ERC-721

#web3-eli5

This is the original standard for NFTs. Each NFT minted requires a separate transaction on the block chain. Each token is completely unique. Even if every other aspect of the token is exactly the same, each one must have a unique TokenID.

Unique TokenIDs allow for tokens from the same contract to have different attributes, which leads to the concept of rarity within a collection.

For instance, as each token is minted, TokenIDs are assigned starting at zero and increasing by one with each mint. Lower numbered TokenIDs might be more valuable because they were minted first.

Creators can also create rarity by assigning various traits, with different levels of frequency, to each token at the time of mint. This is popular with PFP projects where the art is generated by layering different features over a basic form.

ERC-721s are also useful when you need to create an NFT that represents a real world asset. That means you could mint an NFT to replace the deed to a piece of real estate. You could also use them as provenance and proof of ownership/authenticity for a rare piece of art or luxury good.

Much like minting, each transfer of a 721 must be a separate transaction in the block chain. This can add quite a bit of cost if you ever have to move your NFTs between wallets.

  • Non-Fungible
  • Cannot be divided (only Fractionalized)
  • Can be more expensive to mint
  • More expensive to move multiples between wallets
  • Possible Royalties
  • Proof of ownership can be useful for token gating

How can they be used?

Much of the utility of ERC-721 tokens is the same as ERC-20s. The big exception is gas. I haven't come across a blockchain that accepts NFTs as payment for using their network.

There are infinite ways to use NFTs as part of a creative project. But you need to find the combination of utility that resonates best with your community.

Store of value

Since they are rare (in some cases one-of-a-kind), many NFTs are treated as pieces of art. Some people use "Blue Chip" NFTs like those from the Bored Ape Yacht Club or MoonBirds to store their wealth.

Trade

Until more recently, the high cost to mint and transfer ERC-721s on Layer 1 blockchains like Ethereum has made it hard to treat NFTs like currency. But the lower transaction costs of Layer 2 chains and alternative Layer 1s has made this easier to do.

Gary Vee used this concept when he airdropped 125,000 BookGames NFTs to promote sales of his latest book. Once his fans had their tokens they could redeem them for prizes ranging from sports collectables to other NFTs. The token/game theory of this launch is fascinating. I'm already researching a writeup for you on this one.

Initial Funding

When ICOs died, NFT drops eventually took their place. An NFT speculation bubble started in 2021 and ran well into the first months of 2022. Hundreds of projects raced to launch NFT collections during this time. Some had well defined roadmaps for the utility their NFTs. Others didn't bother with much more than a Twitter account and a mint page.

Something interesting happens when NFTs are used to bootstrap a project. It reverses the model of a creator building an audience before monetizing their content. The NFT becomes the test of product-market fit. If it’s successful, the creator can move forward with an actual product. Grass-roots marketing campaigns are essential to this model.

Liquidity can be lower with NFTs. It depends on the popularity of the project. But marketplaces like OpenSea, LooksRare and MagicEden simplify the process of buying and selling.

A word of caution… There have been just as many (or more) rug pulls in the NFT space as there were at the peak of the ICO craze. Be sure to do plenty of research before you buy in.

Rewards

A reward NFT can be as simple as an on chain recognition of someone's contribution or as valuable as a cash bonus. NFTs are used to reward a wide array of behaviors.

  • Promoting projects to other communities
  • Being an early user of a product
  • Proof Of Attendance/Participation (POAP) at both live and virtual events
  • Loyalty programs

Ownership

Because each ERC-721 is unique, they can be used as proof of ownership for both digital and physical goods. Some NFTs get their value because they prove you are part of a community. Others might be a certificate of authenticity that comes with a luxury good as well as a digital twin that can be worn by your avatar inside a digital world.

The uniqueness of each token makes it easier to market them as membership cards. This helps them avoid being classified as an unregistered security.

Governance

Many projects decide not to launch a coin (ERC-20 token) at all. Possession of an NFT is what grants voting rights. Just as with ERC-20 tokens, some projects will grant one vote per NFT while others limit each owner to one vote.

Access

The addition of traits to tokens opens up new ways to gate access to your community and your content. Instead of using the number of tokens to grant access to different tiers, projects can use the rarity of the NFT to determine what level of access you’ll have.

Belonging

I could have included this in the access category. But I think it warrants it's own header.

The smaller number of available tokens, and the art that is associated with them, is a natural community builder. With the possible exception of official blockchain tokens (think ETH for Ethereum or SOL for Solana) ERC-20 tokens don’t seem to have this effect. This is one of the reasons I recommend NFT’s as a starting point for Creators who want to build their communities with Web3 tools.

Passive Income

NFT holders who are committed to owning a project can generate income through a mechanism known as staking. In exchange for locking their NFT into a smart contract (and removing it from the market), they receive payments from the project. This reduction in supply drives up the price of the remaining NFTs along with the valuation of the project.

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