Why NFTs had to be invented

by Arthur · November 28, 2022

Table of Contents

In short

Some of the earliest explorations of digital ownership in the crypto landscape began in 2012 with the use of “colored coins.” These were developed on the Bitcoin blockchain.
NFTs were invented due to limitations with similar tokens on the Bitcoin blockchain, colored coins only worked if all participants agreed on their value.
Unlike the Bitcoin blockchain, the Ethereum blockchain allows for a much more open approach.

What problem were NFTs designed to solve?

Everything that was ever invented was created to solve a problem. As for NFTs, they were created to address the limitations of their predecessors, which were created on the Bitcoin blockchain. It has taken several years for NFTs to evolve to their current state. Some of the earliest explorations of digital ownership in the crypto landscape began in 2012 with the use of “colored coins.”

Pre-NFT tokens: Colored coins

Unlike modern NFTs, which are usually linked to the Ethereum blockchain, colored coins were developed on the Bitcoin blockchain. Colored coins were intended to represent a variety of assets, both digital and physical, much like NFTs. However, due to limitations within the Bitcoin blockchain, colored coins only worked if all participants agreed on their value. If a single participant in the transaction disagrees that a colored coin is associated with a particular asset, the system collapses.

Move to the Ethereum blockchain

In the following years, there were several other attempts to issue assets on the blockchain. These include the peer-to-peer platform Counterparty, which eventually saw the first meme assets issued to the Bitcoin blockchain. But it wasn’t until around 2017 when these proto-NFTs were moved to the Ethereum blockchain that the full potential of connecting assets to the blockchain became possible. Unlike the Bitcoin blockchain, which was designed explicitly for use by the Bitcoin token ecosystem, the Ethereum blockchain and smart contracts provide a much more open approach. This proved beneficial to the creation of the first NFTs as we know them today, and allowed NFTs to be irrevocably linked to specific assets.

NFTs connect the digital world with the real world of physical objects

The uniqueness of an NFT also means that it can be a bridge between the digital world of crypto and the real world of physical objects. NFTs prove digital ownership and provide a tamper-proof record of transactions involving a digital asset. In recent years, NFT enthusiasts have begun to explore applications to connect NFTs to real-world assets as well. For example, real estate company Fabrica has used NFTs alongside traditional trusts to facilitate faster, secure and significantly cheaper real estate transactions. In this case, NFTs are used to represent properties. In other cases, popular clothing and fashion brands such as GAP and Nike have released NFTs that come with unique physical clothing. This world of “physical NFTs”, which includes both a digital NFT component and a linked physical asset, has the potential for rapid expansion. While not necessarily the original problem NFTs were looking to solve, it could still represent a significant part of the future of this technology going forward.