As we are moving forward to digital era and so is the world of collectibles. Just as everyone believed that the Bitcoins are the digital answer to currency, NFTs are believed to be the digital answer for collectibles. This paper will provide a simplified version of what actually is NFT (Non-Fungible Tokens), followed by theoretical and practical knowledge of applications of NFTs in Real world as well as Metaverse. Additionally, we offer generalizable details about the advantages and difficulties of NFTs, as well as the repercussions for both academics and practitioners.
ABSTRACT:
As we are moving forward to digital era and so is the world of collectibles. Just as everyone believed that the Bitcoins are the digital answer to currency, NFTs are believed to be the digital answer for collectibles. This paper will provide a simplified version of what actually is NFT (Non-Fungible Tokens), followed by theoretical and practical knowledge of applications of NFTs in Real world as well as Metaverse. Additionally, we offer generalizable details about the advantages and difficulties of NFTs, as well as the repercussions for both academics and practitioners.
1. INTRODUCTION TO NON-FUNGIBLE TOKENS
Non Fungible Tokens also known as NFTs, are tokens that has special characteristics due to which it cannot be replaced or exchanged 1. A flight ticket can be considered as non-fungible, though they look same as each other but each ticket has a unique name, destination, departure time and siting number. Same as no two plane ticket are identical, no two NFTs are identical. Even though they look same, each NFT has its own unique token so it’s nearly impossible to replicate a NFT.
So NFT is like a certificate of ownership. It gives the owner the right of possession of a particular digital asset. Almost anything can be converted to a digital asset from an art piece to an in-game character.
Here are list of some NFTs:
- CryptoPunks.4
- Bored Ape Yacht Club(BAYC) .4
- Mutant Ape Yacht Club(MAYC) .4
- Otherdeed for Otherside. 4
- Azuki. 4
- Decentraland. 4
All the NFTs have some unique attributes that determine their authenticity. All this information is stored on Blockchain along with the information of owner. Blockchain is the platform on which the functioning of NFT is depended.
2. SOME OF THE PROPERTIES OF NON-FUNGIBLE TOKENS
Since NFT schemes are inherently decentralized applications, they enjoy the benefits/features of the underlying public ledger.
Verifiability: The data on the NFT and the its ownership rights can be verified publicly.
Transparent Execution: Public can directly access the NFT activities like mining and trading.
Availability:Trading of NFT is readily available, means they can be bought and sold 24/7.
Tamper-resistance: The unauthorised use of metadata of NFT or its token cannot be done once the transaction is completed.
Usability: The metadata or the details of an NFT’s owner are updated timely so becomes user friendly.
Tradability: Every NFTs can be traded and exchanged arbitrarily. 7
3. WORKING OF NON-FUNGIBLE TOKENS
To understand the working of NFTs we first need to understand blockchain. So, Blockchain is a large group of data called as a database, this distributed database is shared among a group of computer networks. The data are stored in form of blocks which are closed when information is filled, each block of information is linked with the pervious block forming a chain of blocks hence named block chain.
NFTs exist on this type blockchains. There are many different type of blockchains available but NFTs are typically held on Ethereum Blockchain. As we use blockchain there can be any one owner of a particular NFT at a given time this means they get the exclusive ownership rights!
To make this ownership exclusive, metadata and unique-id are used that no other token can replicate. When someone wishes to generate or mint an NFT they need to execute codes from smart contract that follows various standards like ERC-721.3
4. THE USE OF NFTS IN REAL WORLD
In our increasing digital world you may feel that the digital assets are worthless as they can be copied or replicated very easily. But NFTs can identify which asset is original and which ones are replicated, it’s like a certified painting in a room full of duplicate drawings. NFTs creates uniqueness and digital scarcity
Let’s take some examples to understand it more clearly:
NFTs in Film:
Big film studios and streaming platforms like Paramount, Warner Bros. and Netfilx see NFTs as a new source of revenue as consumers are moving from physical disks to digital files and streaming.
Warner Bros. is reimagining the future of home entertainment with the experimental Lord of the Rings NFT. This unlocks special features and movie copies, effectively replacing DVDs with NFTs. Netflix has taken a different approach with its Stranger Things NFTs. The streaming platform has decided to distribute his NFT digital poster of the show's star as a reward for completing weekly online matches. 3
NFTs in Gaming:
NFTs has become quite popular in gaming industry, some companies like Ubisoft, Take-Two, Epic Games, and Square Enix 6 have adopted the idea of creating games with in-game assets and cosmetics as NFTs.
Web3 games like Axie Infinity, Splinterlands, Alien Worlds, and Big Time are examples of titles with the premise of in-game assets as NFTs at their centers. Brick-and-mortar retailer GameStop created an NFT marketplace and partnered with ImmutableX, an Ethereum-compatible blockchain, to sell Web3 game NFTs through its platform.1-16
5. UNIQUENESS OF NFTs
The inventor of a particular NFT has complete control over the scarcity of asset. Let’s take an example of a sport and you are the event organiser. Now you decide the number of tickets to be sold, say 2000 tickets. Sometimes seat tickets are issued in multiple copies that are very similar but slightly different. In other scenario the developer might seek to make a unique ticket only. So NFT would still be unique (as each ticket would have a unique barcode) and only one owner in this situation. Thus the owner has the complete control over the scarcity. This is fully depend on the owner that if he wishes to make unique NFT in order to establish scarcity or to make a thousand copies. Remember that all of this data is accessible to general public.
6. ROYALTIES
In today’s digital world NFTs play a vital role in digital material. Every time a person uses a platform to showcase his content, the platform determines his revenue and the monetization potential. Like artists posting their work on social networking sites generate revenue for the platform selling ads to fans of the artist. In return they get the exposure but the exposure doesn’t pay the bills. Here come NFTs that gives a creative solution to this issue by letting the creators keep the control of their work instead of handing it over to the platform that promotes it. Wealth is rooted in the material!
Whenever an NFT is sold, the inventor will receive the royalties automatically. Each time an NFT is sold, the original owner of EulerBeats Originals will receive an 8% royalty 7. Furthermore, platforms like Foundation and Zora continuous to encourage its artists to earn royalties. Since we are dealing with the blockchain the creators will just have to sit back and earn the royalties as their work is being passed on to one person to another. Current royalty calculations are time consuming and inaccurate, leaving many authors unpaid. You will never miss out on a royalty if your NFT is programmed with one.
7. INTO THE METAVERSE WITH NFTs
Before going further into the topic let’s first discuss about metaverse. Metaverse is a digital concept of 3-D world which you can access using a VR headset (virtual reality). In this virtual world you will have a body (called an “avatar”) that you can customise and interact with different users, play games, do work, arrange meeting and many more. Metaverse is more convenient that the real world as we can switch between activities, communities, places with a simple gesture rather than cycling between apps and web browser. In digital world everything can be accessed and interconnected.
As we discussed that NFTs are associated with transactions and metaverse is based on a virtual world so you might wonder what might be a connection between them! Despite of relative uniqueness of concepts, many companies have already discovered extraordinary ways to use both simultaneously.
GAMING INDUSTRY
NFT holds a lot of promise for the gaming sector. CrytpoKitties, Cryptocats, CryptoPunks, Meebits, Axie Infinity, Gods Unchanged, and TradeStars are some of the crypto games already in existence 7.The "breeding" mechanism in such games is an intriguing element. Users can spend a lot of time personally caring for pets and breeding new progeny. Also, they have the option to buy the limited or uncommon edition virtual pets and later sell them for a premium price 7. Several investors are drawn to the games because of the increased payoff, which helps NFTs gain notoriety.
VIRTUAL REAL ESTATE
The phrase "digital real estate" may seem absurd to those who are new to the metaverse. Real estate and the concept of physical property are closely related. However,It provides the same ownership rights over a piece of (digital) land, or even stronger ones. An entity that represents land ownership in a game, community, or other platform (NFT). Your metaverse property can be in a prominent location with lots of online foot traffic, making it an ideal location for advertising. The value of the land is further increased by staking advantages and other amenities. Your land's value will depend on which metaverse platform you're using.
ART GALLERY
VR is assumed to be the best digital platform for viewing art. You get to see the art piece close up and from the every possible angle without getting out of your house. For example, many museums are now placing NFT artwork in metaverses such as cryptovoxels powered by the Ethereum blockchain 2.
8. CHALLENGES FACED BY NFTs
As with all new technologies, development of the NFT applications described above needs to overcome many barriers to enable it. Covering both system-level issues arising from blockchain-based platform.
Privacy and Security issues:The system's first concern is to ensure the security of user data. Data (stored off-chain but corresponding to tags on-chain) are at risk of loss of link or misuse by third parties. Here are some details.
- NFT Data Inaccessibility: Instead of a copy of the file being tagged with the token and subsequently registered on the blockchain, mainstream NFT applications will use a cryptographic "hash" as the identification to reduce gas consumption. Due to the possibility of the original file being destroyed or deleted, this causes the user to lose faith in the NFT. Several NFT initiatives link their system with specialised file storage systems like IPFS 7 (The InterPlanetary File System is a peer-to-peer network, protocol, and hypermedia system for sharing and exchanging files in a distributed file system.), where users can find a piece of material by using its IPFS address as long as someone is hosting it elsewhere on the IPFS network. These systems invariably have weaknesses. There is no assurance that users' data will be duplicated across all nodes when they "upload" NFT metadata to IPFS nodes. If the asset is stored on IPFS and the lone node hosting it is disconnected from the network, the data may become inaccessible. The websites CHECKMYNFT.COM and DECRYPT.IO have also reported this problem. 7
- Privacy/Anonymity: The privacy and anonymity of NFTs are still not fully understood at this point. The majority of NFT transactions rely on the Ethereum platform that powers them, which only offers partial anonymity or privacy. If the public is unaware of the connections between users' real identities and associated addresses, users can partially conceal their identities. Otherwise, all user activity associated with the disclosed address is visible.
Consideration by The Government: NFTs experience the same challenges as the majority of cryptocurrencies, including rigorous government regulation. On the other hand, it can be difficult to effectively manage this emerging technology with the associated market. We talk about two common difficulties that affect both sides.
- Legal pitfall: Commodities, international transactions, KYC (Know Your Customer) data, and other potential issue areas are some of the legal and policy challenges that NFTs face. Before beginning the NFT tracks, it is crucial to comprehend the connected regulatory scrutiny and lawsuits. The law governing the sale of NFTs and cryptocurrencies is tight in some nations, like China and India. In order to exchange, trade, sell, or buy NFTs, governance challenges must be overcome. Users may only swap tokens with other individuals directly or trade derivatives on recognised exchanges, such as those for stocks and commodities.
- Issue with taxable property: According to current legal system, IP-related products (such as artwork, books, domain names, etc.) are viewed as taxable property. NFT-based sales, however, are excluded from this analysis. Although only a small number of nations, including the U.S. (internal revenue agency, IRS), tax cryptocurrencies as property, most regions across the world have not yet given it any thought. This might significantly increase financial crimes committed under the guise of NFT trading. Additionally, transactions of NFT for NFT, NFT for IP, and ETH for NFT (or vice versa) should be taxed.
A higher tax bracket should be used for properties or collectibles that generate large profits. After the in-depth discussions, it is advised that NFT-related trades seek additional guidance from specialised tax departments.
Extension problems: There are two ways that NFT schemes can be extended. The first is to emphasise a system's ability to communicate with other ecosystems. The second examines whether NFT systems can receive upgrades if the most recent version is abandoned.
- NFT cross-chain:The current NFT ecosystems are separate from one another. Users can only sell, buy, or exchange a given sort of product within the same ecosystem or network once they have made their choice. This is because of the blockchain infrastructure that underpins it. The barriers to widespread DApp (A decentralised application is one that runs on a decentralised computing, blockchain, or other distributed ledger system that has the ability to operate independently, generally through the use of smart contracts.) adoption are always interoperability and cross-chain communication. Only external trusted parties can be used to implement the majority of cross-chain communications. This has unavoidably resulted in some loss of the decentralisation property. Fortunately, though, Ethereum is used as the primary platform for the majority of NFT-related applications. This suggests that they have a comparable data structure and can communicate using the same protocols.
- NFT updates. A new version must adhere to certain guidelines despite using the generic paradigm, including tolerating particular aggressive behaviours and remaining online while updates are being made. NFT systems strongly rely on and maintain consistency with their underlying platforms. The most crucial functionality and tokenId are still kept on-chain even when the data is frequently kept in other components (like the IPFS file system). It will be essential to properly update the system with upgrades.
9. ADVANTAGES & DISADVANTAGES of NFTs
ADVANTAGES:
- Both artist and business owner can make profit from NFTs and artists can have a new source of income. In part, NFTs were created to help artists earn more money in a digital environment that hasn't always been kind to them. The artist makes more money when the worth of their work increases, which it does when it gains online popularity.
- NFTs cannot be altered or replaced in any manner if their authenticity has been verified on the blockchain. The inherent value of authenticity also obtains a real, external worth.
- Blockchain technology's core component, smart contracts, enables automatic executions in response to certain circumstances. If the artist put a royalty "rider" in the contract and the NFT owner later sells it for a profit, the artist will be paid immediately.
- NFTs offer altruistic donors a direct option to fund the arts while also allowing them to add a one-of-a-kind object to their collection.
- Because the blockchain ledger keeps track of every transfer of ownership, making it difficult to fake ownership or game the system, NFTs can offer transparency and accountability in transactions.
DISADVANTAGES:
- An NFT's worth is currently exclusively based on its aesthetic and sentimental value. It's only speculation at this point because it's impossible to determine how much it would be valued as a long-term investment.
- NFTs have been the subject of attacks in the past by hackers who don't think they're "real" investments. The NFT token exchange uses antiquated and poor security measures.
- Blockchain transactions and the production and sale of NFTs both use a lot of energy. Due to the NFT market's rapid expansion, there are also environmental issues.
- Ownership of a unique NFT no longer entails control over how it is distributed or copied across platforms. Ownership merely denotes possession of the "unique"; it gives them no authority to forbid the creation of "prints." 2
10. CONCLUSION
The blockchain market is dominated by a new technology called Non-Fungible Tokens (NFTs). This paper describes his cutting-edge NFT technology that has the potential to reshape the future digital and virtual asset markets. Before providing the design model and attributes, we first do a technical analysis. We then assess the safety of NFT systems before further discussing about potential and anticipated applications of the NFT. Finally, we outline current research challenges that need to be addressed before the adaption by mass market is achieved. We hope this paper has made it easier for newcomers to understand current developments.
FUTURE SCOPE
NFTs have achieved the virtual and digital future by eliminating the most significant barriers like uniqueness, exclusivity and scarcity. The whole money perception have been changed. People have started to believe than anything from an art piece to a virtual land can be valuable since the concept of money is no longer in the power of centralized authority. Now as per market as a whole seeing it’s strong growth, some have predicted that the bubble might burst while others refer to as a booms and busts.9
REFRENCES
1 NFT History. Available: https://nftschool.dev/concepts/non-fungible-tokens/#a-bit-of-history
2 Bao, Hong, and David Roubaud. "Non-fungible token: A systematic review and research agenda." Journal of Risk and Financial Management 15, no. 5 (2022): 215
3 Hayes, A. (2022) Blockchain facts: What is it, how it works, and how it can be used, Investopedia. Investopedia. Available at: https://www.investopedia.com/terms/b/blockchain.asp
4 Ali, Omar, Mujtaba Momin, Anup Shrestha, Ronnie Das, Fadia Alhaji, and Yogesh K. Dwivedi. "A review of the key challenges of non-fungible tokens." Technological Forecasting and Social Change 187 (2023): 122248.
5Irwin, K. (2022) NFT real-life use cases, Decrypt. Decrypt. Available at:https://decrypt.co/resources/nft-real-life-use-cases
6Fonarov, O. (2022) Council post: What is the role of nfts in the metaverse?, Forbes. Forbes Magazine. Available at: https://www.forbes.com/sites/forbestechcouncil/2022/03/11/what-is-the-role-of-nfts-in-the-metaverse/?sh=b8e54c16bb87
7 Wang, Qin, Rujia Li, Qi Wang, and Shiping Chen. "Non-fungible token (NFT): Overview, evaluation, opportunities and challenges. arXiv preprint arXiv:2105.07447 (2021).
8 Binance Academy (2022) What is metaverse real estate?, Binance Academy. Binance Academy. Available at: https://academy.binance.com/en/articles/what-is-metaverse-real-estate
9Purohit, A. (2021) What are the prospects for nfts in the future, Medium. Geek Culture. Available at: https://medium.com/geekculture/what-are-the-prospects-for-nfts-in-the-future-320cd0891dd8
10 Kong, De-Rong and Lin, Tse-Chun, Arnative Investments in the Fintech Era: The Risk and Return of Non-fungible Token (NFT) Available: http://dx.doi.org/10.2139/ssrn.3914085
11 Ante, Lennart. The non-fungible token (NFT) market and its relationship with Bitcoin and Ethereum." FinTech 1, no. 3 (2022): 216-224.
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Frequently asked questions
What are Non-Fungible Tokens (NFTs)?
NFTs, or Non-Fungible Tokens, are unique digital assets that cannot be replaced or exchanged due to their specific characteristics. They act as certificates of ownership, granting the owner exclusive rights to a particular digital asset, ranging from artwork to in-game characters.
What are some examples of NFTs?
Some popular examples of NFTs include CryptoPunks, Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), Otherdeed for Otherside, Azuki, and Decentraland.
What properties do NFTs have?
NFTs offer verifiability of ownership, transparent execution of transactions, 24/7 availability for trading, tamper-resistance, usability, and tradability.
How do NFTs work?
NFTs operate on blockchains, typically the Ethereum blockchain. When someone mints an NFT, they execute codes from a smart contract (following standards like ERC-721) that assigns a unique ID and metadata to the token. This metadata and ownership information are stored on the blockchain.
How are NFTs used in the real world?
NFTs address the problem of easily copied digital assets by establishing verifiable uniqueness and digital scarcity. They are used in film (e.g., Warner Bros. using NFTs for special features and movie copies) and gaming (e.g., in-game assets and cosmetics as NFTs in Web3 games).
What makes NFTs unique?
The creator of an NFT has control over the scarcity of the asset. They can choose to create a single, unique token or multiple copies, all of which is transparently recorded on the blockchain.
What are royalties related to NFTs?
NFTs enable creators to maintain control of their work and earn royalties automatically each time the NFT is sold. Smart contracts ensure that the original creator receives a pre-defined percentage of the sale price every time the NFT changes hands.
How are NFTs used in the Metaverse?
NFTs and the metaverse are connected in areas like gaming (in-game assets as NFTs), virtual real estate (NFTs representing land ownership), and art galleries (NFT artwork displayed in virtual museums).
What challenges do NFTs face?
Challenges include privacy and security issues (data inaccessibility, anonymity concerns), government regulation (legal pitfalls, taxable property issues), and extension problems (NFT cross-chain interoperability, NFT updates and versioning).
What are the advantages of NFTs?
Advantages include a new income source for artists, verified authenticity of digital assets, automatic royalty payments, a direct funding option for the arts, and transaction transparency and accountability.
What are the disadvantages of NFTs?
Disadvantages include an NFT's value being based on aesthetic and sentimental value (speculation), vulnerability to hacking, high energy consumption for blockchain transactions, and the owner not controlling how the digital asset is distributed or copied.
- Quote paper
- Hardik Modi (Author), Kartik Sumwala (Author), Harshkumar Ravariya (Author), Sagarkumar Patel (Author), The Rise of Non-Fungible Tokens (NFTs). Comprehensive Review of Applications, Benefits, and Challenges, Munich, GRIN Verlag, https://www.grin.com/document/1335191