The content of this page was updated in July 2019, with an excerpt from the book Token Economy by Shermin Voshmgir.
While many tokens issued in the early years of blockchains and token sales represented fungible tokens, non-fungible tokens (NFTs) seem to be an exciting new token class, which in itself is very diverse, and could by far exceed the impact of native blockchain tokens or other fungible tokens.
Non-fungible tokens are digitally scarce assets that have started to attract a lot of attention since the success of CryptoKitties in 2017. Crypto Kitties is a game on the Ethereum blockchain where players can collect and breed digital cats, which they pay for in ETH, and where each cat’s digital “genetic material” is stored on the Ethereum blockchain.
NFTs are unique in nature, with varying properties that can be distinguished from each other. Offering and managing digital, unique, and thus scarce assets like collectables is not a new thing, but before the emergence of blockchain and other distributed ledgers, this type of scarcity was costly to manage. It relied on the validation and security of the centralized issuing entities. Distributed ledgers, on the other hand, enable a decentralized and publicly verifiable substrate to issue and manage these assets at very low operational costs.
Non-fungible tokens can be used in decentralized applications like crypto-collectables or crypto-games. They can also represent certificates of any kind (drivers license, academic degrees, and other educational certificates), as well as keys, passes, identities, wills, voting rights, tickets, and any type of access right, loyalty programs, copyright, supply chain tracking, medical data, so ware licenses, warranties, and many more. Non-fungible tokens furthermore enable the tokenization of all types of assets, whether digital or real. They allow unique investments tied to a physical object, like unique artwork, real estate, or any other real-world assets and securities. They also allow fractional ownership of goods that were not easily divisible before, like real estate, artwork, or other memorabilia. Tokenizing physical assets gives investors more liquidity. One could tokenize a building, where some tokens could grant simple ownership titles of a fraction of the real estate, while other tokens could grant special privileges like access rights. Non-fungible tokens also nd potential use in digital art, by helping prove provenance, authenticity, and ownership.
The concept of non-fungible crypto tokens is not new. In 2013, Colored Coins was one of the first projects that attempted to tie unique properties to a digital asset. The idea was to use Bitcoin tokens to represent real-world assets like stocks, bonds, commodities, or the deed for a house. Counterparty was another project that built on this idea, but went one step further. It enabled users to create their own virtual assets on top of the Bitcoin blockchain. Both projects struggled to gain wide adoption when Ethereum emerged, allowing more simple token issuance and sales with a few lines of code. This spurred token sales as a new way of fundraising vehicles.
As opposed to ERC-20, which only covers a few asset attributes like name, symbol, total supply, and balance, ERC-721 allows for more detailed attributes that make an asset special, beyond the name, balance, total supply, and symbol. It allows the inclusion of metadata about an asset and information about ownership. When validated, such additional information can add value, guaranteeing the provenance of the assets. The ability to trace the provenance of assets can be very valuable in the case of art and collectables, but also along the supply chain of other goods and services. The success of ERC-721 probably also triggered other blockchain projects, such as the NEO blockchain, to begin development of their own non-fungible token standards.
Use Cases of Non-Fungible Tokens
Crypto-collectibles & Crypto-games: Crypto-collectibles allow one to tokenize owning something unique and the thrill of comparing it to others. NFTs can be used to represent any in-game asset, to be in control of the user instead of the game developer. Crypto Kitties spurred a lot of attention to this new asset class, when it clogged the Ethereum Network. It has currently 2.700 monthly players, while at peak times it had up to 14.000 daily players. Major League Baseball in the US is planning to launch a game where baseball cards can be exchanged on the Ethereum blockchain. Just to have an idea of how much is already in development, here is a selection of games, collectibles and marketplaces that trade them: “Crypto ght- ers,” “Decentraland,” “Etherbots,” “Ethermon,” “Gods unchained,” “Plasmabaers,” “ 0x universe,” “Hyperdragons,” “Loom,” “Spells of Genesis,” “Crazy,” “Superrare,” “Terra0,” “Unico,” “Opensea,” “OpSkins,” or “Rarebits.”
Asset Tokens: Tokenizing physical objects gives investors a chance to expand their portfolio, and owners more potential liquidity when they need it. This will allow for more flexible classes of securities. The owner of an asset, for example, may want to liquidate some of an item’s value but still control the physical asset itself. The owner of a painting could sell a minority of the shares in the artwork, a fraction of ownership of this artwork, but maintain physical control over it. NFTs can grant token holders with different levels of investment different levels of control over the object. A museum could allow the public to purchase shares in an artwork in order to raise money to buy a new piece. In that case, a museum wouldn’t hand over control of the piece, but they could grant the token holder the opportunity to invest in it, and offer privileged access rights to the art piece in question (read more: Part 4 – Tokenized Securities & Fractional Ownership).
Identity Tokens & Certificates: Non-fungible tokens can also represent IDs or certificates, like school transcripts, university degrees, so ware licenses that are tied to the existence of one single person, or memberships. Anything that uniquely represents a person could be represented as a non-fungible token. A diploma could be issued on the blockchain and universally recognized by authorities around the world, with no need to translate, notarize, or verify them, if and when reliable repository of trusted issuers of such certigicates can be established. Wallet-like so ware could manage all personal data without the need for centralized institutions storing our data. The token hereby represents a container for identity information related to a speci c person without giving information about what it identi es. These iden- tity tokens allow for claims to be associated with the token (the container of infor- mation). In the Web3, we can now detach core personal data (objective information about me, like my name, address, school degree, etc.) from the verification process of that data that can come from individuals or trusted institutions like governments or other trusted parties. Identity tokens can rewire the way the Internet works, and give control over personal data back to the users. With non-fungible tokens, we can therefore manage proof of identity, while keeping the identity information securely stored by itself, impossible to be forged or stolen. Identity tokens can come with an attached transaction history, attached content, and attached reputation tokens. If properly designed, reputation tokens might be able to resolve, or contribute to resolving, the “fake news” problem of social media sites. One could lose reputation tokens if others can prove that the source of the news is fake. However, the design of such reputation tokens is complex, and depends on the use case. Functional and representative reputation token design is probably the holy grail of decentralization and could be the subject of a book of its own.
Access Tokens: The same applies to keys or passes that grant access to some resources. In the physical world, we have been using keys to open the doors to our homes or our safes. This technology has been around for thousands of years. Just as a key represents access to your home, a non-fungible token could be used to manage any type of access right that is tied to a special person, a special property, or a special event. The so ware world manages access rights with passwords, which grant permission to open my mailbox, access a server, access a service I paid for, etc. Blockchain uses public-key cryptography to manage access rights to assets and can offer more secure and decentrally veri ed access right management. My key pair cannot be replaced by anyone else’s key pair, in the same way that a passport cannot be replaced by another one.
Access Transfer Tokens: When someone passes away today and passes on singular physical objects to be split between multiple people in the will, it results in a bureaucratic and often time-consuming process to manage the splitting value of these assets. The beneficiaries could sell the item and split the money between themselves. Fractional ownership tokens in combination with multiple smart con- tracts that reflect the functions of wills could resolve many of the problems and time lags in todays will management process.
Full text and high-resolution graphics available as paperback & ebook: Token Economy, by Shermin Voshmgir, 2019
About the Author: Shermin Voshmgir is the Author of the Book “Token Economy“. She is the director of the Research Institute for Cryptoconomics at the Vienna University of Economics, and the founder of BlockchainHub Berlin. In the past, she was a curator of TheDAO, and advisor to various startups like Jolocom, Wunder and the Estonian E-residency program. In addition to her studies at the Vienna University of Economics, she studied film and drama in Madrid. Her past work experience ranges from Internet startups, research & art. She is Austrian, with Iranian roots, and lives between Vienna and Berlin.
About the Book: Blockchains & smart contracts have made it easy for anyone to create a token with just a few lines of code. They can represent anything from an asset to an access right, like gold, diamonds, a fraction of a Picasso painting or an entry ticket to a concert. Tokens could also be used to reward social media contributions, incentivize the reduction of CO2 emissions, or even ones attention for watching an ad. While it has become easy to create a token, which is collectively managed by a public infrastructure like a blockchain, the understanding of how to apply these tokens is still vague. The book refers to tokens, instead of cryptocurrencies, and explains why the term “token” is the more accurate term, as many of the tokens have never been designed with the purpose to represent a currency. However, since tokens do have similarities to fiat currencies, the role of money as a medium of exchange is analyzed at length in this book. This book gives an overview of the mechanisms and state of blockchain, the socio-economic implications of tokens, and deep dives into selected tokens use cases: Basic Attention Token, Steemit, Token Curated Registries (TCRs), purpose-driven tokens, stable tokens, asset tokens, fractional ownership tokens, Libra & Calibra (Facebook), and many more.