Technology is moving fast-forward in a day-to-day manner. As such, ordinary people must get acquainted with the terms so that they’re able to stride simultaneously with the current world. This paper tries to explain technical terms in a non-technical manner so that any novice can know the fundamentals.
Blockchain
Blockchain is a Distributed Technology (DLT) across numerous computers in a network. In such a kind of technology, a public database is present wherein any transaction is updated and shared across those computers. The computers present over the networks are known as ‘nodes’. They aren’t controlled by anyone i.e.; they are independent and can leave or join a network as per their preference. They only follow the protocols defined under the blockchain that they join. The reason why the technology is named so is because whenever a new set of transactions is carried out, a new ‘block’ is added over the network, forming a chain-like structure, after each transaction.
The concept of blockchain is entirely decentralized, meaning there isn’t a single central authority to manage them. There are two main protocols viz., Proof-of-work (PoW) and Proof-of-stake (PoS). These consensus mechanisms are used by the nodes to approve transactions and then accept the next block. In PoW, the right to create the next block is received only when the node can solve a mathematical problem. In the case of PoS, there is a pre-defined set of protocols that offer rights to the node, based on tokens that they’ve staked, to earn the rights. Nevertheless, the process of selecting the node is unpredictable and arbitrary.
Any new block created in a blockchain is linked to the previous block through cryptographic proof. It is due to these proofs, that once written, transactions in a block cannot be interfered with.
Features of Blockchain
Three key features that come with blockchain are:
- Immutability This means that if a transaction is once recorded over the blockchain, it cannot be reversed, tampered or obstructed.
- Authenticity To make the process guaranteed, transactions can only enter a blockchain once they get verified.
- Provenance Since each transaction that happens in a blockchain is ever-present and recorded, it is easy to locate the origin of each block.
Drawbacks of Blockchain
Some limitations associated with blockchain include:
- Speed The transaction speeds in the blockchain are counted as transactions per second. If a huge number of transactions increases, then backlogs can result. To solve this problem, would again cause an increase in the cost of processing.
- Consent Blockchain needs consensus from several nodes, for a transaction to be approved.
- Cost The cost of processing is directly proportional to the demand for transaction processing. The more the transaction, the higher processing capabilities are required, and vice-versa.
- Interoperability Since different blockchains have different standards and protocols, there are instances the user gets locked in it, which can then cause hindrances in transferability to NFTs.
Trilemma of Blockchain
Usually known as ‘Blockchain Trilemma’, it is a concept coined by Vitalik Buterin that proposes a set of three main issues, namely, decentralization, security, and scalability. While building blockchains, these are three main concerns that developers encounter. It is, therefore, many a time, they’ve to sacrifice one aspect as a trade-off to contain the other two.
Blockchain & NFTs
A list of factors is considered when deploying NFTs to the blockchain. They can be:
- Transaction Swiftness
- Price to develop, install and execute
- Safety strength of the blockchain
- Strong smart contract functionality
- Potency of the developer community
- Environment influence
Viewing as a project perception, blockchain having lesser transaction volume would be well-matched. In case the standpoint is of trading, a blockchain network having a large community of buyers and sellers is recommended as it increases the probability of quicker transactions.
The top five blockchains for NFTs currently, include Ethereum, Ronin, Solana, Flow, and Polygon. Moreover, Ethereum 2.0 is still under development which is expected to boost the tps from 12-15 transactions to 100K transactions per second.
Smart Contracts
Smart Contracts can be understood as a digital illustration of contracts from our conventional world. They are contracts converted into segments of code that can auto-execute. As soon as the conditions for action are met, the code executes and the transaction completes. Talking digitally, a contract is encoded through coding in terms of blockchain. Blockchain is the home to a smart contract, which means, a smart contract lives over the blockchain network. They also own an address that can be changed later. For inspection, verification, or cross-examination purposes, one can check the smart contract’s address to ensure its authenticity.
A few features of smart contracts include:
- Delivers predictable outcomes
- Own a permanent/ non-changeable address on the blockchain
- Are publicly viewable and verifiable
- Perform transactions over the blockchain
Smart contracts are very flexible and robust. They can interact with other smart contract addresses. They respond to how they’re programmed. Smart contracts transactions occurring over a decentralized blockchain, are both trust-less and permissionless.
Smart contracts are also used by Web3 projects. In order to construct and structure digital token creation, and understand tokenomics, Web3 projects utilize smart contracts to form longstanding worth for the token holders. Smart Contracts are also used by NFT projects to administer the characteristics and traits of NFTs. Cryptocurrencies use a smart contract for lending digital assets, and earning rentals and interests.
Limitations of Smart Contracts
While employing smart contracts, common drawbacks faced include
- Hacking Hazard: As smart contracts are usually built on a decentralized network, and can be publicly accessed, hackers can look for susceptibilities in the code and attempt to hack for special interest/benefits.
- Cut-off from External Data: Smart contracts have the limitation of being unable to pull or retrieve information from the outside world through the web.
Non-Fungible Tokens (NFTs)
The term ‘non-fungible’ stands for goods/commodities that cannot be traded with any other or can be replaced. NFTs have specific token IDs and unique contract addresses. These non-fungible tokens are native to blockchain and possess the attribute to verify ownership. There are numerous use cases of NFTs, but the most prominent of them is for holding digital art and collectibles. Other applications include music, video-graphed sporting moments, domain names, event tickets, trading cards, digital identity, digital wearables in the metaverse, the as a digital twin for a real-world entity, etc.
NFTs are also advantageous for the creators and artists to earn royalties, in perpetuity for their work. Through implementing smart contracts in Web3, on the blockchain, a fixed royalty amount gets deposited in the artist’s wallet at all instances, whenever their NFT gets traded. This royalty amount is determined by the artist at the time of minting.
Token Standards for NFTs
For diverse use cases, the building of NFTs is dissimilar due to the requirement of different functionalities. Ethereum is a kind of programmable blockchain that provides different token standards for building NFTs, based on the desired characteristics. Various NFT Standards
- ERC 721 Standards: It is the most employed token standard. The tokens are unique and hold unalike values, from one another, even if they’re present in the same smart contract. Also there is a new ERC721A
- ERC 20 Standards: This type of token is similar in both quantity and value to any other token in the same smart contract. They are fungible and are like digital currencies.
- ERC 1155: It is a multi-asset token standard used for creating both fungible and non-fungible tokens over the same smart contract. It is best suited if used in a fungible manner in-game currency and as non-fungible collectibles.
Storage Section of NFT Data
The content, be it any – art, or music - of an NFT isn’t stored on the blockchain, but rather, on the web. The reason for the same is the size and high cost of storing the NFTs on the blockchain. Creators can also store their content on cloud-based or on-premises centralized servers. (Centralized servers being the most undesirable option.)
Off-Chain Storage on IPFS
IPFS (InterPlanetary Filing System) is a peer-to-peer decentralized web, made up of nodes, connected to it. These nodes store data and make it available to anyone requesting it. Before serving the files from nodes on the request made, the larger batches of files are broken down, their links are created and then stored in a distributed manner as hashes. Whenever a request is made for the file, a file copy is cached on the nodes. Thus, through IPFS, NFTs can be stored safely.
In the case of on-chain storage, the NFTs are stored completely with their smart contracts and metadata.
Dynamic NFTs
For static NFTs, the metadata stays constant and verifiable as the original version. For example, tokenized real-world assets, athlete trading cards that require updating, etc. Dynamic NFTs (dNFTs) offer the best possible attributes, wherein NFTs retain their unique identifiers while updating the aspects of their metadata. These NFTs can be prompted by both on-chain and off-chain events.
POAP NFTs
POAP stands for Proof of Attendance Protocol. They denote digital mementos, that are created in order to celebrate life’s noteworthy instants. Such NFTs are minted through smart contracts over the Ethereum blockchain. They remain non-fungible as they are ERC-721 tokens. It is due to these NFTs that attendance at any particular event like seminars, sports events, training, in-game milestones, et al, can be verified. POAPs can be issued for both virtual and real-world events and celebrations.
Soul Bound Tokens
Soul Bound Tokens (SBTs) are reputation tokens that adhere to a non-transferable identity. They permit people to validate all of their info through blockchain technologies. These tokens are linked permanently to the owner’s blockchain wallet, and cannot be traded or transferred. SBTs aren’t in practice, since they don’t exist now. It still requires a concept and framework to be built ultimately. It also needs to minimize the risk associated, as well as the need to establish an option for owners to discard any NFT from their wallet if needed.
Trading NFTs
The latest sales of NFTs (2021) are about $40 Billion. NFT projects that have been successful include, Bored Apes Yacht Club, Moonbirds, Art Blocks, and Mutant Apes, wherein a single NFT ranged from thousand to millions of dollars. NFTs can be classified into eight categories:
- 1/1 Art
- PFP/Avatars
- Generative Art
- Collectibles
- Photography
- Music
- Game NFTs
- Virtual Land
For trading (buying and selling) NFTs, the pre-requisites are:
- Cryptocurrency
- Crypto wallet
- A user account over an NFT marketplace
Consider reading Various NFT Use-Cases in the Marketplace
Buying Cryptocurrency
Buying cryptocurrency is the first step in trading NFTs. Since NFTs are minted on different blockchains and as each blockchain has a native token (Eth, Matic, etc), it is thereby essential to own a cryptocurrency. To acquire a cryptocurrency, one can:
- Purchase it on a centralized platform – Binance, FTX
- Purchase it on decentralized exchange – Uniswap
- Swap from cryptocurrency with another inside the wallet – Metamask
One must always go for the purchase to those platforms that don’t compromise with the security as well as have flexible transactions.
Crypto Wallets
As the name suggests, crypto wallets refer to the applications designed to function as a wallet, for cryptocurrency. These wallets store ‘passkeys’ that are required to retain cryptocurrency transactions. They are the tools that help blockchain to make transactions possible. A crypto wallet has a pair of two keys, a public key, and a private key. A public key is derived from a private key. Its purpose is to function as the address needed to send or receive cryptocurrency to the wallet. A private key is like a password that is needed to retrieve and access the wallet, thereby it mustn’t be disclosed to anyone. Also, if it is lost, it becomes impossible to access and recover the wallet.
There are two categories of wallets: hot wallets and cold wallets. Hot wallets are perpetually connected to the web/ internet. Cold wallets are offline and are connected when one requires to do so. There are further three divisions of hot wallets:
- Web-based – Metamask (most popular and compatible with ETH)
- Desktop Wallets – Electrum
- Mobile app – Blochchain.com
On the other hand, cold wallets can be either paper wallets (a piece of paper with printed private and public keys), or hardware wallets (a kind of pen-drive that can be used for the storage of massive cryptocurrencies and high-valued digital assets. Cold wallets are usually safer because they aren’t connected to the internet at all times.
Buying NFTs
NFTs can be obtained through two means:
- Original Minting
- Acquiring through Secondary Marketplace
1. Original Minting of NFTs
The term ‘original mint’ refers to the first release of an NFT. NFTs are customarily dropped at specific dates and times. The payment method is determined by the project owners and can be in both fiat currency and blockchain token format. Many projects promote themselves before initially launching them. This buys them the time to engage with the interested set of buyers. It is in this phase that projects create a Reserve List (RL) or White List (WL) of early supporters. The individuals present on the white list are entitled to special privileges like lower prices, guaranteed availability, airdrops, etc. In order to get the original mint, one must visit the project’s website, connect their wallet to it and then purchase the NFT by clicking on the mint tab. A gas transaction fee may apply to proceeding with the purchase, which goes over the nodes for processing the transactions over the blockchain.
2. Secondary Marketplace
Secondary marketplaces are a kind of platform, where one can purchase an NFT. The factor that one must keep in mind before making a deal here is the floor price. Floor price denotes the lowest price at which a collection is available in the marketplace at that moment. It is seen that higher trading activity indicated higher liquidity for a particular NFT. This information is present in the marketplace as well.
The top marketplace for NFTs is ‘OpenSea’. Other players include MagicEdeb, NBA TopShots, LookRare, Rariable, Solanart, et al.
Top Five Blue-chip NFTs
Blue-chip is a term that signifies the worth of an NFT. The NFTs with high value, investments, and stability are included in the chart of Blue-chip NFTs. The top five in the list are:
- Axie Infinity
- Bored Ape Yacht Club
- CryptoPunks
- Mutant Ape Yacht Club
- Art Blocks
The trading volumes of these NFTs range from $1,293 million to $4,080 million. Axie Infinity which tops the list was initially the first Play to Earn (P2E) game where gamers earned money just by merely playing the game. This embarked on an immense transformation in the gaming economy.
Selling NFTs
The selling of NFTs can be done through secondary marketplaces. The process begins with the price fixation of an NFT by the marketplace. In some cases, an auction-based approach is also extended. Let’s understand them briefly.
- Fixed Price Approach – The cost is stated by the seller. If the interested buyer is meeting the demand, the transaction is then executed by smart contracts.
- Auction Approach – A reserved price is indicated by the seller. If this price is met, the transaction is executed. If not, the seller has the option to trade it at a lower price There are three charges that the seller must know, before making the sale.
- Gas (transaction) Fee – The fees that go to the nodes after the transaction is completed. This fee is dependent on the load present in the blockchain at the moment.
- Marketplace Processing Fee – The amount charged by the marketplace to facilitate the transactions.
- Creator/Project/Owner Royalty – Generally under 10%, this refers to the royalty set by the creator at the time of minting that is deducted by the marketplace and transferred to the creators.
One must also be aware of the project aspects before making the purchase. These take in the expertise, the team behind the project, the road map, influencers, partners, etc. A hands-on experience is the best way to learn the process. Extensive research must also be performed before investing. It is recommended to consult an investment advisor before making investment decisions.
The Metaverse
Metaverse is an immersive space present over the internet where people interact with one another as digital avatars. It is an extension of the physical world into a virtual one. It is through the latest AR/VR/XR, AI, blockchain, etc, that are powering the contemporary metaverse. The earliest players in the same genre are Decentraland, Sandbox, and Axie Infinity. (All of them being P2E games.) Metaverse is getting increasingly popular among the common audience and even among well-established brands. Recently, MTV has announced an award for ‘Best Metaverse Performance Category’, in recognition of this widespread technology endeavor. Other cases where brands have entered this digital sphere embrace:
- Luxury house Burberry created accessories for Blankos Block Party.
- Louis Vuitton launched ‘Louis the game’, which is its own NFT-studded video game.
- Nike acquired RTKFT, a virtual sneaker company. It also created NIKELAND in Roblox.
- Metaverse virtual lands and worlds
Besides, Web3 commerce-enabling solutions are also being made available. There is also a portion for decentralized eCommerce. The event ‘Fashion Week’ in the Decentraland metaverse came across the merging of physical and digital experience (Phygital experience). Herein, the visitors could order a brand or wearable in the metaverse and then receive a collectible or digital wearable NFT. In addition to this, they’ll also receive the same, as a physical product in real life.
NFTs are thus very significant for the working of the metaverse. Without NFTs, the metaverse would have very limited utility.
NFT Use Cases for Brands
Below is a set of use cases for brands who wish to dive into this digital ecosystem of the metaverse. Metaverse, NFT and Blockchain in Sports
- Digital Twin: A digital twin is a replica of a real-world item, but exists in the virtual domain. It can be used to provide ownership and authenticity verifiable on the blockchain.
- Revenue Streams: Brands can interact and engage with their customers in new ways by introducing digital collectibles and wearables. As users would be present in the form of digital avatars, these wearables would be required to get the desired outlook. This would also be more environment-friendly, as it’ll reduce the need for fast fashion.
- Low CAC and More CLTV: CAC (Customer Acquisition Costs) and CLTV (Customer Lifetime Value) are the two values that work simultaneously with each other. NFTs offer the opportunity to create membership-based loyalty and customer engagement programs.
- VIP Experience: Access to exclusive content like merchandise, token-gated access to VIP events in real life, upcoming NFTs drops, etc, can be practiced and provided to engage with the audience.
- New Class of Assets: A new class of assets that is related to one’s business can be created to connect better with the people out there. One such example of the same is ‘NBA TopShorts’, which lists the sporting moments of top athletes. It attracts sports fans and makes up a new custom to connect with the audience.
There can be new methods also introduced by brands to interact with their followers. The metaverse is still developing and customers are nevertheless experimenting and exploring this space. For an efficient business, it is essential one must build a Web3 strategy to walk together with the upcoming technologies that are shaping the future of brands and businesses.
Conclusion
In this paper, we have kept our focus on a briefing about NFTs and their contemporary stands. It is seen that blockchain powers NFTs which in turn powers the metaverse; all three of them being linked in the ecosystem of Web3, which is still under development. It is thus safer for an emerging business to understand the elements of the existing and approaching technologies. After that, one can develop a foundation for building their industry in the digital system.