What Is an NFT and Why Does it Matter?

NFTs provide us with the first viable solution for digital property ownership

What Is an NFT and Why Does it Matter?
Virtual RealityMetaInsights

Last Edited: March 9, 2022

XR Today Team

The rise of the Metaverse means that we will soon have rich VR worlds that provide users with naturalized interactions in an immersive environment to simulate the dynamics of real life.

One of the key building blocks of real-world economies and communities is property ownership, which ranges from owning land and real estate to owning personal effects and durable items.

It is a person’s ability to own non-interchangeable objects (i.e., items that cannot replace each other) that allow them to express themselves and more clearly define their identity.

How do they recreate this in a virtual world like the Metaverse? That is where non-fungible tokens or NFTs come in by providing users with irrevocable ownership rights for even for virtual objects.

Defining Non-Fungible Tokens or NFTs

To understand what an NFT is, we first need to understand its underlying technology – i.e., the blockchain. Blockchain is defined as a distributed digital ledger containing a growing list of records or blocks, where the blocks are connected through a cryptographic hash.

A blockchain is secure, as every block is protected through a cryptographic, and immutable, meaning that no one can change the records already added to the blockchain and every alteration will be recorded as a new record.

Blockchain is used to store sensitive data such as information pertaining to financial transactions. A top use case for blockchain is for cryptocurrency, which is a currency typically decentralized in nature and largely immune to fraud.

A non-fungible token (NFT) is hosted on the blockchain like cryptocurrency, but the difference is that it is non-interchangeable in nature. If you have multiple units of cryptocurrency, they will be identical in value and can be used comparatively to each other, just like real-world currencies.

In contrast, NFTs are assigned with a unique degree of value and one NFT cannot be used in lieu of another NFT, which makes it ideal for use as a durable asset class. Simply put, you can have digital art, digital apparel, digital gaming items, digital real estate, and other items as NFTs, with each asset containing a unique value of its own.

Why Are NFTs Important?

NFTs are immensely important in a virtual space as it provides us with the first viable solution for digital property ownership. Assets such as photographs, music, movies, and artwork have always existed in digital form, but they could always be replicated and there was no real ‘scarcity’ to drive value.

That is why a digital replica of a Van Gogh painting could never compare to the real-world version or even a high-quality real-world print in terms of its value. NFTs introduce the notion of scarcity and consequently, higher demand than supply, to the virtual world.

Limited edition NFTs can sell for thousands or even millions of dollars, as the owner is assured of its uniqueness and irrevocable value. In the context of VR worlds, NFTs open up possibilities of trade and commerce inside the Metaverse.

The Role of NFTs in the Metaverse

The Metaverse is a large-scale immersive environment where users leverage VR technologies to interact with their virtual surroundings. It is an interconnected world with spaces for gameplay, education, events, content consumption, collaboration, and other purposes. Here are the top use cases for NFTs in a VR-based metaverse:

  • NFT real estate – Virtual land sales are among the top drivers of profitability in the Metaverse, which would not be possible without NFTs. A piece of virtual land or metaverse “parcel” is sold as an NFT, granting the owner full rights to do whatever they wish with the property. NFT real estate can be leased out for events, used to build VR buildings, or resold for profit.

  • NFT collectibles in VR marketing – Merchandising was always a popular tactic among brand marketers, and NFTs bring the same capability to a virtual space. Instead of physical collectibles, brands can develop 3D objects that are sold to customers and investors as virtual collectibles. Nike has recently purchased a crypto collectibles studio that will help develop branded NFTs.

  • NFT in-game purchases – In the Metaverse, in-game purchases could take place via NFTs, which would assign buyers real ownership rights to the object they have bought. Users would retain these rights even when they have left the game, deleted their account, moved to a different gaming environment, and so on. NFTs would make in-game purchases persistent and therefore more attractive.

  • Developer incentivization through NFTs – NFTs are crucial for the creator and developer marketplace in the metaverse. It offers a powerful revenue generation stream and ensures that VR designers and world builders are compensated for their creations. Over time, this will encourage greater adoption and participation in the metaverse economy.

In addition to VR, NFTs can also exist in augmented reality (AR) using the same principles. Here, instead of a 3D VR object, you have a 3D AR object like a hologram that NFT buyers can own. Hololoot is a company currently developing AR-based NFTs for marketplaces and the Metaverse.

Pros and Cons of NFTs

The biggest benefit of NFTs is that it democratizes value creation with digital objects. All users need to do is create a piece of digital artwork or develop an AR/VR object that is worthy of collection. Some of the common NFT categories include utilitarian items for gameplay, digital photographs, domain names, artwork, music, trading cards, and virtual world elements like land or prefabricated buildings.

These NFTs can then be listed on an NFT marketplace like OpenSea, WazirX, Crypto.com NFT, and several others, and can sell for millions of dollars, similarly to the digital painting titled “Everydays: the First 5000 Days,” which sold for a record $69.3 million.

However, a potential downside of NFTs is that ownership rights are limited in comparison to real-world trading. For instance, there is no way to alter the digital artwork once you have purchased it — one of many reasons why NFTs continue to be an emerging and largely volatile market with high potential but some risks.

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