Non-fungible tokens already exist on Ethereum as ERC-721 tokens since 2017.
However, only very recently they received the attention of the community that actually corresponds to them.
All of a sudden new use cases are popping up as the sleeping giants are waking up.
What are Non-Fungible Tokens?
The non-fungible tokens (NFTs) on Ethereum are specified by the ERC-721 token standard. The ERC-721 standard stands in contrast to the well known ERC-20 token standard, which is specifying fungible tokens on Ethereum.
In simple terms these token standards can be summarized as such: While ERC-20 tokens are all the same, every ERC-721 token is unique.
Take the US Dollar as an example. The Dollar is a fungible bill and every Dollar bill you receive carries exactly the same value for the owner. Therefore the US Dollar corresponds to the ERC-20 token on Ethereum.
On the other hand, you might have a ticket to the theater. In this ticket, the date of the theatre presentation and your particular row and seat are specified. There is only one such ticket which corresponds to a certain date and a certain seat. In that sense, your ticket is unique and corresponds to an ERC-721 token on Ethereum.
Non-Fungible Tokens: Use Cases
Now that we have clarified what a non-fungible token actually is you may wonder in which case it makes sense to use these tokens.
Ntrak – The Railway Company: Exploring the Benefits Of NFTs for Businesses
Imagine you are the manager of Ntrak, a railway company. In order to maximize your profit, it is necessary for you to maximize your occupancy rate.
From past experiences you know that it is best for the business to sell all your tickets as early as possible. This allows you to solidify your cash position and plan ahead accordingly. Ideally, you would sell all of your tickets for next summer already one year in advance.
Your actual customers who will occupy the seats of your train during next summer have not yet made up their travel plans. Therefore you decide to issue a transferable ERC-721 token for every single ticket that you plan to sell.
For your purposes, you decide to sell your tickets issued as ERC-721 tokens to middlemen. Such middlemen include travel agents and other market participants that hope to sell the tickets later on for a profit.
The middlemen buy the tickets from you because they believe they can sell them later on even more expensive. However, with every business opportunity comes a risk. Due to the weather or the outbreak of a global pandemic the demand for train tickets might be decreased in the next summer.
The middlemen are aware of these risks and will figure out a strategy that works best for them: either to accept the risks or to mitigate them by entering an insurance. Insurance against such adverse outcomes is available on prediction markets such as Augur.
In fact, to ensure such risks might be just as easy as buying a token issued by Augur Foundry on any decentralized exchange:
However, hedging risks and Augur Foundry will be the subject of another post by Frontier Protocols so make sure to follow us on Twitter in order to not miss out.
Back to your train company Ntrak. Eventually, Ntrak has transferred the risk of selling future tickets from the company to external third parties.
Ntrak has sold their tickets for next summer already for a fixed price and does no longer care about any adverse outcomes that decrease the demand for their tickets. In fact the price at which middlemen will be able to sell Ntrak’s tickets is irrelevant for Ntrak.
On top Ntrak gets further advantages by this model:
- Ntrak can change the sales process from a labor-intensive B2C channel to a resource efficient B2B channel
- Ntrak can outsource all marketing activities to third parties who are specialized in marketing
- Ntrak can focus on what it can do best: its core operations which consist of operating trains
- Occupancy rate for operators will increase since time slots with low demand for tickets will trade very cheap and eventually get bought
Ntrak – Part Two: Exploring the Benefits of NFTs for Consumers
Imagine your nephew Joe wants to travel on Ntrak. He uses a website called Nfinance which essentially provides an interface for limit orders on Uniswap. In this case, he is looking for train tickets that are issued as NFTs. He selects his route and dates and finds the prices for his train ride.
One month after he bought the ticket Joe discovers that just on the weekend he wanted to travel his friend Lea is getting married. He checks on Nfinance and finds out that comparable tickets sell for a little less compared to what he initially paid for his ticket.
Eventually, he manages to sell his ticket at a 5% discount from the price at which he originally had purchased the ticket. He is super happy that he was able to resell his ticket which just a few years ago would have been non-refundable and he would have lost the entire price of the ticket.
Joe’s friend Sarah is really into music. Sarah reads on a subreddit she follows that a music festival will take place in her city in April next year. Before the festival is advertised to a broader audience she buys 10 tickets from the neighboring city to her own on the date of the festival.
As she anticipated, the price of these tickets went up by 35% only one month after she bought them. Sarah decides to cash in the profit and sell the NFTs on Nfinance. She loves the fact that suddenly anyone can do what only travel agents could do only a couple of years ago.
The benefits of using NFTs in the consumer segment include:
- Price data is constantly available allowing for better decision making by consumers and companies
- Consumers gain more flexibility for their reservations and travel plans since they can resell their tickets on specialized markets
- Markets become more efficient as anyone can participate in them which leads to an overall welfare gain for everyone engaging in the market
- Even if a train is sold out there will always be someone willing to sell her ticket for a sufficiently high price
Anything of what was described based on train tickets could be done in the same way with hotel rooms or AirBnB reservations, plane tickets, concert tickets, or tickets for sports games.
However, the potential use cases of NFTs go well beyond the travel, hospitality, sports, and cultural events industry.
Additional use cases of NFTs include:
- Digital Art as it is traded on marketplaces like Opensea
- Game Items as demonstrated by Gods Unchained
- Collectibles such as CryptoKitties
- Insurance as it is provided by Yearn Finance
- Financial Assets: anything that can be valued and owned
- Revenue Streams: e.g. a sportsman who sells an NFTs which represents a right to his future income streams
- Intellectual Property
- Proof of identity or membership
- Music or movie royalties
- Domain Names as shown by the Ethereum Name Service
- Real Estate as it is tokenized by RealT
Basically, any real-world item can be turned into a non-fungible token and many items will indeed end up being transferred.
Besides an asset having a single owner it is also possible for multiple people to own an item. The joint ownership of an item can be represented on Ethereum as a bunch of ERC-20 tokens that together represent the ownership of one ERC-721 token.
The benefits of fractalization are obvious: they bring liquidity to a market and help to price non-fungible tokens. On top, fractionalization allows using the existing DeFi infrastructure that is already built out for ERC-20 tokens.
Eventually, market observers expect that NFTs and Decentralized Finance will merge as NFTs get integrated into DeFi. Typically NFTs could be used as collateral that gets locked into DeFi protocols.
Users may take out loans against these collaterals and apply leverage. A requirement for the integration into DeFi is a coherent valuation of NFTs which can be obtained through fractalization.
In theory, non-fungible tokens are great. They serve thousands of potential use cases. In reality blockchain technology is still extremely early stage and real-world use cases are still rare. Nevertheless, adoption is slowly but steadily happening for Ethereum’s non-fungible token standard.
OpenSea was one of the first marketplaces for non-fungible Tokens. However, lately Rarible has gained momentum in the space and overtook OpenSea in terms of NFT sales volume. Rarible is governed by its Platform Governance token RARI which is designed to reward active platform users.
Another remarkable adoption story of NFTs includes $SOCKS, dynamically priced limited edition socks issued by Uniswap. Initially, it seemed pretty useless to buy expensive Unisocks. However, buyers of $SOCKS were generously rewarded during the UNI airdrop.
Before you Go…
Non-Fungible tokens provide a broad range of fascinating use cases of which we have just seen the tip of the iceberg.
At the current stage there remain a few barriers to adoption. Ethereum as the base layer will eventually need to figure out how to scale the network in the next few years in order to benefit from the boom of NFTs. This is especially relevant for low valued NFTs in video games.
Furthermore, wallet providers need to provide an easy to use interface and user experience for trading and storing Non-Fungible tokens. Eventually, non-technical consumers will need to learn to trust and understand this new form of digital scarcity.