Non-fungible tokens, or NFTs, are becoming more popular as entertainers, influencers, artists and brands use them to increase interest and awareness while improving engagement and customer loyalty.
This article will look at NFTs, how they're created, the ways brands use them now and how they might use them in the future.
What Is a Non-Fungible Token?
NFTs are non-interchangeable units of data that can be used to represent ownership of unique items. They enable people or brands to tokenize digital files such as art, videos, audio and collectibles, as well as non-digital properties such as real estate.
They can only be officially owned by one entity or person at a time and are secured by the Ethereum blockchain. Once on the blockchain, nobody is able to modify the record of ownership or debut a new NFT into existence without going through an official, legitimate exchange or service.
NFTs are created according to ERC-721 or ERC-1155 standards, both of which describe how to create NFTs on Ethereum Virtual Machine (EVM) compatible blockchains and include a set of rules that simplify the process of working with NFTs.
Maria Rebello, head of business development, NFT Magic Box at Gate.io, a cryptocurrency exchange, spoke with CMSWire about ERC-721, one of the most popular token standards used to create NFTs. "A token standard helps define the template and functions required to give the NFT its particular flair."
The ERC-721 standard defines the functions as follows:
- ownerOf(): Defines the token's ownership, as it keeps track of the token owner's address.
- approve(): Gives third parties the right to transfer the token on the owner's behalf.
- transfer(): Transfers the NFT to another wallet.
- tokenOfOwnerByIndex(): An index that keeps track of all the NFTs owned by the user.
“These functions allow the token creator to establish ownership of the NFT and to transfer the tokens to other wallets,” explained Rebello. ERC-1155 is very similar to ERC-721, except that it is a multi-token standard.
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The History of NFTs and Why They Are Valuable
On May 3rd, 2014, Kevin McCoy minted a psychedelic NFT entitled Quantum, a pixelated image of an octagon filled with denoting circles, arcs or other shapes, all of which pulse in fluorescent colors. By 2021, it was offered for sale at the price of $7 million, and later that year, Sotheby’s sold the NFT during its "Natively Digital" auction for $1.47 million.
Given that many NFTs are minted from JPEG, PNG or GIF image formats, many may wonder why they couldn’t just screenshot an NFT to obtain a copy without paying for it. Anyone could certainly do that; however, the copy would not retain the value of the original.
This is similar to any work of art, such as those in galleries and museums — anyone could take an amazing digital picture of those works, including famous pieces of art, but it's unlikely they'd be able to sell them to collectors because they're not the original. Even prints of art don't hold the same value as the original piece.
It’s the same with NFTs, as the person who purchased it holds the “bill of sale” within the blockchain, which verifies who bought it, when and, if they later sold it, to whom.
Many services allow artists to create NFTs from their artwork, and plenty of tutorials exist that can walk them through the process. NFTs enable artists to authenticate their work without having to stay within the traditional legacy art world. NFTs create a scarcity of digital works, enable artists to determine their own prices for their art and allow them to take control of their secondary market.
How Are Brands Using NFTs?
Brian Perrin, head of creative partnerships at Cent, a platform for creators to make a living through the use of NFTs, spoke with CMSWire about the ways brands are currently using NFTs.
“The smart ones are using NFTs to engage directly with their fans and customers around custom content — outside of the walled gardens and fiefdoms of the Web 2.0 world — and to form durable connections with them that allow for real audience ownership and access,” said Perrin.
Web3 provides brands with social opportunities for engagement that big social platforms do not. “There is no longer any reason for Facebook, Instagram, Twitter and other major platforms to have a monopoly on content distribution and audience engagement,” said Perrin.
“Why should a brand bring, say, four million followers to Facebook or Instagram but not be able to communicate fully with those followers — all four million of them — at will, without paying to juice the algorithm to reach them? Why should only the monolithic walled gardens be able to monetize that audience, when someone else did all the work of building it?”
People and brands are beginning to think outside the box and have come to realize that NFTs can help facilitate the creation of digital communities.
“It’s clear that Web3 wallets and identities are the future of content distribution and audience management," Perrin added. "Some brands see that now and are maximizing the opportunities. A great example is what Gary Vaynerchuk has done with his VeeFriends, building whole communities and touchpoints and experiences around ownership of them. That guy is a true visionary."
Other brands have used NFTs for:
- Establishing new income streams
- Building brand loyalty
- Rising money for charity
- Enhancing brand culture
- Building community among new user groups
In March 2021, Taco Bell auctioned off 25 NFTs on NFT marketplace Rarible to drive brand awareness and support the Live Mas Scholarship, which helps support education.
Four months later, Coca-Cola announced the release of four animated NFTs, which unlocked surprise items for the initial owner, raising $575,883 for Special Olympics International.
In November of that same year, toy manufacturer Mattel debuted NFTs based on its Hot Wheels brand and released 40 NFT Hot Wheels designs with a beginning price of $15 each. Plus, McDonald’s commemorated the return of its limited collection McRib. The McRib NFTs were available exclusively to those who retweeted the brand’s invitation, which 93,000 people had done by Jan. 2022.
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A Focus on Virtual Environments
Marcel Hollerbach, chief innovation officer at Productsup, a commerce platform provider, told CMSWire that as consumers become more involved with the digital environment, they are more aware and concerned with how their favorite brands are getting involved. "We’ve seen by now that some of the world’s most popular brands are focusing their marketing campaigns on the rise of the metaverse, and rightfully so,” said Hollerbach.
As people become comfortable and more involved in a virtual environment, they will revert back to physicalities such as looks, furniture, cars, decorations, etc. “People will soon become consumed with appearances, belongings, and experiences in the virtual world, as much as they are in ‘real life,’" predicted Hollerbach.
"For example, as consumers start to build houses in the metaverse, they might value having a CryptoPunks or Bored Ape Yacht Club collectible on their virtual wall,” said Hollerbach. “And these virtual assets will have the ability to be blended with the physical world ... Consumers could display NFT collectibles on the walls of their physical home, which would be visible by wearing AR glasses."
The recent focus on the Metaverse has been influential in forcing brands to think about how they are going to be a part of it. “Brands are absolutely making the right move by debuting their own NFTs and diving headfirst into the inevitable metaverse-driven future," Hollerbach added. "The digital evolution is happening fast, as we’ve already seen with ecommerce, and I have no doubt the early adopters will gain a competitive advantage as others start to get involved."
Sale and Creation on NFT Marketplaces
NFTs are not susceptible to the same disruptions as non-digital financial mechanisms and, as such, are a safer investment than many physical investments.
“You might think of an NFT as a certificate of ownership. But rather than a certificate that is issued by a centralized institution or organization or public authority, it’s registered on a completely decentralized, global, autonomously governed system." Therefore, NFTs can theoretically withstand major disruptions, such as market collapses, natural disasters and the fall of governments.
Record of ownership is one of the main differences between NFTs and standard image, audio or video content. “Already [NFTs are] being put to use as receipts for real-world objects, events and status," explained Perrin.
When NFTs are created, metadata is automatically associated with them, and all of that data is entered into the blockchain for posterity. “The metadata set includes a title, a description of the item represented, a URL or address where the item can be found and other information about the item. The instructions — known as a ‘smart contract’ — define what happens in a variety of potential circumstances,” said Perrin.
“For example, a smart contract records who created the NFT and who is receiving it or purchasing it — and what they are allowed to do with it. And it usually defines a royalty that is payable to the original creator if the recipient ever decides to sell the NFT to a third party."
While ownership of the NFT can always be verified through the details saved in the blockchain, Perrin added that there are currently no mechanisms in place to ensure the item represented in the NFT (and the associated copyright) is legally owned by the NFT creator.\
To sell or purchase NFTs, Perrin points to well-established marketplaces like OpenSea and Nifty Gateway, adding that many more are entering the field each day. "Coinbase is opening an NFT marketplace and partnering with celebrities like Bill Murray on new offerings," he said. "Facebook is reportedly working on plans, too, though somewhat murky — it’s unclear if that will be a marketplace or something else.”
The Challenges of NFTs
Public perception is still an issue when it comes to cryptocurrency, NFTs, digital wallets and Web3. While there is plenty of curiosity about such technologies, there is also hesitation due to the uncertainty and volatility of the market and the level of technical expertise required.
“I would say the general public is skeptical — but very intrigued,” said Perrin. “They can see that something big is happening, and they wonder if they should be a part of it. My 75-year-old aunt asks me all the time if she should be buying NFTs. I tell her no. But I think she should be using some free tools to make her own NFTs, test the waters. People should start getting involved so they are prepared and set up to benefit from a future that’s coming fast.”
Media coverage on NFTs has largely been about the huge ticket prices paid for NFTs created by famous individuals, groups or entities. Still, the monetary value of NFTs is only one aspect that defines them. Imagine if people only cared about how much the Mona Lisa was worth?
“At Cent we genuinely believe that the vast majority of NFTs, eventually, will be freely transferred between parties — traded, if you will, because of their intrinsic value, which is more about codifying relationships and tracking data in interoperable ways across a huge variety of parties and systems and applications and platforms — to the benefit of all involved, ideally,” said Perrin.
The major issue impacting the adoption of NFTs, and Web3 for that matter, is that the majority of people don't own any cryptocurrency, nor do they have a digital wallet — both of which are typically required for interactions with Web3.
"Only a very small minority of the population owns any cryptocurrency right now. In America, I think, it’s just over eight percent," Perrin said. "You can’t even receive a free NFT unless you already have a crypto wallet to receive it into. And for some free transfers you still need to have at least a little cryptocurrency to cover the ‘gas fees’ associated with the transfer,” said Perrin.
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While the concept of minting, buying and selling digital art in the form of NFTs may still strike some as unconventional, it’s a trend that is definitely here to stay.
As Web3 continues to evolve and cryptocurrency becomes more integrated into our daily world, brands will further step into the business of creating, sponsoring and being a part of the NFT trading world.