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NFTs 101: A Beginner's Guide to the World of NFTs

NFTs 101: A Beginner's Guide to the World of NFTs

Scott Kasten
August 14, 2024

In the web3 world’s fast-pace of changing digital innovation, Non-Fungible Tokens (NFTs) have emerged with revolutionary potential, challenging traditional notions of ownership and creativity. If you are familiar with web3, NFTs may likely have been your first point of contact. They were covered frequently between 2018 and 2021, when artistic NFTs connected to communities like Crypto Kitties or The Bored Ape Yacht Club were selling for astronomical prices. Digital speculation is just a small part of the NFT story. Whether you're an art enthusiast, a tech aficionado, or simply curious about the latest buzz, understanding NFTs opens doors to a digital universe where uniqueness (and even utility) reigns supreme.

What Are NFTs?

NFTs are both a digital asset and an immutable and easily transferable digital record of that asset. NFTs are created with smart contracts to automatically execute the terms specified in the code and have a unique digital signature to verify authenticity.

As the “Non-Fungible” portion implies, the underlying asset of the NFT is unique. This sets NFTs apart from other digital assets like cryptocurrencies which are readily exchangeable with other cryptos of the same kind. One bitcoin at any point in time is the same as any other bitcoin at the same time, they are not unique to each other.

The uniqueness of NFTs creates value driven by scarcity if that NFT is connected to something that makes it desirable. In the case of Bored Apes or Crypto Kitties, each ape or kitten held a unique design and was connected to a larger community that holders had gated access to. As the community grew in its social cache, ownership of the NFTs that served as your ticket to entry became increasingly valuable.

The ability of NFTs to maintain a secure and immutable digital record of that NFT and any other asset attached to it provides the owner with a verifiable and authenicated history of their NFT. This level of security and authenticity helps to protect the value of the NFT. Beyond NFTs for investment, the secure recording features can extend the use cases of NFTs to serve as a digital representation of other assets like real estate, automobiles, or other financial instruments and make the transfer of those assets faster and more efficient.

The Evolution of NFTs

NFTs didn't materialize overnight; their journey is intertwined with the rise of blockchain technology. Initially, blockchain served as the backbone for cryptocurrencies, enabling secure and transparent transactions. Over time, developers realized its potential to authenticate and track ownership of digital assets beyond currency.

The concept of NFTs gained traction with the launch of projects like CryptoKitties in 2017, where users could buy, sell, and breed unique virtual cats. This early experimentation paved the way for broader applications across art, gaming, music, and more. Although these entertainment laden use cases are what has brought initial noticeability to NFTs, it is their ability to provide proof of uniqueness and ownership to more utility-type uses, such those mentioned above, that will drive their growth in the future.

Exploring Use Cases

NFTs have transcended novelty to become integral to several industries:

1. Art: NFTs have revolutionized the art world by providing a digital certificate of ownership (provenance) for digital artworks. Artists can tokenize their creations, enabling direct sales to collectors and ensuring royalties on secondary market transactions.

2. Gaming: In gaming, NFTs unlock new possibilities by allowing players to own and trade in-game assets such as characters, skins, or virtual real estate. This ownership extends beyond a game's ecosystem, fostering a vibrant secondary market.

3. Collectibles: From virtual trading cards to rare digital items, NFTs have revitalized the concept of collectibles. Collectors can authenticate and trade unique digital items securely, adding layers of value and authenticity.

4. Real Estate: NFTs are poised to disrupt the real estate market by tokenizing property ownership. Fractional ownership and automated smart contracts streamline transactions, potentially reducing costs and increasing liquidity.

NFTs and Loyalty Programs

Perhaps one of the most intriguing and impactful opportunities that NFTs provide is their use in customer loyalty programs. Loyalty programs have become an increasingly popular tool for businesses to retain customers and build the reputation of their brand.

One study has shown that the average customer is active in nearly 7 loyalty programs and enrolled in 15. However, nearly a third of members are dissatisfied with the level of personalization in the experiences and communication they have with the brand. For those companies that do successfully engage loyalty members revenues have been seen to grow about 2.5X that of their competitors.

Adidas NFT Loyalty Program: Revolutionizing Customer Rewards

Adidas has taken a bold step into the world of customer loyalty with its innovative NFT-based rewards program. Launched in 2023, the Adidas NFT loyalty program leverages blockchain technology to create a unique and engaging experience for its customers, setting a new standard for brand interaction and reward systems.

NFTs for Exclusive Rewards: In the Adidas NFT loyalty program, customers earn NFTs for their purchases and interactions with the brand. These NFTs are not just digital tokens but gateways to exclusive rewards and experiences. Each NFT represents a piece of Adidas' digital collection, which includes limited-edition apparel, early access to new releases, and invitations to exclusive events.

Gamification and Engagement: The program incorporates elements of gamification, where customers can complete various challenges and activities to earn additional NFTs and unlock special rewards. This approach keeps customers engaged and motivated, enhancing their connection to the brand. For example, completing a certain number of purchases or participating in brand-related activities might earn you a rare Adidas NFT that provides access to unique benefits.

Blockchain for Security and Transparency: Adidas utilizes blockchain technology to ensure the security and authenticity of its NFTs. Each token’s provenance is recorded on the blockchain, guaranteeing that rewards are genuine and transactions are transparent. This technology also enables Adidas to offer a secure and verifiable way for customers to manage and access their rewards.

Future of Loyalty Programs: The Adidas NFT loyalty program exemplifies how traditional reward systems can evolve through digital innovation. By integrating NFTs, Adidas not only enhances customer engagement but also creates a more personalized and rewarding brand experience. This program marks a significant shift in how brands interact with their customers, offering a glimpse into the future of loyalty programs powered by blockchain technology.

Types of NFTs

The diversity of NFTs mirrors their applications. Here are a few other ways in which NFTs are being used:

Art NFTs: Digital artworks ranging from illustrations to immersive virtual reality experiences.
Music NFTs: Songs, albums, and concert tickets offering unique access and ownership benefits.
Domain Names: Digital real estate in the form of memorable domain names.
Virtual Real Estate: Parcels of virtual land in decentralized metaverses like Decentraland or The Sandbox.

Benefits and Drawbacks

Benefits:

Authenticity and Ownership: NFTs provide indisputable proof of ownership and authenticity, combating digital piracy and plagiarism.
Revenue Streams: Artists and creators can earn royalties on resales, fostering sustainable income streams.
Accessibility: NFTs democratize access to art and collectibles, allowing global participation in cultural and digital economies.
Engagement: NFTs provide a unique and mutually beneficial way to engage customers and target audiences by providing personalized and entertaining experiences.

Drawbacks:

Environmental Concerns: The energy-intensive nature of blockchain operations, particularly Proof-of-Work mechanisms, raises environmental questions. Blockchains like Ethereum have been taking significant steps to reduce energy impact and it is likely that many others will follow suit.
Market Volatility: The speculative nature of NFT markets can lead to price volatility and investment risks. However, this is only true for those interested in the speculative investment of NFTs and is not a concern for more utility-oriented use cases like financial/property transactions or in the rewards programs.
Legal and Regulatory Uncertainty: The evolving legal landscape around digital assets poses challenges for creators and investors alike. Again, this depends on the nature of use. Regardless, clearer regulatory rules will likely be coming in the near future.

The Future of NFTs

Looking ahead, NFTs are poised to catalyze further innovation:

Integration with Virtual Reality (VR) and Augmented Reality (AR): Enhanced digital experiences and immersive environments.
Education and Certification: NFTs could authenticate educational credentials and professional certifications.
Social Impact: NFTs have the potential to empower marginalized communities through digital ownership and economic participation.

Non-Fungible Tokens represent a significant shift in digital ownership, blending technology with creativity to redefine how we perceive and exchange value in the digital age. As the ecosystem evolves, embracing transparency, sustainability, and inclusivity will be crucial in unlocking NFTs' full potential.

Whether you're an artist exploring new revenue streams or a collector seeking unique digital assets, understanding NFTs opens doors to a dynamic and transformative digital future.

In the very near future Hashed Out will be releasing a range of new resources to help you to delve deeper into the world of NFTs and other parts of the web3 ecosystem. Stay tuned for announcements regarding official release dates.

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