This article originally appeared in The Business Times.
No other blockchain operates as a non-sovereign and fully decentralised network, with no owner and no single point of failure.
THE concept of unique tokens recorded on a blockchain dates back to 2012 and “coloured coins” on the Bitcoin network. There were also early experiments on the Bitcoin network with digital collectibles, coupons and property. Fast forward to 2021 and non-fungible tokens (NFTs) are taking the world by storm, with sales volumes surging to a record US$2.5 billion in the first half of this year. These apes, punks and penguins live mainly on the Ethereum blockchain, though.
Collectibles are just the first generation of NFTs, hinting at their longer-term potential. As NFTs mature, they could start to be used for purposes like verifying people’s identity; for medical or educational certificates; to process royalties; to prove ownership of real estate and to shop and pay. As this happens, security will become increasingly vital – and that is why we think some NFTs may return to their Bitcoin roots.
For information that is sensitive, that relates to people’s identities or that proves ownership of highly valuable digital assets, minting NFTs on the Bitcoin network makes a lot of sense. No other blockchain operates as a non-sovereign and fully decentralised network, with no owner and no single point of failure. So NFTs that are truly intended for the long term may well find themselves living on top of the Bitcoin network one day. If your children will need the NFT to inherit an asset worth millions of dollars – or hundreds of Bitcoins, if you prefer – then there is really no safer place.
Before we get too deep into the battle of the blockchains, let’s take a longer-term perspective. NFTs are the digital iteration of humankind’s timeless interest in collecting objects, whether for aesthetic reasons, to confer status or because we expect them to increase in value. Unlike works of art or antiques, they are programmable digital collectibles that are not unique in their substance – they can be copied – but unique in terms of ownership.
But, while there are similarities between NFTs and physical collectibles, as well as with other illiquid real assets, the centrality of social context with NFTs sets them apart. The growth of the whole NFT phenomenon is really all about the potential of the digital world within which they are auctioned, displayed, discussed, used and sold.
Stored away in a digital wallet, an NFT is just a combination of pixels or a silent claim on da real-world object. It has no intrinsic value because it has no real-world application. In the context of a community of curators, art enthusiasts or people playing games in the “metaverse”, though, the NFT comes to life. The value of these digital collectibles is entirely socially determined – and that value can be considerable. Basketball player Steph Curry recently paid US$180,000 for a Bored Ape NFT that he could use for his Twitter profile picture.
In the near term, though, gaming is likely to power the next phase of growth for NFTs. In-game NFTs allow players to own “skins” for their avatars, weapons, land, rare objects or special powers. Crucially, securing ownership inside the game also allows players to capitalise on the value of these virtual objects outside the game. They can sell the objects for cryptocurrency and then use an exchange to cash out into fiat currency that can fund real-world purchases.
This metaverse is still nascent but has grown incredibly fast during the pandemic. The number of people playing Axie Infinity, a popular game that supports NFTs, has grown from about 600,000 a month at the beginning of the year to nearly 19 million users today. Games players have long come together online to communicate, compete, collaborate, build social status and develop identity. Now, with NFTs and cryptocurrencies providing the rails to move value between the physical and virtual world, gaming also offers earning opportunities, especially for people in developing countries.
We are moving rapidly towards a Web 3.0 world, in which digital networks will be decentralised, permissionless (open to anyone) and trustless (where confidence is placed in mathematical code rather than human institutions).
This is going to drive the continued convergence of our physical and virtual lives, making verifiable ownership a crucial component of the more globally inclusive economy that we hope can emerge from this integration.
It is still early days for NFTs and it will be important to see whether they can ultimately be enforced in legal structures, especially when they are used to record land titles and other real-world assets. Self-governance will be vital to NFTs earning the confidence necessary for assets with significant valuations.
RISK OF ‘CENTRALISATION’
In the decentralised Web 3.0 environment, users bear individual responsibility for the networks they participate in and consensus-based blockchain governance structures will need to mature. Change is likely to come from within the industry, though, as it seeks to protect itself against scams – rather than being imposed in a top-down manner.
The underlying code will also matter. Ethereum is still the dominant platform for NFTs, although they are also minted on different protocols like Solana or purpose-built blockchains such as Flow. There are good reasons for Ethereum’s dominance: the addition of the ERC-721 NFT standard, alongside the more familiar but less suitable ERC-20 standard, allows for the ownership as well as the movements of self-contained tokens to be tracked from a single smart contract.
For some NFT projects, blockchains like Ethereum and Solana may suffice. But the risk of “centralisation” is always there and must be considered: These networks have founders and teams who could be compromised in different ways and in some cases – theoretically – forced to hand over users’ data or assets to a third party.
Enter Bitcoin, then. If the community that participates in its governance chooses, NFTs could be minted on the Bitcoin network, with the recent Taproot upgrade likely to be used in such a way that each unspent transaction output functions as a distinct asset that can be transacted on the Bitcoin’s second-layer Lightning Network.
It might take another three or four years to fully play out, but its profound implications can be understood today. It would allow your medical records, the digital deeds to your house and the original CryptoPunk you bought in 2017 to sit securely on a truly decentralised network with no single point of failure.
NFTs are still an experiment, of course, and it’s too early to be certain about what direction they will take. But Bitcoin is not an experiment and one of the few things that we can be certain about is the integrity, resilience and security of its network.