Explaining Dynamic NFTs: A look into the dynamic future
Explaining Dynamic NFTs: A look into the dynamic future
The progress of the traditional NFT market
Due to a widespread adoption throughout the crypto community and Web3 movement, non fungible tokens (NFTs) are heading to the mainstream direction. With spotlights in media outlets and a number of well-known public figures launching their collections, NFTs became one of most popular technologies.
The NFT market is expected to reach approximately $1.6 million in 2023 with an expected growth at a compound annual rate of 18.55% from 2023 to 2027. Basically, this means that the market size will amount to approximately $3 million by the end of 2027.
NFTs are not a novel concept of digital assets anymore. NFTs are virtual goods that can represent anything from digital art and music to tweets. Each of them is unique due to a special code, and can be traded like any other valuable item.
You might ask what is different now compared to the times they first emerged? The answer lies in their nature – static and dynamic. As the name suggests, static NFTs cannot be changed or modified in any manner.
Unlike their static counterparts, dynamic NFTs are able to be altered, updated and modified under certain conditions. Due to such an interactive nature, there has been a surge of interest in dynamic NFTs as the NFT market progresses.
If you don't quite understand the concept of NFTs, we suggest reading this article: 'How does an NFT have value?'.
What are dynamic NFTs?
The concept of dynamic NFTs presents a significant evolution within the NFT space due to levelling up the functionality and interactivity of these digital assets. Dynamic NFTs or dNFTs refer to a new generation of NFTs that encompass programmable and interactive features, along with responsiveness to external conditions or inputs.
For example, imagine a vintage vehicle NFT; the metadata of such digital assets could change depending on a number of factors such as historical data, maintenance records or value on the market. Additionally, dynamic NFTs are able to reflect other events such as ownership changes or modifications made to the car.
These ‘living’ NFTs have been designed to be programmable and provide new possibilities for value creation and personalisation within the digital economy. Looking at the vintage car example, it is evident that a digital asset has been enabled to evolve and be modified over time.
Let's lay down another example - a dynamic NFT could represent in-game items or characters that evolve and gain new abilities based on external conditions and the player's progress.
What does this mean for creators? Unlike traditional NFTs with fixed properties, dynamic NFTs provide an architecture that easily responds to external inputs such as environmental data or market prices. Interactivity and programmability is added to a unique digital asset with the aid of smart contracts and other technologies. For creators this means more opportunities to provide engaging experiences for their customers, new business models and more revenue streams.
Difference between static NFTs and dynamic NFTs
Traditional or static NFTs refer to unique digital assets with a fixed form and the inability to change over time. Once minted to a blockchain, they cannot be altered; the token’s metadata is immutable regardless of any external factors or the passing of time. For example, once you mint a piece of digital art as an NFT, it shall remain the same.
Apart from the obvious difference that dynamic NFTs can be altered while their static counterparts cannot, there are few other features that should be highlighted for the sake of this comparison.
Let’s start with coding – dynamic NFTs require more complex smart contracts. Static NFTs are typically regarded as more secure due to their immutable nature. This makes them less susceptible to errors or fraud since any changes would be apparent. Additionally, their static nature means that they can be more easily authenticated since any user with access to the original data can verify their immutable status.
On the other hand, dynamic NFTs can be authenticated by anyone with access to the most recent data which means they also include a substantial level of security, yet more prone to errors as changes may not appear immediately.
It is not about just being changed or modified – dynamic NFTs can level up. The underlying asset represented by a dynamic NFT can obtain novel properties, traits, content or visual effects. This evolution is based on a set of rules contained in the smart contract. The change is founded on external triggers, actions of the holder or periods of time, along with any other possible programmable decision.
Therefore, they evolve based on user conduct and real-world events, unlocking novel applications beyond the initial concept of static collectibles, along with bridging the gap between the physical and digital worlds.
While static NFTs provide a single utility following the minting process, dynamic NFTs offer constant utility. Since they are enabled to obtain new traits and level up constantly based on a set of rules, their utility is ongoing. This is especially helpful for the gaming industry since levelling up goes hand in hand with the gameplay.
When it comes to value, static NFTs offer a fixed value in relation to their original form. In contrast, dynamic NFTs can increase in value over time.
How do dynamic NFTs work?
Based on blockchain technology as static NFTs, dynamic NFTs are built as an immutable and verifiable record of ownership. Unlike their static counterpart, a dynamic NFT is created using a smart contract that encompasses a set of rules for how the NFT can change.
We have already mentioned that these rules can be based on a wide range of factors such as real-world data, environmental data, time of the day and other owner’s preferences. Dynamic NFTs function by storing data in a format that can be edited.
Traditional NFTs are usually created using the ERC-721 token standard while dynamic NFTs are based on another one – the ERC-1155 token standard. It refers to a multi-token standard that enables the creation of fungible, non-fungible and semi-fungible tokens. Semi-fungible simply means that a token can be modified if needed.
Dynamics are enabled through the use of smart contracts that automate functions such as appearance, interactivity, animation or conduct of the NFT depending on particular circumstances. In a dynamic NFT, smart contracts provide instructions regarding the token's metadata and external triggers.
For modification purposes, dynamic NFTs utilise oracles. Basically, oracles transfer external data to the smart contract causing the change of the NFT’s metadata. When this happens, the token’s appearance is updated and the changes are reflected on the blockchain.
If you want to understand oracles better, check out this article: ‘What is an Oracle in Blockchain?’.
Similar to other NFTs, smart contracts define how dynamic NFTs can be traded and how royalties should be distributed.
Advantages of dNFTs
Obviously, interactivity and programmability are clear upper-hands when it comes to dynamic NFTs. These features are directly linked to customer experience and novel revenue streams. Simply put, creators of digital assets can provide a more engaging experience to their customers.
However, dynamic NFTs offer several advantages over static NFTs that should be highlighted as well. Let’s check them out.
Increased interactivity
Due to the ability to be programmed to respond to user output, dynamic NFTs aid in increasing engagement with the product or digital content. If you offer something that can constantly evolve, users tend to come back for more.
Increased interactivity is linked to enhanced loyalty. If users feel engaged by the content and get new ways to enjoy it, it is likely that they will become loyal customers. This provides a viable business model to build on and create brand recognition.
Better immersion
Immersion is associated with user experience; the potential to create a higher level of immersion for users means that they are able to discover new things constantly without getting bored. A more enjoyable experience means you are getting your money’s worth.
That brings us right to increased virality. If the content is enjoyable, there is a big chance it will be shared with other users.
Enhanced analytics
Dynamic NFTs can be used to provide enhanced analytics and insight into how users interact with the content in question. This further amounts to better optimisation of the offering and making changes based on feedback.
Novel use cases
Over time and with the adoption and development of NFT technology, new possibilities and types of NFTs emerge. Unlike static NFTs, dynamic NFTs can be utilised for a wide range of new use cases.
This opens up new revenue streams and enhances the existing ones as well. For example, a dynamic NFT can be in the form of a ticket that changes to reflect the status of an event or an in-game digital asset that evolves with the player’s progress.
Are there any disadvantages?
Even though dynamic NFTs provide a wide range of benefits, there are a few challenges they need to overcome.
The first challenge is linked to complex smart contracts that are needed to manage them. There is a risk of bugs in the code or unintended behaviour that could be difficult to patch after deployment. Aside from potential errors, complex smart contracts could incur higher costs for creators and users when compared to traditional static NFTs.
Secondly, their stability is still in its unproven phase. Since they represent a novel and relatively untested application of blockchain technology, there is a possibility of encountering security loopholes that have not yet been discovered.
What are the most popular dynamic NFT use cases?
Dynamic NFTs offer more use cases outside traditional static NFTs. Let's take a closer look at the most prominent ones.
Gaming and the Metaverse
The use case of dynamic NFTs within the gaming industry and the Metaverse is evident – they refer to characters, items and avatars that can evolve and change in line with the progress and moves taken by the player.
For example, imagine you are playing a RPG game with a wide range of creatures and battles. You could have weapons as dynamic NFTs that can be modified throughout the gameplay. All game advancement would be reflected in the metadata of the corresponding NFT. This adds up to both enhanced gaming experience and digital ownership.
These ‘living’ tokens could have an important impact on play-to-earn (P2E) games, especially through the use of the Verifiable Randomness Function (VFR). The VFR function enables the random distribution of in-game digital assets and traits, which determines the rarity of these factors. Random results are auditable on the blockchain.A
Additionally, dynamic NFTs can be used within the P2E ecosystem to create other dynamic objects such as power-ups and in-game currencies.
When it comes to fantasy sports, dynamic NFTs have the power to enhance the whole gaming experience since features of an athlete's NFT can be modified based on their real-life performance.
Digital art
NFTs, either static or dynamic, are closely linked to digital art. Dynamic NFTs enhanced this area by providing a few novel features. For example, a creator can offer a collection of NFT artwork that changes colour or encompasses specific time-bound features based on temperature or location.
Unlike static digital assets, these tokens are able to mimic real-world art installations and provide interactivity with the audience. This trait could enhance engagement at exhibitions of digital artwork.
Collectors would have dynamically evolving items that constantly change. This provides a new era of creativity for artists exploring the boundaries between digital and physical art.
Identity
Digital identity management is an interesting real-world use case of dynamic NFTs. Due to their changeable nature, they can represent an individual’s identity and store related data such as citizenship, place of residence and contact details.
For example, governments could issue passports in the form of dynamic NFTs that update information as the individual travels. Given that all pieces of information are stored on the blockchain, there would be no need for additional paperwork. Possibilities of fraud would be reduced to a minimum due to blockchain being a verifiable immutable record of data.
Real estate industry
When it comes to the real estate industry, it is important to keep all records accurately. Prices of property are based on a number of factors such as the law of supply and demand, maintenance, and interest rates.
In simple words,information regarding real estate is constantly changing. Therefore, it is vital to have the ability to update all relevant data in real time. This can be seamlessly done with the use of dynamic NFTs since these changeable tokens can keep immutable records of transactions, ownership credentials and maintenance works that can be updated frequently.
Fundraising
The use of blockchain technology, decentralised finance (DeFi) and NFTs for the purpose of fundraising is not a novel concept at all. However, dynamic NFTs can level up this activity.
For example, dynamic NFTs can be programmed to mint when fundraising reaches a particular amount or to unlock hidden content. This could make the whole fundraising concept more appealing to the general public.
Examples of Dynamic NFTs
The potential of dynamic non fungible tokens can be best spotted through a list of examples. Examples of dynamic NFTs include use cases within the spheres of digital art, gaming, sports and collectibles. Let's explain them briefly.
Crossroads by Beeple
The popular digital artist Mike Winkelmann aka Beeple sold his ‘Crossroads’ piece of digital art for $6.6 million. The digital image was inspired by the 2020 US presidential elections; it was primarily designed to feature one of two possible animations, depending on the outcome of the election.
Following Joe Biden winning the election, the image changed to depict the former president Donald Trump lying in a heap.
CryptoKitties
The popular NFT-based game enables users to trade and breed digital cats. Each kitty is represented by a dynamic NFT that can transform with the passage of time. This amounts to an enhanced user experience and the capability of players to constantly update cat-related data such as visual appearance, genes or personality.
La Melo's NFT collection
Good news for basketball fans; the NBA player LaMelo has utilised the potential of dynamic NFTs by creating a collection ruled by on-chain sports data that changes depending on the outcome of a game.
For example, if an athlete scores more than 1,000 points in a season, a corresponding NFT avatar will change to reflect that achievement. LaMelo himself won the Rookie of the Year award making the dynamic NFT representing him turn gold.
The future ahead
When we put it simply, dynamic NFTs are basically tokens with memory and management abilities. The power of these tokens lies, besides those two features, in their existing and potential use cases. From tickets and digital art over customer loyalty programs and sports to education and real estate, the list is pretty broad.
If dynamic NFTs manage to overcome their challenges, there is a bright future ahead of them. Using these tokens, creators and brands can provide more immersive and interactive user experiences. A new form of digital ownership is here.