NFTs

Chapter 1

A few of my friends and family have asked me about NFTs. About a year ago I started talking about them and people looked at me like I was crazy. Now that they're all over the news, people want to know - so I'm writing my thoughts here :).

In order to understand NFTs, we first need to understand blockchain.

Blockchain is essentially a ledger of transactions that cannot be tampered with. This is at least visible to multpile parties, if not completely open to the public. There are different methods of ensuring a blockchain is secure, and each has their pro's and con's - none of them are perfect even though they think they are.

The original Blockchain use case / implementation is Bitcoin: which aims to make a digital currency that cannot be controlled by a central authority (like a bank). This is a perfect use case for blockchain because bank accounts are simply ledgers of transactions (deposits and withdrawals). Removing the ability of banks and governments to centrally control those assets is also good for certain cases (decentralization). Some immediately think of the dark web, drugs, and other bad things - but that's an exaggeration. There are good reasons to remove centralized control - like authoritatian governments who can freeze all your assets and make you disappear, or people who live in developing countries without a central banking system at all! This is hard for some people to imagine, but this is a reality for many people. Do a quick search for "unbanked" or "unbankable" and be amazed.

Bitcoin worked well, hundreds of people copied it and then thousands of people copied it. The blockchain or "crypto" space is flooded with projects that vary in quality from another copy of Bitcoin, to a blatant scam, to an actually innovative project.

NFTs are one of those innovative projects. Why just have decentralized currencies when you can also have decentralized assets? That's basically what NFTs are.

The term "NFT" (Non-Fungible Token) is often misapplied. The term "Fungible" technically means that it is equivalent to and can be traded for other items of the same kind. Think of things like standard currency coins - nickels and dimes. With this in mind, Non-Fungible means that the items are NOT equivalent, or that they are unique. Think of things like unique collectors coins.

So a Non-Fungible Token is a token that represents a unique item. A Fungible Token is a token that respresents a non-unique item.

Great, so now we know what an NFT is, and that it's on the blockchain. But what are they really?

They're whatever people want them to be. Some of the earlier notable projects were unique and randomly generated pieces of art, represented by a unique and non-fungible token. Many projects since than have followed the same pattern as Bitcoin - many copies, many scams, and a few actually innovative projects.

So an NFT is really just a representation of something, backed by a blockchain which puts some constraints on what can be done with it. For example, the item cannot be taken back from you, and depending on the contract it cannot be altered.

Much like fiat currencies or real art, cryptocurrencies and NFTs only have as much value as people assign to them. There are two main reasons people assign value to things: speculation and utility.

Speculation means believing the item will be more valuable in the future. Speculation is what has caused Bitcoin and Ethereum prices to skyrocket. Speculation is what many art projects are leaning on to justify the value of their art - much like in the real world. There is no additional usefullness now that justifies the higher price - just the believe it will be worth more later.

The best reason, in my opinion, to assign value to things is utility. Currency itself has the utility of being able to exchange value between parties in an easy and reliable way. When projects like Bitcoin and Ethereum become speculative and network fees become too high, the very utility that makes them valuable is lost for the average user.

How does this apply to NFTs? NFTs can be a part of a project that assign utility to the NFTs in order to do things. For example, a concert ticket could be an NFT. It's a unique item that you can prove you hold to gain access to something. The thing that gives it utility (and value) is that someone is going to create a concert and let you into it because you have this NFT - just like a regular concert ticket. The "trustless" element that the blockchain gives you is that you are sure your ticket cannot be taken away from you, and you can also verify that the ticket is legitimate when you purchase it. However, it is impossible for the blockchain to force a concert to be held, or for someone to honor the ticket. Some may argue that there are generative NFTs that are fully on-chain which could be a "concert", but this is not the common use-case. Also, until court systems hold projects legally accountable for their promises, nothing is forcing projects to honor the tickets.

The idealistic view of blockchain is that everything is supposed to be trustless. This is a nice concept, and it's even possible with something as simple as currency. Once projects get more complex, like games or concerts, it becomes nearly impossible to fully decentralize it, and there is going to be an element of trust between the NFT purchaser and the seller. Yes, some would argue that a game COULD be fully done on the blockchain - but this would require every single interaction to be "on-chain". Currently, this is impossible for pretty much every blockchain out there, so projects must implement a hybrid model. Even if a game COULD be fully implement on-chain, it would still be difficult to decentralize it. Games require consistent direction and design to be successful. So perhaps a voting mechanism could be done on-chain to define the direction, but this would take a very long time, and the end product is not likely to be consistent or possibly any good. And keep in mind, all of this goes back to the NFTs having value because they have utility. If the games the NFTs are for are not fun to play, then they are not games at all and the whole thing was a waste.

Illegitimate Projects

There are too many illegitimate (fake or scam) projects to count. While there is definitely room for art for the sake of art, there are too many projects that are literally just pictures that someone is charging a lot of money for. There are also projects that make huge promises that they could never, and will never, deliver on. Other projects don't make specific promises, but just promise guaranteed ROI or high APY%. Money does not come from nothing! As I've said before, what makes these things valuable is that people see value in it.

Legitimate Projects

There are a few key things I look at to determine if I think a project is legitimate:

• The project has a specific purpose and plan to achieve it (utility)
• There is a team actually working on it
• The project is transparent about the ownership and economics of it
• There is no easy "rug pull" mechanism (like cashing out the contract and disappearing)

Some of my favorite legitimate projects are based on decentralized storage, decentralized computing, and games where people own their assets. All of these are great use cases for blockchain.

Risks

The common advice given in the blockchain space is the same as in Las Vegas: don't gamble with more than you can afford to lose. You should always be cautious of people promising to increase your money (people were using this to scam long before blockchain existed).

Because blockchain is not regulated, it's much easier to get scammed and due to the lack of regulation and the nature of blockchain - it may be impossible to recover anything if you are scammed!

Your security is your responsiblity in the blockchain space!

Why am I doing this?

I believe blockchain is an awesome technology when properly applied. I also strongly believe that all games should allow their players to own their assets and what they make from their time spent on the game. I hate that so many traditional game developers have abusive TOS that make it clear that you own nothing. I think it would be possbile for game developers to give players ownership of their assets without blockchain technology - so when game developers do put their games on blockchain it's just them proving they mean what they say.

Closing Thoughts

This has trended towards discussing games, probably because I work for a blockchain gaming company, but the same logic applies to any blockchain project. Blockchain itself does not solve fundamental issues like greed, and there will always be people looking to exploit others or make quick money for doing nothing. Whether the blockchain project is a game, or trying to be a decentralized cloud service provider where you can rent out your computer - you must look at the project, the team, the utility, and make your own informed decisions.