Ch6. NFTs and Digital Assets — A New Form of Ownership

What Is Digital Scarcity?

Files on the internet can be copied infinitely. So why do some digital images sell for millions of dollars? The key is scarcity of ownership.

Traditional digital files:
A copy = identical to the original
No way to know who the "true owner" is

What NFTs add:
A blockchain-recorded proof that "this person owns the original"
Copies may exist, but ownership itself is unique

What Is an NFT?

NFT (Non-Fungible Token) = a token that cannot be replaced or exchanged for another.

Fungible: 1 ETH = another 1 ETH (interchangeable)
Non-Fungible: a specific NFT is not identical to any other NFT

Each NFT has a unique ID and metadata

NFT Components

1. Smart contract: defines ownership rules and transfer logic
2. Token ID: unique identifier
3. Metadata: image, audio, or attribute data (usually stored on IPFS)
4. Royalties: automatic % payment to the creator on secondary sales

Use Cases for NFTs

Digital Art

CryptoPunks: issued in 2017, total of 10,000 pieces
→ 2021 peak sale: approximately $20 million (single piece)

BAYC (Bored Ape Yacht Club): membership NFT
→ Owners receive community access + commercial licensing rights

Gaming Items

P2E (Play-to-Earn): a model for earning income through games
→ Axie Infinity: earn tokens using NFT characters
→ Problem: economic sustainability (Ponzi structure concerns)

Strengths of in-game NFT items:
- Ownership persists even after the game shuts down
- Theoretically usable across different games / platforms

Music and Creative Works

Musician NFT use cases:
- Album NFT: limited-edition collectible + fan perks
- Royalty NFT: NFT holders share in music revenue
- Ticket NFT: unforgeable concert entry passes

Sports Collectibles

NBA Top Shot:
- Sells official NBA highlight clips as NFTs
- Single clips have traded for hundreds of thousands of dollars
- The digital equivalent of physical trading card collecting

Technical Structure of NFTs

ERC-721 vs. ERC-1155

ERC-721: Ethereum's NFT standard (1 token = 1 unique asset)
ERC-1155: Mixed fungible + non-fungible tokens (useful for games)

Example: gold coins (fungible) + legendary sword (NFT) managed in the same contract

The Storage Problem

The NFT itself lives on the blockchain → permanent record of ownership
The actual content (image) is usually on IPFS or a centralized server

Risk: if the server shuts down, the image can disappear (the NFT record remains)
Solution: use IPFS (decentralized storage) or Arweave (permanent storage)

The NFT Bubble and Reality

The 2021 Boom and 2022 Crash

2021 NFT market:
- Total trading volume: approximately $25 billion
- BAYC floor price: peaked near $400,000

2022–2023:
- Most NFTs lost over 90% of their value
- "Dead NFTs": millions of collections with zero trading activity

A Sober Assessment

Cases where NFTs have genuine value:
✓ Strong community (BAYC, Pudgy Penguins)
✓ Practical utility (gaming, membership, events)
✓ Works by well-known artists

Cases where NFTs have no value:
✗ Anonymous team with no roadmap
✗ The only "value" is "it'll be worth more later"
✗ Hype with no connection to real-world assets

SBTs: Soulbound Tokens

SBT (Soulbound Token) = a non-transferable NFT, proposed by Ethereum co-founder Vitalik Buterin.

SBT use cases:
- Degrees and certifications (recorded on blockchain, forgery-proof)
- Credit history (potential for under-collateralized DeFi loans)
- Medical records (accessible only with patient consent)
- Proof of voting eligibility

Property: once issued, cannot be transferred to another wallet

Global NFT Market and Regulation

Current landscape:
- Major exchanges (Coinbase, Binance) offer NFT services
- NFTs integrated into various blockchain ecosystems (Ethereum, Solana, etc.)
- Entertainment companies issuing artist and IP NFTs

Regulatory issues:
- Whether NFTs are securities (utility vs. investment purpose)
- Legal status not yet clearly defined in most jurisdictions
- P2P trading without exchanges is possible → self-reporting tax obligations

NFT = proof of ownership of a digital asset, not the content itself ERC-721 (single NFT) vs. ERC-1155 (hybrid token standard) Real value = community + utility + scarcity SBT = non-transferable NFT → used for credentials and identity verification