NFTs For Dummies. Tiana Laurence

NFTs For Dummies

It All Began: Non-Fungible Kitties

NFTs can credit their existence to CryptoKitties (www.cryptokitties.com), a novel game that was launched in the fall of 2017, by Dapper Labs. (Dapper Labs also created the smash hit Top Shop, the platform that allowed users to purchase NFTs of their favorite NBA players.) The creators felt that the general population didn't understand what a cryptocurrency was or why it mattered, let alone how its technology worked. Likewise, the public perception of blockchain applications remained narrow-minded and focused on get-rich-quick scams, dark web utility, and new financial instruments. The creators wanted to change the shortsighted perception in the market and demystify its potential and long-term implications, which had remained esoteric at best.

Blockchain for the masses

CryptoKitties provided a new angle from which the general public could view blockchain. As one of the world’s first blockchain games, CryptoKitties could take advantage of all the same blockchain technology that makes Bitcoin possible. CryptoKitties isn’t a digital currency; it’s a cryptocollectible (a unique, non-fungible digital asset), and it has the same security as a cryptocurrency.

Each CryptoKitty (see Figure 2-1) is one-of-a-kind and cannot be replicated, removed, or destroyed. Playing the game sometimes requires a significant amount of resources, but a user gains an intimate understanding of how cryptocurrencies and blockchains work while having fun. (The game is a tad addictive, to say the least.)

Schematic illustration of learning about cryptocurrency while buying and selling cute cats.

FIGURE 2-1: Learn about cryptocurrency while buying and selling cute cats.

CryptoKitties not only introduced the world to NFTs but also introduced NFTs that could make their own NFTs. They took the more-difficult-to-understand features of blockchains — like its implications for digital permanence and the traceable provenance of data that can't be faked — and built them into their game mechanics.

Dapper Labs also understood the limitations of earlier blockchain projects. Many blockchain solutions were looking for problems and had to use one-time fundraising events for cryptocurrencies, called initial coin offerings (ICOs). CryptoKitties was one of the few blockchain projects in 2017 that didn’t host an ICO. But they were so popular that the sale of kitties broke their blockchain, slowing the transaction speeds for the rest of the users — a limitation Dapper Labs may have overlooked.

The sales of these unique digital cats, secured by way of the new token called ERC 721, slowed Ethereum to a crawl. The systems struggled to keep up with the demand for these cute little cats.

The Ethereum was a new blockchain that was designed with internal programing languages that allows developers to build blockchain applications — ones that could take advantage of distributed networks and built-in systems for clearing and settling transactions. Tokens were the killer app for blockchains, allowing almost anyone to issue a whole range of rare digital item — equities, currencies, coupons, and more.

ERC 721 added to the functionality of the earlier tokens by introducing an open standard that describes how to build non-fungible or unique tokens on the Ethereum blockchain. The Kitties perfectly demonstrated the functionality and limitations of blockchain technology while also making it fun and approachable.

The game made waves all over the world, even in mainstream media outlets like the New York Times, Wired, Forbes, CNN Money, and many more. It was fascinating to see this quirky and well-designed game change blockchain forever.

The CryptoKitty development team built a sustainable revenue-based model that allows them to keep growing as they acquire new users. Before CryptoKitties, blockchain struggled with sustainable business models. Often, the token economics didn’t align with user interest and market demand. CryptoKitties showed the world that blockchain technologies could be used for anything — even silly and cute games that let you breed digital cats.

Not just a passing fad

Skeptics who thought cryptogames were just a passing fad for bored millennials have been proven wrong. CryptoKitties, which proved that anything can generate value on top of blockchains if it has sufficient token economics, allows users to access blockchain technology in a way that users find engaging. The token economics are solid, and the utility is apparent to anyone. Most importantly, users didn't have to open their terminals or know how to code. They could just play.

Distributed ledger technology (I tell you more about this topic in the next section) that supports non-fungible tokens has the potential to turn into the biggest revolution of the information age. Its potential applications are varied beyond just digital cats, even if that’s where it began for NFTs.

The impact of NFTs

Since the inception of blockchain in 2009, it has been disrupting numerous industries. However, the general concept of blockchain technology, especially in the mind of the mass consumer, was still beyond most people’s comprehension. (The Internet, in its early days, also seemed like an unfathomable mystery to most people.)

Democratizing blockchain

NFTs democratized blockchain, making it accessible and extremely valuable to a wide variety of people. NFTs took a once costly and time-consuming activity — selling a collector's item — and made it instantaneous and verifiable, similarly to how email was a paradigm shift for sending a letter, which could take days or weeks to arrive at its destination. With email, you could instantaneously receive or send a written message anywhere in the world. NFTs are the same for ownership of unique digital items and, maybe someday in the future, they can represent tangible assets.

Blockchain is the underlying technology that powers NFTs. (You've probably heard about blockchain in passing, but you might not be aware of many of its aspects.) Blockchain is a distributed ledger system where information can securely and reliably be stored and where any modification of this stored information is governed by strict rules. For example, no single party can change data without the whole system being made aware of it. (You might not think that’s an interesting strategy, but data before blockchain was secured by an admin who had godlike powers over the records.)

NFTs derive their value from being trustworthy records of provenance. You can record transactions between yourself and another party efficiently and verifiably on the system's blockchain. The record of the transfer of your NFT becomes an immutable shared memory, distributed across the world with strict built-in accountability features.

Representing ownership

NFTs can represent ownership of all sorts of items, including digital artworks and in-game elements, not just digital cats. These NFTs are typically purchased for Ethereum or Bitcoin on a centralized exchange — a platform (like the NBA Top Shop) that facilitates the transaction.

Trading between users

NFTs can be traded on a peer-to-peer basis without the need for an intermediary. In this model, the trade takes place directly between two people or groups instead of using one person (or company) as an intermediary for all trades to facilitate and monitor them. This means there's no need to rely on another party, like eBay or Amazon, to buy something from someone else; you can do it yourself using just your phone.

The internal exchange mechanisms that allow users to trade between themselves without an intermediary are called

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