An Introduction to Non-Fungible Tokens (NFTs): The Future of Digital Asset Ownership

Written By Discovery Team 1: Owen Johnson, Katie Gjelaj, Youssef Refai, Spencer Kiang

The first known NFT, Quantum, was created in 2014 by digital artist Kevin McCoy on the Namecoin blockchain. Today, while NFTs have been created on various blockchains, they are most popularly produced and traded on the Ethereum Blockchain. The second largest blockchain for NFTs is Solana (SOL). As displayed by the Twitter image from @ASanevik shown below, ETH and SOL have different values, with 550K ETH equaling $650M and 1.3M of SOL equaling $340K. NFT projects have amassed heavy popularity, commonality, and utility since 2014 when Quantum was created. This begs the question: What really is an NFT, why should you buy an NFT, and what is in store for the future of NFTs?

What is an NFT?

NFTs, also known as non-fungible tokens, are cryptographic assets built on a blockchain. A blockchain keeps a record of every transaction with NFTs, typically purchased with cryptocurrency such as ethereum or fiat currency. NFTs are typically created by an individual or a group of people and are released as part of a collection. Collections commonly release from 2,000 to 10,000 NFTs, with each NFT in the collection having differentiating traits, making each specific NFT unique. Most collections have a finite amount of NFTs, meaning the value of these NFTs changes along with supply and demand that buyers create.

There is a misconception regarding NFTs in the media; the utility behind NFTs is often not discussed, and information regarding NFTs that is publicized is centered around a select few, very expensive projects, misleading viewers to think all NFTs are extremely expensive. In reality, there are many drivers of the value of an NFT, and one of the driving factors is an NFT’s rarity.

NFTs with highly uncommon traits and appealing designs will sell for much higher prices than NFTs that lack such traits. Let’s take a look at the NFT project, Azuki. Azuki is a project whose non-fungible tokens can obtain over 12 differing traits. Some of these traits have a ‘golden’ characteristic, which make an NFT rarer and as a result, much more valuable. NFT sales involving golden traits sell for an average of $70,000, whereas NFTs without golden traits sell for an average of $20,000.

Azuki NFT holders have experienced strong value appreciation as the community has provided solutions to multiple shortcomings during the growing stages of the NFT industry.

As NFTs are assets, an investor might purchase an NFT if they believe in the team behind the project. A good team will help the project gain more recognition and publicity, therefore creating more demand for the project. Moreover, another important factor in determining an NFT’s value is the utility that it provides for the owner.

The utility of NFTs and tokenization is endless and can be applied in both virtual and physical scenarios; modern subscription services can be adapted via NFTs, allowing owners of the project to view extra content. Similarly, NFTs can be used for memberships, discounts, and promotions (ex. 20% off purchases). NFTs can also be used as tickets or passes, allowing owners of the specific collection to attend concerts or networking events. The gaming industry can use NFTs to unlock video game characters and certain maps within a game. There are countless ways NFTs can provide utility to the owner, and there are some specific NFTs that have become renowned for the benefits they provide.

The endorsement from mainstream celebrities has also massively impacted their recognition and implementation with the likes of Paris Hilton, Snoop Dogg, Steve Aoki, and Jimmy Fallon endorsing various NFTs and even creating their own.

One of the most prominent NFTs is the Bored Ape Yacht Club (BAYC), a collection of 10,000 Ethereum-based NFTs that was launched by crypto startup Yuga Labs in 2021. Earlier in this article, it was mentioned that NFTs could be related to the musical field, and Bored Apes are no different. The creators of BAYC aimed to incorporate elements from 1980–90s era music scenes such as punk, hardcore, and hip hop. These Ape NFT caricatures feature various facial expressions, clothes, and unique elements with rarer traits selling for much more. They had a mint price of 0.08 ETH ($95) when they first launched and now sell for millions. Owners of Bored Apes are considered members of the BAYC and gain access to exclusive perks such as private online twitter spaces, exclusive merchandise, and members-only live events.

Despite many projects not producing tangible assets or experiences for investors, there are a handful of projects we would like to highlight based on their commitment to generate external value beyond the NFT image.

ACRE:

One NFT project that encompasses the concept of utility is the ACRE World and PlatinumBay project. ACRE World is developing an NFT ecosystem with its own platform, which can be accessed through the ACRE World Website, that seeks to support a network of asset-backed NFT projects, to develop a Web3 launchpad for current and future projects in the Web3 space, and to create new DeFi (decentralized finance) protocols. For their first project, they have partnered with PlatinumBay, a resort company, and profit off of initial NFT sales as well as trades. ACRE’s PlatnumBay NFT is currently available for presale through the PlatnumbayNFT website, and will be available on open sea after its launch at the end of Q1.

ACRE World’s PlatinumBay NFT is a project backed by the physical assets of a luxury 432-room resort in Phuket Island, Thailand, which is scheduled to open in the Summer of 2023. Owners of the PlatnumBay NFT will receive fractionalized ownership of the hotel, earn passive income from resort revenue, and gain access to luxury travel benefits and rewards. NFT owners can receive a portion of the resort’s revenues, which are primarily derived from payments from tourists and other non-NFT owners who stay at the resort, based on how many tokens they own. Each NFT token held will accumulate benefits such as discounts at the resort, free night stays, personalized yacht and tour experiences, and flight discounts. This gives retail investors a chance to invest in the international real estate sector which has traditionally been difficult to invest in due to the high capital investment requirements and legal restrictions.

A completed rendering of PlatinumBay’s resort. The community plans to provide benefits to NFT holders via various revenue generators from the resort.

One of ACRE’s points of differentiation as compared to competitors is its legal team. ACRE, compared to other companies conducting similar projects, has put a heavy emphasis on making sure actions taken by all parties comply with international and country-specific regulations by hiring sophisticated lawyers to work on the back end of projects.

Max Morgan, one of the co-founders of ACRE, commented on how ACRE World plans on implementing blockchain-enabled solutions to solve real-world problems faced by traditional businesses. They hope to attract individual retail investors to pioneer the real estate market into a new paradigm. As of right now, ACRE world has five other unreleased projects in the works.

Azuki:

Another NFT project that has recently gained momentum is the Physical Based Token project, launched by Azuki in October 2022. Azuki offers a collection of NFTs that display an anime-inspired digital avatar. The NFTs are uniquely hand-drawn by Chiru Labs, an LA start-up that was created by a group of artists and technology specialists. Beyond their design, Azuki NFTs are considered valuable due to the utility that they offer: owners of Azuki NFTs have exclusive entrance to The Garden, a platform that offers NFT holders access to a culmination of clothing collaborations, NFT drops, and live events.

Azuki’s newest NFT project, the Physical Based Token, differs from their previous ones because this project ties a digital token and a physical item together as a single asset, deeply interconnecting the Ethereum Blockchain and the physical world. This project not only differs from other Azuki projects but also from the NFT community as a whole. While other NFT projects have linked a digital token to a physical item, Azuki has worked towards overcoming many common obstacles, prohibiting their NFT from being traded independently of the physical item it is tied to and allowing for authenticity verification of the physical item without the use of an outside party. Compared to other projects, Azuki has maintained the link between the digital token and the physical item throughout the item’s lifecycle in a more successful and decentralized way.

The Physical Based Token, or PBT, enables decentralized ownership authentication and tracking, which is all done on-chain and without a centralized server. Unlike traditional authentication systems, no entity has sole rights to authenticate and verify ownership. Rather, all individuals are free to use this open-source technology to authenticate ownership. The PBT uses a Blockchain-enabled Authentication Network Chip to create a physical cryptographic chip, known as the BEAN Chip, that is located on the physical item that the NFT is tied to. For the October PBT drop, the physical items the NFTs are tied to will be a series of golden skateboards that are plated in 24 karat gold. The BEAN Chip allows for a feature called scan to own, by permitting owners of the physical item to scan the chip with a phone and mint or digitally transfer the Azuki PBT.

Moreover, in addition to all individuals being free to verify ownership, all are free to leverage this extensible technology and the utility it offers to build experiences — from engaging in digital events to taking part in real-life quests. Since the announcement of this project, which offers PBT holders the opportunity to use a physical item to create digital experiences, the Azuki-based PBT technology has gained traction on Open Sea.

Art Gobblers:

Another unique project that has emerged in the NFT space is Art Gobblers. Art Gobblers is an experimental art gallery which was launched as a free mint on October 31st, 2022 and founded by Justin Roiland, creator of the Adult Swim show “Rick and Morty.” Art Gobblers is a good example of what the future holds for the NFT and Web3 space. Art Gobblers follows in the footsteps of the majority of its NFT precedents, namely through staking and tokenomics. Staking is a process in which one “locks up” digital assets and has them earn passive income. Possession of the asset is not lost while the token is staked, but it is inaccessible to the owner. This concept is quite similar to a savings account where you keep money in the account in return for a small interest percentage. Tokenomics encompasses the staking mechanism while also involving a whole umbrella of elements that make an NFT valuable, including supply, burning, and allocation of tokens.

In the case of Art Gobblers, staking Gobblers allows for the production of the Goo token, which can then be spent to produce blank canvases needed for NFT owners to draw on and create art. The Goo token increases exponentially. Completed art can be gobbled up back by the Gobblers themselves and permanently stored in the Gobbler’s belly gallery. Legendary Gobblers can be bought in exchange for a large number of regular Gobblers. This process is depicted below. As more gobblers are staked and goo is generated to produce blank pages, the value of goo decreases because of its abundance, resulting in an imbalance in supply and demand.

What sets Art Gobblers apart from what NFTs currently offer is their self-sustaining mechanism called Variable Rate Gradual Dutch Auction, or VRGDAs, which is implemented to maintain equilibrium. According to Dave White, Frankie, and Transmissions11 from the Paradigm research team, VRGDAs “let you sell tokens close to a custom schedule over time by raising prices when sales are ahead of schedule and lowering prices when sales are behind schedule.” In other words, if the demand for making Blank Pages or new Gobblers is very high, the VRDGAs mechanism kicks in to charge an even higher price to level off the demand, and vice versa. Another aspect that differentiates Art Gobblers from standard NFTs is the process of glamination. Glamination allows artists to mint their own drawings on Blank Pages as a collection that can be bought or sold using community resources. This opens the door for aspiring artists or NFT collection founders to publicize and spread the word about their unique art with others in the Art Gobblers community. The VRDGAs mechanism is a fascinating tool that can be utilized in many real-world cases outside of Web3, for example: limited-time drops that only occur in a certain time frame can use this mechanism to control the overwhelming demand for the certain products.

Institutional investments:

The blockchain space provides attractive investment opportunities for businesses in addition to individual investors. One company that has taken advantage of these opportunities is PolySign, an asset custody and trust company that deals exclusively with digital assets. Unlike traditional financial assets, such as stocks, individual cryptocurrencies and other types of digital assets, such as NFTs, have unique government regulations that are still in the process of being developed, which trust companies must oblige to. Polysign is approved to hold over 30 cryptocurrencies. While PolySign currently does not deal with NFTs, holding clients’ NFTs is on its roadmap for future developments in order to capitalize on the potential of institutional investors in the NFT space.

Conclusion:

Currently, the NFTs are a highly speculative market to invest in. The value of an NFT can be driven by various factors, some of which include its rarity, the team that is creating the project, and the utility of the NFT. NFTs, regardless of these value-driving factors, are valuable in that they create a bridge between the physical world around us and the cryptocurrency world. Through tokenization and blockchain technology, NFTs provide retail investors the opportunity to invest in sectors, companies, and projects that they would otherwise not have access to, whether due to a lack of sufficient capital to invest or to a lack of awareness of projects. In the case of the Platinum Bay NFT, for instance, Acre provides an opportunity for retail investors to invest in international real estate, allowing investors to gain equity in real estate with low capital investment.

While the potential uses and applications of NFTs are endless, whether or not these opportunities are taken advantage of depends on how much effort individuals put into the space and how much success they find. While there currently are many NFTs projects, investors should do their own research and due diligence before investing in projects because not all projects will be successful. Simply because the idea is good does not mean it will be executed well. The NFT space is still very new, and therefore, a high-risk investment. However, though all projects may not be successful, even failed projects will still educate users and advance the space of NFTs, spreading new ideas and teaching individuals lessons about what works.

Written By:

Discovery Team 1

Owen Johnson, Katie Gjelaj, Youssef Refai, Spencer Kiang