The Beginner’s Guide to NFTs and Blockchain Technology
What they are, what they’re used for and how YOU could use them in YOUR business.
You’ll have heard lots of talk about NFTs and the blockchain – and their potential to disrupt the business world.
In March 2021 digital artist Beeple sold an NFT for a whopping $69 million – the first NFT to be sold by a major auction house (Christie’s). Now, some of the world’s most successful brands are getting in on the action. Adidas has partnered with Bored Ape Yacht Club, a collection of 10,000 cartoon ape NFTs. Meanwhile the NBA has launched NBA Top Shot, a digital version of trading cards. And in December 2021 Pepsi released The Mic Drop, a “generative-style collection of unique NFTs that live on the Ethereum blockchain”.
And it’s not just the artworld where NFTs are causing a stir.
In music, John Lennon’s eldest son Julian has announced the first Beatles “NFT auction” from his own personal memorabilia collection. Items for sales include digital images of an Afghan coat worn by John Lennon and the handwritten notes of “Hey Jude” by Sir Paul McCartney. An audio clip of Julian Lennon sharing a personal memory accompanies the NFTs but the winning bidder does not receive the physical objects. Last year Kings of Leon generated more than $2 million from NFT sales of their latest album.
With such huge sums of money hitting the headlines, it could be easy to get swept along by the excitement. Are NFTs the next big thing? Or is this trend just a bubble waiting to burst?
Before we dive into NFTs, it’s best to get a baseline understanding of blockchain.
The blockchain is so much more than Bitcoin and cryptocurrencies. It has the potential to revolutionise industries like logistics, supply chain and insurance. Even our everyday actions could be affected, from the way we store and manage medical records, to how we make financial exchanges.
But what actually is a blockchain?
Simply put, blockchain is a record keeping technology. Ledgers have been in use since ancient times. Their purpose is to record contracts, payments, buy-sell deals, or moving assets or property. Transactions are still recorded on paper and computers, but today the goal of a blockchain is to allow digital information to be recorded and distributed, but not edited. It’s a decentralised and distributed ledger, meaning no single person or group is in control.
How does it work?
Think about a traditional database. Data is usually recorded and stored in tables. It’s usually owned or managed by one person or organisation. Anyone who has permission can potentially change data. If someone makes a change, the other stakeholders won’t necessarily know or be informed.
In a blockchain, data is stored in blocks. Each new entry is time-stamped, encrypted and chronologically “chained” to the previous block. A copy of this block is distributed to all the members in the network, which can be accessed by an app, QR code or text message in a matter of seconds or minutes. You can’t change, edit or delete previous entries, making transparency a major advantage of blockchain.
Imagine you grow wheat for flour which is used in gourmet cakes. Blockchain technology enables you to digitally track the journey of your crop to the end consumer. Each new participant (e.g. miller, baker, retailer) logs their activity/a new block of data on the chain. That’s good news for the consumer who can feel happy about the source of their treat. It’s also good news for the producer who could use the data to secure funding from banks.
Benefits of the blockchain include:
- Enhanced security
- Greater transparency
- Instant traceability
- Increased efficiency and speed – you don’t need to rely on paperwork, which could get lost
- Automation through smart contracts: once pre-specified conditions are met, the next step in the transaction or process is automatically triggered e.g. when a delivery truck crosses a land border, a payment is made.
There’s also no single point of failure that could take down the entire database.
Public blockchain
In a public blockchain, such as Bitcoin or Ethereum, anyone can participate by adding or verifying data. There can be thousands of participants and blocks in a public blockchain. This helps with security as it minimises the chance of “bad actors” grouping together and taking control of the network. The bigger the chain, the slower it is. Public blockchains like Bitcoin are extremely slow, only managing to process seven transactions per second. Compare that to Visa which can do 24,000 transactions per second
While the decentralised nature of the public blockchain is celebrated by many, it also means that there isn’t a third party (like a customer services department) to help if a transaction goes wrong e.g. sent to the wrong person.
Private blockchain
In a private blockchain, there are restrictions on who can participate in the network and how much access they have. Private blockchains are usually used in business and are often much smaller than public. This means that they are faster, but they don’t have the same numbers to help maintain the trust and security associated with the public blockchain.
In anycase, the blockchain is also only as good as the information that is added. If a person has something to hide, they can still choose to add and omit information.
Is the blockchain good for the environment?
When new data are added to the blockchain they need to be verified. One form of verification is “Proof of Work” and this is energy intensive.
Proof of Work uses high-powered computers on the network working continuously to solve complex mathematical puzzles. Once the equation is solved, the transactions can be audited, with miners who complete the verification process being rewarded with cryptocurrency.
A single Bitcoin transaction is estimated to burn 2,292.5 kilowatt hours of electricity, enough to power a typical US household for over 78 days. Also consider the most commonly used blockchain for NFTs – Ethereum. An Ethereum transaction uses roughly 48 kWh which can be equated to roughly the amount of energy used by a U.S. household for 1.5 days. It is the verification algorithm that uses so much energy, not the NFT itself.
Efforts are being made to make blockchain technology more energy efficient with increased use of renewable energy, more energy-efficient protocols and carbon footprint offsetting.
What can the blockchain be used for?
The most widely known use case for blockchain technology is Bitcoin and cryptocurrencies. However, there’s so much more to it.
Carrefour has been using blockchain technology since 2018 to show the provenance of certain products: the origin, where it was farmed or how it was produced. They started with chicken from Auvergne and now includes a range of products such as Norwegian salmon and Cauralina tomato. Nestle uses AWS Amazon Managed Blockchain to enable more precise tracking in the supply chain for its 15 commodities.
Blockchain has been used by two NHS hospitals to track storage and supply of temperature-sensitive Covid-19 vaccines. In medicine, blockchain can also contribute to the fight against counterfeit medicine. Medications with individual serial numbers can be tracked throughout the entire supply chain. It can also help to identify weak points where counterfeits could enter.
In insurance, one of the benefits of blockchain is fraud prevention. The ClaimShare app was developed using blockchain technology to detect and prevent “double-dipping” (the processing of multiple claims) across insurers whilst maintaining customer privacy.
And of course there are NFTs which are built on the blockchain…
So what is an NFT?
NFT stands for Non-Fungible Token. If something is fungible, it can easily be exchanged for others of the same type and value. Currency (including cryptocurrency like Bitcoin), shares and goods are classed as fungible. It doesn’t matter which particular £10 note or Bitcoin (BTC) you use to buy something with. They are all worth the same.
However something that’s non-fungible isn’t easy to exchange or mix with other similar goods. Houses, cars and diamonds are examples of non-fungible assets. They are not interchangeable. Each unit has unique qualities that make them more or less valuable.
So, a non fungible token is unique. It’s a digital representation of ownership. You can take anything – music, art, video, a tweet (Twitter CEO Jack Dorsey sold his first tweet as an NFT for $2.9 million) “mint” it to create an NFT, and the NFT represents your ownership stake.
They can be bought, sold and exchanged just like physical goods and assets.
But can’t digital files just be copied?
Yes, they can. But NFTs create a sense of scarcity and exclusivity which wasn’t previously possible in the digital world.
Imagine I’m famous and I send a selfie to you. The picture itself doesn’t really matter. If I’m famous, there are millions of photos of me. The unique and critical factor is that I, as the famous person, sent it to you and you can prove it.
Another way to explain it using physical art: There are many copies of the Mona Lisa, but only the original hangs in the Louvre. The value is in the exclusivity and respect of the community.
The creator of the NFT determines the quantity of the digital asset. It could be 1. It could be 100. The NFT proves that you have the (or one of the) original or official assets. It’s your target community or customer base that determines the value of it. They have to want or desire it.
And it’s not just about the digital asset.
There are often other associated benefits that come with NFT ownership, such as exclusive access to a private or exclusive community. For example, if you own a Bored Ape NFT, you also get access to “The Bathroom” graffiti wall community, whose celebrity members include tennis superstar Serena Williams, popstar Justin Bieber and US billionaire Mark Cuban. You also get invitations to exclusive parties (in real life). If you buy an NFT of Maroon 5’s animated JORDI album artwork, you also get exclusive access to a listening party hosted by the band.
Welcome to the Metaverse
The Metaverse is the network of 3D virtual worlds focused on social connection. Recently, it’s gained attention from established fashion brands – not just brands born in the digital space.
High-fashion brand Balenciaga featured its apparel in the online game Fortnite. And Burberry launched its first ever NFT within Blankos Block Party, a multiplayer game which features characters (“blankos”) that live on the blockchain.
RTFKT Studios uses the latest in game engines, NFT, blockchain authentication and augmented reality, then combines it with manufacturing expertise to create one-of-a-kind trainers and digital artefacts. The brand was acquired by Nike in December 2021.
In January 2022, sportswear brand ASRV released 60 NFTs of a luxury jacket as part of its winter clothing release. They sold out in less than 30 minutes. The company has also begun scouting out plots of virtual land in The Sandbox Metaverse. (Business Insider)
And in March 2022, the first Metaverse Fashion Week came to Decentraland (The Next Cartel).
We may be far from a Ready Player One reality where we spend all of our leisure time in the Metaverse, but with big brands investing in the digital landscape it is gradually becoming more mainstream.
So is it time to jump on the NFT bandwagon?
It’s still very early days for NFTs, blockchain and the Metaverse. Some people liken it to the Wild West. Others say it’s the start of a massive paradigm shift. It’s true to say that it’s a very volatile market.
If you’re considering experimenting with NFTs, then ask yourself:
- What are you trying to achieve with the NFT?
- What’s your business use case?
If you’re looking to get rich quick, you’ll want to think again. The stories that have hit the headlines are exceptions to the rule. Generally, more people are making NFTs than buying NFTs and there isn’t currently a strong secondary market to sell on your NFTs.
When making your decision, consider your target customer. Are they actually able to purchase what you’re selling? After all, the purchasing process is much more complex than typical online transactions (like ecommerce). For example:
- You need to have a crypto wallet (e.g. Metamask, Trust Wallet, Coinbase), which stores crypto currencies and your NFTs
- Usually you will need to pay in ETH (Ethereum cryptocurrency)
- Sometimes you will have to pay a gas fee (similar to a transaction fee). This fluctuates and is not a fixed fee
These are all currently barriers to widespread adoption.
But could you capitalise on the early adopter advantage?
NFTs could provide opportunities if your ideal customer uses cryptocurrency and interacts in the Metaverse already.
It could also offer advantages if you have a strong ecommerce brand and dedicated community/customer base. Do they already value exclusive events or sales previews? Adding an NFT element takes exclusivity to the next level.
Wondering how blockchain technology and NFTs could work in your business?
If you’re thinking about how blockchain technology or NFTs could be used in your business, talk to us for an open and honest appraisal to help you decide if or how you should move forward.
Believe it or not, we’ve just scratched the surface of blockchain technology and NFTs. The industry is moving quickly and there are new developments all of the time.
