The NFT revolution Part 1: How we got here – ID, Blockchain

The decline in excitement surrounding non-fungible tokens (NFTs) has prompted various media channels to forecast their potential downfall, suggesting an inevitable bursting of the bubble. However, the technology underpinning these digital assets has historically transformed our world, and the independent proof of ownership they provide has far-reaching implications that extend beyond the NFT art space. In this first installment of a three-part series, industry expert Sergio Muscat delves into the fundamentals of NFTs, clarifying their definition and historical origins.

Just a few years ago, I would have struggled to define non-fungible tokens. After months of rigorous research and experimentation, I recognize my understanding is still evolving. This dynamic landscape is characterized by rapid innovation and continual development, making it challenging to keep pace with emerging trends and applications.

Despite my background as a technologist, I have approached the blockchain revolution with a degree of skepticism. I struggled to envision a scenario in which cryptocurrencies and their underlying technologies could achieve widespread adoption, ultimately serving as a viable substitute for fiat currencies. The original vision for cryptocurrency, articulated in the influential Bitcoin white paper by the pseudonymous Satoshi Nakamoto in 2009, proposed a “peer-to-peer electronic cash system” designed to facilitate direct online payments without the intervention of traditional financial institutions.

The Bitcoin white paper represented a pivotal juncture, addressing fundamental challenges and facilitating the notion of a decentralized, secure digital currency. Key among these was the need for a system that operates without a central authority. In essence, the blockchain allows anyone to participate as a node, requiring merely access to the blockchain protocol and computational resources.

While the intricate workings of blockchain technology can be complex, the foundational principle revolves around “proof of work.” In this model, miners deploy significant computational power to validate transactions, creating a competitive environment that deters fraudulent efforts. Theoretically, to control and manipulate a blockchain, one would need to command at least 51% of the network’s total computational power. Additionally, a block can only be recognized after subsequent blocks are added to the chain, enhancing security and virtually eliminating the prospect of successful forgery, as attackers would need to consistently outperform the network over multiple rounds of mining.

The developments that followed were revolutionary, albeit not entirely aligned with the original expectations. Despite the emergence of stablecoins, cryptocurrencies have yet to fulfill all critical functions associated with “money,” including serving as a stable store of value and medium of exchange. Today, the cryptocurrency market resembles a stock exchange more than a conventional currency environment, a framework that informs the evolving landscape of non-fungible tokens.

NFTs, while relatively new, have rich historical roots, shaped significantly by the COVID-19 pandemic and accompanying lockdowns that disrupted traditional societal structures. The concept of NFTs finds its origins in the blockchain technology developed in the early ’90s, yet it was not until the advent of Ethereum in 2015—along with its introduction of smart contracts—that the true potential for unique digital tokens was unlocked.

To understand NFTs, it is crucial to clarify the meaning of “non-fungible.” In economic terms, fungibility signifies interchangeability; two identical €5 notes serve as perfect examples. While distinguishable by their unique serial numbers, these notes maintain the same value, making them fungible. Conversely, if an individual €5 note were linked to a significant historical event, its value might exceed its nominal worth, rendering it non-fungible. NFTs operate on this principle, but with the added dimension of the blockchain as the definitive proof of ownership and authenticity.

Each NFT is a unique digital asset, residing on the blockchain and indelibly linked to smart contracts that dictate their functionality. Once minted, the content of an NFT becomes immutable. Therefore, an NFT simultaneously functions as a container for information and a contractual assertion of ownership.

This leads us to the pressing question: Why have NFTs gained such extraordinary popularity, and what lasting impacts might they have on business and society? The latter inquiry will be explored in future articles, but key milestones in the rise of NFTs offer valuable context.

CryptoPunks is widely acknowledged as the first prominent NFT project, although several earlier concepts, such as Colored Coins (2012), hinted at the potential for non-fungible assets. The Ethereum blockchain’s launch was a revolutionary step forward, introducing robust scripting capabilities that enabled the creation of smart contracts.

CryptoPunks showcased generative art, featuring 10,000 uniquely generated characters combined from various traits. Initially distributed for free, these digital collectibles have seen unprecedented trading volumes and valuations. Other pioneering projects like CryptoKitties introduced gamification, allowing users to collect and breed virtual cats, further driving interest in NFTs.

The surge in NFT trading can largely be attributed to the global pandemic, which prompted individuals to seek out digital alternatives to physical experiences. While trading volumes began to build steadily in 2020, explosive growth occurred in mid-2021. Notably, high-profile sales, including a rare Alien Punk, set new price records, culminating in Beeple’s “Everydays – The First 5,000 Days” selling for an astounding $69 million at Christie’s, marking a watershed moment for the NFT market. This phenomenon attracted widespread attention, with celebrities such as Snoop Dogg and Elon Musk entering the space, and transaction spikes causing significant congestion on the Ethereum network and raising concerns about environmental impacts due to high gas fees.

Yet, this narrative isn’t all bleak. Emerging technologies such as proof-of-stake offer promising solutions to reduce energy consumption and enhance transaction throughput. While some observers interpret the current decline in NFT enthusiasm as a bubble burst, others view it as a maturation process, paving the way for a refined, more professional innovation landscape reminiscent of the post-dot-com era. Numerous intriguing developments and avenues require thorough exploration, particularly as new bubbles emerge, such as those associated with the metaverse.

In conclusion, the future of NFTs and their wider implications for the gambling industry and beyond warrant closer scrutiny. The rapid evolution of this field promises exciting opportunities, and ongoing discourse will shed light on its transformative potential. Stay tuned for the upcoming articles in this series, where we will continue to track the dynamic developments in the NFT landscape.

Sergio Muscat is the Founder of Oxygia, a specialized management consultancy focused on strategic, operational, and human insight advisory. With extensive experience in project management, business analysis, and operations across various sectors, Oxygia helps organizations navigate the complexities of future trends.

Sergio will be presenting on NFTs at 11:00 on Day 2 of iGB Affiliate London, scheduled for April 13-14 at London’s ExCeL. He will participate in the panel discussion “Metaverse and NFTs: Future or Bubble?” alongside industry leaders Noah Fischer from Gambling Apes and Andreas Köberl from Betgames.tv. Access additional details on the agenda here.