfolios of digital assets. These vNFTs are NFTs with built-in fractionalization and can be split and merged, traded, and used as collateral.
Revest Finance has chosen a similar approach by wrapping and locking any number of different ERC-20 tokens inside an NFT. Access to the original token portfolio is only possible upon meeting certain conditions like identity proof, the passage of time, or price appreciation. Twenty years from now, trust-fund kids will have an NFT paying them a monthly allowance in ETH.
Insurance
NFTs can also be useful for decentralizing the insurance industry. Armor Finance is a protocol for trading insurance coverage against the failure of various widely used smart contracts. While Nexus Mutual provides the underwriting for the coverage, Armor enables users to mint an ERC-721 NFT representing their coverage contract. These NFTs can then be traded or staked in the Liquidity Pool for further rewards.
The applications and possibilities for Financial NFTs are vast; however, the underlying infrastructure is still in its infancy. For NFTs to grow into an ecosystem of trustless finance, much work still needs to be done.
Ever since the invention of “Copy & Paste,” physical and digital realms existed in parallel without much interaction. The difficulty of introducing unique physical objects into the digital space with potentially infinite, indistinguishable copies seemed insurmountable.
NFTs can change that. Beyond recording ownership of digital art and collectibles, they offer the possibility to create unique digital representations of physical objects, individual identities, and financial claims which we can then use within DApps in various ways. Forays are already being made to use NFT-based tools for various applications, such as publishing/journalism, real estate, luxury merchandise, certification/identification, and financial engineering.
Founder teams are already working on building such platforms and apps. Creating a decentralized and trustless ecosystem based on NFTs would be a massive step towards a bankless future.
(published at medium.com – read source )