You might have heard of different cryptocurrencies and have heard the term NFT, but what are crypto NFTs and how do they work? Let’s discover this innovative approach not just to the world of crypto but also the potential that it holds for the future of rare and luxury items as well as assets.
What is NFT?
First thing first, let’s define what this is. NFT stands for non-fungible token. Fungible basically means that one item is equally and easily exchanged for another. An example of that would be US dollar. Whether you hold $1 in your wallet or I hold $1 in my wallet, they are the same. Sure the serial number and date of issuance might be different, but the value of each is exactly the same. Seller doesn’t care whether they get your dollar or mine as they are interchangeable and hold the same amount of value.
On the other hand, you have items that are non-fungible, or not easily exchangeable one for one. An example might be a car. You might have a brand new Mercedes-Benz with 10 miles on, leather seats. I might own a Honda with 200,000 miles, worn out seats and some missing parts. Clearly we can agree that you would not want to trade your car for mine, as they do not have the same value.
And this is where the world of crypto NFTs gets in and things really heat up.
What are crypto NFTs?
Now that we know what non-fungible means we can get into the world of crypto and how they work.
Say that you play a video game, pick your favorite one. Within each one of these games there are special features, such as an extra life, a shield, a weapon, or maybe an ability to fly or be invisible. It turns out while you can just buy these with a credit card, they can also be represented on the blockchain to prove ownership, ensure that number of the stated features is truly limited to the advertised number and to allow you as the owner of the said feature to easily and quickly sell it (should you ever decide to).
Blockchain, as you know is pretty awesome and it has entered every day conversation thanks to the first and the most popular cryptocurrency, Bitcoin. Since then, we’ve seen an amalgam of currencies enter the world and with the innovation and technological revolution the ability to secure non-tangible assets, like features in a game, was born.
Are NFTs strictly limited to games and non-tangible assets
It turns out the answer is NO.
Utilizing blockchain and the revolution of NFTs we can tokenize just about anything and it is not limited to virtual items. With technology and blockchain we can tokenize cars, homes, art, luxury items, food and drinks and a host of other things. Just about anything you can think of can be tokenized.
Basically, you take the real-world asset, say a house and you can represent it on the blockchain and secure the ownership utilizing the new tech. That’s pretty rad if you think about it.
Inside the token you can not only show the address of the said house, but also the current owners, previous transactions and price, layout of the building, current taxes, and a host of other things.
What are the benefits of tokenizing assets?
Again, you can likely think of some benefits and use cases on your own, but here are a few that we’ve thought of:
- Added layer of security
- Proof of ownership or authenticity
- Faster and easier transactions
Let’s break these down a bit.
Added layer of security with NFTs
If we were to take real estate as an example to tokenize with NFT (which makes sense, right since each house is at least slightly different than the next one, even if they were built by the same company/person) it means that your proof of ownership (we’ll get to that in a second) would be secured on the blockchain. Blockchain as you may know is not hackable and it’s immutable. This gives us a piece of mind knowing that we always have access and it cannot be changed by someone.
The challenge with many non-blockchain databases is that someone always has access to make changes to the information stored in the said database. That means that there is always an individual who can alter the documents and because this can be done without publicly showcasing the change, you would never know it… until it’s too late that is. Additionally, even if the person in charge of altering data was non-malicious individual because they are a person that means that someone can steal their information and use it to access and alter the data. And one doesn’t have to look hard to find a slew if leaked, stolen, or changed data.
Proof of ownership and authenticity
Now you can easily locate the required paperwork and easily prove that you indeed are the owner of the said house (car, collectible, etc.). Or as a producer or seller of the said asset you can easily prove the authenticity (super important with luxury and collectible goods).
This is important because things happen… flood, fire, lost box in a move, faded paper over time, wars, uprisings, and revolutions.
Sure, probability of these things happening are low, but they do happen. And while you can go to the land record office and ask for another copy that takes time and money. And going to the land office only works if you are located in the same area where the property is registered. But if you are a few hours away or further, now add your traveling costs, cost of taking off from work or business, and add it to the equation.
Faster and easier transactions
This may be one of the best use cases for NFTs as digitalizing your house means that you can sell it that much faster. No need for title agency, land registry, brokers and realtors and often no need for banks either. You basically eliminate all the middlemen and women from your transaction and with it you also eliminate many expenses.
Just imagine for a moment that NFTs now represent all these different houses. Instead of driving around the city looking for your new home, you now go to a computer. With a click of a button you can see all of the information about the house. From price to taxes and size, everything is available on the page. And you’ll likely be able to do a virtual walkthrough thanks to VR.
You like the place, you know you can afford it and with a click of a button you fill out a buy/sell agreement (already pre-populated so you just fill in your info and price you’d like to offer) and press send. Within seconds the seller receives the information and can either accept or counter offer. You can now negotiate with each other without any intermediaries. You agree on the price and the terms and the agreement is fully executed. It’s time to transfer funds.
Smart contracts acting as escrow will hold the funds until deed is transferred. The computer automatically send the new deed to be recorded. A few days later you get the recorded deed and money is automatically released to the seller. Transaction is done!
But WAIT! I don’t have all the cash how will I pay for it?
Simple! The same way you do now by borrowing money with the house as a collateral. The only difference is that you won’t need a mortgage broker or a bank. You’ll utilize the NFT of the house you are buying as a collateral. A bank, a wealthy individual, or a group of people will underwrite your mortgage using digital currencies. As for the payments you’ll continue to do what you do now, except with crypto.
That is the future. And while it may seem unrealistic to you today, just wait a few years!