An overview of three ways that blockchains can bring value to NFTs
What is an NFT?
An NFT is typically composed of the following:
- ID: An identifier made up of a contract address and token ID
- Owner: An address that defines the NFTs owner
- Metadata: Information inherently tied to the NFT, such as image data, features, or any other useful or interesting data
Blockchain Value Propositions for NFTs
I would argue that there are three primary value propositions that blockchains offer NFTs. Let’s dig into each of these below.
1. Digital asset ownership
Digital asset ownership is the primary value that blockchains bring to an NFT, and all NFTs make use of this value proposition. Blockchain networks allow people and protocols to own digitally-native assets in a clear and concise way. Without blockchains, digital assets are nearly impossible to track and define, because there is no single source of truth. Blockchain’s decentralized ledger technology enables a global consensus to be reached and can clearly define who owns what.
2. Metadata permanence
Some NFTs make use of blockchain’s ability to store metadata on the blockchain itself. I would argue that this is a very important aspect of NFTs, because without metadata, an NFT is just an ID and an owner.
Some projects only store a link to an off-chain web server that defines the NFT’s metadata. However, time and time again, we see those projects shut down and admins abandon their servers. This leaves a project’s NFTs without metadata, rendering them essentially meaningless.
The highest quality NFT projects opt to store their data on the blockchain itself, guaranteeing that the NFT’s metadata will survive as long as the token itself does. This is a major value that blockchains can bring to NFTs, but it is often under-utilized due to the higher costs associated with on-chain data storage.
3. Transparency during asset creation (minting)
Blockchain technology enables the creation of NFT assets in a decentralized, transparent, permissionless, and trustless manner. This is only possible because the tokens are native to the blockchain itself. Smart contracts can be designed in various ways to let any address mint a token for any price defined in any digitally-native asset.
Many projects may choose to not fully utilize blockchain’s value proposition in this area. The benefits of using a blockchain often come with technical barriers, for both developers and collectors, that many projects may not be willing or able to overcome. However, I would argue that an ideal state when minting any project is made up of the following:
- A base-layer of minting smart contract(s) that are trust-minimized and transparent
- Services available (decentralized applications) to make interacting with the minting contracts easy via blockchain wallet applications (e.g. metamask)
- Services available (mobile apps, credit card integrations, etc.) to make interacting with minting contracts easy for collectors without blockchain wallets, and are willing to trust the service providers with their assets
In the above scenario, a collector can make their own choices when weighing trust and security vs. convenience. It also allows a project’s tokens to be created in a decentralized, transparent manner, maintaining integrity of how the project was distributed.
Summary
Blockchains bring three core value propositions to NFTs:
- Digital asset ownership
- Metadata permanence
- Transparency during asset creation (minting)
While all NFTs use blockchains to track digital asset ownership, only some NFTs utilize blockchain technology for metadata permanence and transparency during asset creation.
Blockchain data storage is still relatively expensive, so not all projects choose to store their metadata on-chain. Not storing metadata on-chain degrades the assurance that an NFT’s metadata will remain available as long as the token exists.
Minting on a blockchain still typically requires a high technical bar for collectors, so some projects may prefer to mint via off-chain systems. Using off-chain systems reduces transparency and adds trust assumptions. Alternatively, with the correct systems in place, blockchains may still be used as a base layer, and optional services may be built to provide a way for less technical collectors to trade trust assumptions for a less technical process.
Final Thoughts
I encourage collectors to consider how a project utilizes the three value propositions described in this post. If a project is opting to not use blockchain for metadata or minting, are they able to explain why? Valid reasons might be that a project plans to retroactively upload matadata in the future, or is targeting less-technical customers.
Best of luck creating and collecting, and I hope you found this post informative and helpful!