• January 28, 2023

The Next Wave of NFTs will be Dynamic

ÖIn the past few months, non-fungible tokens, also known as NFTs, have broken into public awareness, expanding and even questioning our collective understanding of digital scarcity and ownership. Before Beeple’s now-famous NFT artwork worth $ 69 million hit the headlines, NFT’s Twitter feeds and clubhouse chat rooms had taken over. Many artists, game designers, and celebrities argued that this new technology would completely disrupt their industry.

While NFTs are certainly on the rise, a large chunk of these blockchain-based collectibles that we see in the market are still facing two major limitations. First, are these supposedly unique NFTs proven to be rare? Rarity gives NFTs their value and it is much harder to guarantee than most people realize. The second key factor is whether NFTs can actually interact with the real world to unlock novel gameplay and incentive mechanisms. Only when we move beyond static digital collectibles to truly dynamic NFTs will the blockchain ecosystem and the world see the true value of this new unique asset class.

Why demonstrable randomness is half the equation with NFTs

Many NFTs, especially those that are collected through random “drops” such as virtual trading cards or in-game items, gain a significant portion of their value due to their perceived rarity. Just like with real trading cards, the lottery-like process of opening a pack in hopes of finding a rare item is extremely tempting as everyone has the chance to own something truly unique. As one of the largest NFT projects Ether cardsAs recently made clear, randomness is “one of the key elements in creating value and fun in gamified NFTs”.

At NFTs, this lottery-like process of fairly distributing collectibles and assigning unique attributes relies on random number generation (RNG) – a functionality that blockchains cannot securely provide themselves. While some projects have looked at more opaque, off-chain RNG models, as well as on-chain techniques like using existing block data, none of these approaches guarantee the tamper-proof randomness that NFTs require. For example, a malicious blockchain miner could manipulate block hashes that are used as randomness to exploit the coinage process of NFTs. If someone wrongly “won” an NFT with the “rarest” attributes during its initial distribution, it would seriously question the value of that asset and the legitimacy of the underlying protocol.

Fortunately, there is a solution for blockchains to access a secure random source for powering NFTs: oracleThese are entities that can supply and calculate data from outside the blockchain, ie the “real world”. By computing data out of the chain, oracles can generate random numbers that are fully verifiable using a complex mathematical function that cannot be tampered with by a central operator, self-interested blockchain miner, or even the game designers. Oracle-based randomness is already used by several NFT platforms and Blockchain-based dApps this has been proven to require random input to run On-chain lotteries, to distribute unique digital collectibles, and Assign infrequent attributes this increases the value of NFTs. With the verifiable randomness of oracles, both NFT owners and game developers can rest assured that there is cryptographic evidence that every asset is minted and updated in a way that is demonstrably random and therefore demonstrably fair.

The next generation of NFTs will be dynamic

While oracles can play a key role in safely generating the randomness necessary to imprint NFTs, they can also play a much larger role throughout the life cycle of an NFT. By connecting NFTs to data outside of a blockchain, developers can create dynamic NFTs This can evolve and improve in relation to real-world events, unlocking a host of new features for digital collectibles, as well as completely new game mechanics.

For example, a soccer player’s digital trading card may contain performance statistics such as goals scored. The same trading card, ported to an NFT format and connected to the real world via oracle networks, can automatically update its stats in response to the player’s live game performance. NFT projects can even automatically mint new NFT cards in real time when a player reaches a certain milestone, e.g. B. a certain number of completed hat tricks. This dynamic behavior would be an evolutionary step in the way unique assets are created and traded.

The utility of dynamic NFTs extends well beyond trading cards and the gaming industry. With oracle networks, governments could issue fraud-proof digital passports linked to NFT counterparts on the blockchain. With oracles, smart contracts can query and verify personal credentials as well as attach data to a person’s decentralized digital identity based on a real-life event. Land deeds could also be represented in the chain as dynamic NFTs that are automatically evaluated in real time by oracle networks that pull data from local IoT sensors, weather indices and property records. This would allow for more objective, data-driven property valuations that could be used as collateral. These use cases are just a few examples of the wide range of real goods and processes that can be represented as dynamic NFTs to generate a new class of automatically updated assets that are more liquid, more data-driven, and more accessible.

NFTs bring digital assets into the public imagination, but if they are to become the foundation for greater mainstream adoption of blockchain-based systems, they must prove that they can gain user trust and evolve beyond the cute static collectibles, who they are today. Allegedly rare, dynamic, oracle-driven – these are the decisive factors for the NFTs that will shape the works of art, games and industries of the future.

The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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