Thinking | Where does NFT come from and where is it going?

There are fewer and fewer news about NFTs being sold at crazy prices.

Even some celebrities seem unable to bring their NFT projects to a climax.

So is the hype over? Will the bubble burst?

For now, NFTs look like a glittering path to riches, even if the actual buying and selling of NFTs isn’t entirely clear. The most famous example so far is a work by artist Beeple that was auctioned off at Christie’s for a whopping $69 million. Christie’s called it “the first purely digital work to be offered by a major auction house.”

Why would a buyer pay so much for a work that can be exactly reproduced and enjoyed by anyone for free? The winning bidder gets a file stored on the blockchain that gives the winner nominal "ownership" of the artwork. But the term does not imply any kind of exclusive access. Many NFT transactions do not even include copyright or reproduction rights. In this case, "ownership" simply provides the buyer with so-called "bragging rights," which can, in theory, be transferred to another buyer. In other words, the buyer gets exclusive rights to a few lines of computer code, not a tangible asset.

However, in reality, tokenized digital art is just one of many possible NFTs. Simply put, NFTs are universal digital certificates of authenticity. Anything that can benefit from the blockchain's transferable, verifiable, and interoperable ownership may be represented by an NFT in the future.

The ins and outs of NFT

Early versions of NFTs date back to 2012, when “colored coins” were created, small denominations of bitcoin that represented ownership of any number of assets. Five years later came CryptoKitties, an online game that allowed players to adopt and trade virtual cats on the blockchain. Soon after, demand for NFTs (meaning unique and non-fungible) surged to cover any imaginable creation—even a New York Times column that “sold” for $560,000. (The Times, of course, retains copyright.)

Current Problems with NFTs

High Power Usage: Let’s start with the biggest and most reported problem. NFTs are currently minted and traded primarily on Ethereum. This blockchain uses a proof-of-work consensus mechanism, as does Bitcoin and other popular blockchains.

It is well known that the proof of work and mining required to keep these networks secure requires a lot of electricity, which is unacceptable in an era when climate change is a huge issue. The Proof of Stake consensus mechanism is a new generation of blockchain technology that allows for a secure decentralized network without the associated energy requirements.

Most new chains are now using PoS, and even Ethereum is working to move away from PoW in the next few years.

Gas Fees: Transactions on the blockchain are not free, they require a fee. This is a simple and effective security method to prevent denial of service attacks. However, this can cause problems when fees must be paid in blockchain tokens, whose valuations change with the cryptocurrency market.

For older blockchains like Ethereum with high fiat value tokens, this means that gas fees paid in ETH can be very expensive. There are solutions to this problem. Ideas like the dual token economy offer a way to have stable cheap gas fees and high value tokens.

Key Management and User Knowledge: Blockchain has some unique characteristics. One of the most important is key management. When setting up a wallet to store tokens and assets, users must set one or more unique passwords called keys. If these passwords are lost, no one can access the wallet again.

Key recovery is very limited or even non-existent, which means that permanent loss of blockchain assets is a very real problem. This can mainly be corrected by providing a good onboarding experience for new users so that they make good passwords and store them correctly.

NFT Seeks New Development

Financial NFTs

Financial NFTs range from insurance and bonds to tokenized real-world assets — and they will be the largest single use case for NFT technology to date.

A major recent example of this came with Uniswap v3, which began issuing liquidity provision tokens as NFTs (claims on tokens provided by market makers) — that’s $1.3 billion worth of NFT assets from a single protocol.

In addition to Uniswap, it has begun to be used for financial purposes in various ways. This includes:

• Yearn.finance insurance contracts underwritten by Nexus Mutual sold as NFTs on Rarible

• The Solv Protocol encodes investment contracts into NFTs to increase transparency and transferability of project tokens.

• UFiT DAO combines different fungible and non-fungible tokens into “basket” NFTs.

• Existing NFTs are combined with Charged Particles’ interest-bearing ERC20 tokens.

NFTs will account for a large percentage of value in DeFi, a rapidly growing industry that already has nearly $60 billion in value. A conservative 10% of DeFi positions representing NFTs alone would equate to $6 billion in financial NFT assets — and the DeFi pie isn’t done growing yet.

For example, a real-world company that sells luxury real estate might use NFTs to verify fractional ownership of a property. Stored on the Ethereum blockchain, the associated NFTs replace the need for paper documents.

NFT+DeFi

Currently, DeFi makes it incredibly easy to earn returns on fungible tokens and use them as collateral for collateral. Trustless protocols like Compound and Yearn have become very popular by allowing users to do this.

But when it comes to NFTs, there’s simply not much infrastructure for borrowing or earning returns. That’s a huge need for a new multi-billion dollar market. It’s also worth noting that holders of financial NFTs aren’t just art collectors who don’t care about opportunity costs — people who hold financial NFTs need to consider every penny.

With a potential financial NFT boom on the horizon, projects like Drops may solve many of the challenges that financial NFT holders face when finding ways to make the most of their financial NFT assets.

Drops is a versatile platform that enables these financial NFT holders to trustlessly borrow fungible assets, including ETH and stablecoins, against their NFT assets. These loans can be used as the borrower wishes, for collateralization, liquidity mining, or simply to avoid selling NFT assets when the owner needs a quick source of funds. Drops plans to have liquidity mining vaults built into their platform by the end of 2021, enabling NFT holders to seamlessly earn quantifiable returns by staking their NFTs.

Conclusion

None of us have a clear idea of ​​where the NFT concept is headed.

These projects range from integrating into the current gaming world to tackling real-world problems like event ticketing to digital identity and community building to the financial sector.

Can NFT continue its current momentum?