Actual Use Cases for NFT’s: From Gambling on the Weather to the Stock Market and Derivatives Trading

In my last article  I talked about how NFT’s have primarily been used much like the global art trade has traditionally been used for money laundering and tax avoidance. But what if there was an actual use case for them other than the idea of “true digital ownership”? After we talk about what smart contracts are, we’ll talk about the top 3 industries that will be affected by NFT mass-adoption. 

**And yes, this should probably be titled “introduction to smart contracts and NFT’s and future use cases for each” but I just click-baited your ass because you’ve never heard of a smart-contract. Buckle up, this article is a long one, but I think it’s my Magnum Opus.

Quickly, I’ll give a background on an NFT in laymen’s terms, if you aren’t already aware.

Imagine you’re holding the deed to your house. That deed is not the same thing as your house, it is simply a piece of paper. That deed is extremely important to you, however, because it signifies in the eyes of the law that that house is yours. An NFT is a similar concept to the deed to your house. Take any line of code, be it an image, a gif, a video, a piece of software, or even a physical, non-digital asset , encrypt the data and assign it to yourself, and then add this to the ethereum blockchain. Just like the deed to your house is not the same as your house, the NFT is not the same as the image itself. Many people can have an identical house, but the deed signifies that that one is yours. A non-fungible token is essentially the same. Anyone can have an identical copy of the image that you’ve turned into an NFT, but only you own that image in the eyes of the ethereum blockchain. And the big difference is that a deed could be counterfeited or forged. That could cause someone to contest you for ownership, with the only middleman being the government, and the government doesn’t necessarily have to act in your best interests. With an NFT, this data cannot be faked, because it is encrypted and added to the blockchain. Now everyone who runs a full node can see who owns the rights to the NFT, and no actor can contest it. This is the beauty of a decentralized system, that it is trustless and verifiable, and requires no middleman.

So what’s the point of that?

Well, Nothing really yet. Anyone who wants to say that the NFT market is changing the way we look at digital art doesn’t really understand the point. So far its main use case is just money laundering, tax avoidance, which you can read about more in my previous article, here. People also use it to flex that they have money, but they don’t really get it either.

But the important technological advancement that NFT’s bring is the concept of digital asset ownership, not the artwork. NFT technology is going to disrupt lots of industries with its digital asset ownership, the digital art was just the first and most people are sitting here wondering why a picture of a cartoon rock sold for $1.3 Million dollars.

That brings me to Smart Contracts. Before I can talk about how NFT’s are going to change the world, you need to understand the concept of a Smart Contract.

So what is a Smart Contract? A Smart Contract is a code which consists of three portions:

• The Boolean “If ____, Then ____” Statement
• The State Sensing Protocol
• The Order Execution System

This might not sound like a transformative technology initially. In fact, it sounds like any other contract in the real world, just codified. Well, the added bonus of a smart contract is that it is on the blockchain. 

Here’s a quick example for your dumb human brain:

Imagine Satoshi bets Vitalik 50,000 $DOGE that it will rain tomorrow in Albuquerque, New Mexico. Is that a good bet for Satoshi to make? Probably not, it never really rains in New Mexico from what I’ve heard, but Satoshi doesn’t know that because he’s never been there (he might not even be real, he could be an alien, but that’s a different article altogether).

Anyways, the conditional statement becomes:

IF [rains in Albuquerque, New Mexico tomorrow]

THEN [Vitalik pays Satoshi 50,000 $DOGE]

ELSE [Satoshi pays Vitalik 50,000 $DOGE]

This conditional statement is added to the blockchain so that multiple witnesses (everyone running a full node and everyone who will run a node in the future) can verify that both counterparties are in agreement on the terms of the bet. Along with this short boolean code is the state sensing piece of code.

This analysis protocol will also be agreed on by the counterparties, and must be unambiguous. For Example:

If there are three weather stations in Albuquerque, they must each be in agreement that it rained in Albuquerque, and Vitalik and Satoshi must both be in agreement that this state-sensing protocol is sufficient to determine the winner of the bet.

Finally, along with the prior two pieces, an order execution mechanism must be in place, so that regardless of any hurt-feelings, the bet is payed in full. This means that when it ultimately doesn’t rain (because it never rains in New Mexico) the code automatically transfers 50,000 $DOGE from Satoshi’s DOGE wallet to Vitalik’s DOGE wallet without user input after the contract is drawn up. There’s no ducking the bookie, because your debts are payed automatically and encoded into the mechanics of the contract.

Now apply these two concepts to:

• Sports gambling
• Gaming
• Decentralized Stock Market & Derivatives Trading

The list could keep going on and on because the number of applications are endless. This technology, despite widespread basic understanding of the principle, is still in its infancy. It seems like every 12 year old on fortnite has at least heard of an NFT (have we reached a market peak?) but as a society we have yet to scratch the surface for actual NFT and Smart Contract use cases.

1. Sports Gambling

Imagine, for just a moment, betting with no house.  The old adage of “the house always wins” is gone, because there is no house. The entire betting system is Peer-to-Peer with no middleman, no bookie. Since there’s no house, there’s no way for them to set the lines to maximize profits. The lines will now be set by the bid/ask spread of the bettors. If someone makes a ridiculous bet and the odds are uneven, then supply and demand dictates more people will pile on the other way and cause the bet to reach equilibrium at a globally-agreed upon line. So we have our “If, Then” Boolean Protocol. Now we just need our State-Sensing and our Execution Mechanism.

The state sensing mechanism would be the score of the game or some other recorded metric about the game, which would be audited by judges or universally audited on the blockchain. This could work for prop bets as well, with people watching live and judges on site at an event reporting the outcome of such prop bets. Majority rules in this situation, but if someone feels cheated they could “challenge” the decision, and it would be open to all players on the decentralized betting application to watch footage of the event and determine if the decision was made incorrectly or maliciously by bad actors. In order for a bad actor to rig the vote, they would have to put-up 50% or more of the funds being bet on a particular line. The punishment for rigging a vote could be losing your entire bet (which would then be distributed throughout the platform, or burned, causing de-inflation of the coin) and/or banishment from the platform.

And finally, our Order Execution System.  When you create an account on the decentralized book, you enter your wallet address, or build a new wallet on the site. When you place a bet, you enter into the contractual agreement, and when you win or lose, funds are automatically entered into your account.

Ok, I started you off easy with a purely-smart-contract case, similar to that of my original example of Satoshi and Vitalik betting on the weather. Now I’ll give you a purely-NFT based case. Then, we’ll mix the two in our third example.

2. Digital Gaming with NFT-Backed Games, Characters, Items, In-Game Currency

I can’t talk about it here, but if you know me personally, you know there’s a particular ticker that relates to gaming that I’m extremely excited about because NFT’s are about to upset the entire industry, and no other company can even see it coming.

If you have ever tried out PC gaming, you probably know about Steam. Steam is an online game store, where you can buy the license to games and download the game packages, characters, in-game items, etc. Its the biggest name as a digital gaming retailer for PC right now. It works like this: You make a steam account, you load your money onto steam one way or another, and then you buy your game and download it. Now, what happens if Steam were to go out of business? You have the game downloaded, you have the game launcher, you have everything you need. What you don’t have is the license. You gave steam your money, they gave you the game for free, and you payed to rent the license. As soon as the steam servers go down, that license is no longer yours, and no longer usable. The solution? NFT’s.

If your copy of a game is backed by an NFT, you really own that game. There are many like it, but that one is yours. It is not the same as a license, because there is no central location for the NFT to be authenticated. If Steam servers eventually go down, the NFT will be authenticated in the blockchain by every location running a full node, and you can continue to play it without Steam’s permission. (That brings up the idea of internet censorship, which will be gone with web3.0, but the mechanism is a little abstract for my little brain to understand right now so I’ll get to it in a later article. All you need to know is Twitter and Facebook are shaking in their boots)

In addition to you truly owning the digital game with an NFT platform instead of simply “renting” it for as long as the licensing company exists, another advantage is a resurgence of the used-game market. (That ticker I talked about earlier that I really like- they’re known for their physical used-game market- just a little hint). You’ll be able to buy used digital games at a discount and see the ownership history of the software package. You could collect games played by celebrities, and have verifiable proof that yes, that specific copy of 2K really was owned by Lebron, or the World Champion of Magic the Gathering really won using that copy of the game.

This brings us to another NFT use case for the gaming industry: in-game items and collectibles. Imagine each item in a game was backed by an NFT and could be bought, sold, traded, or collected? Imagine you could purchase your favorite streamer’s gun from warzone in a digital marketplace, or an item that was used to win a tournament. Imagine there were hundreds of unique clothing/skin options available based on completing missions in a game like GTA, and you could buy/sell trade for one you liked with other players. The collectibles/gaming memorabilia market would be enormous, but it is as of yet untapped potential.

One final point while we’re talking about gaming: cross-game currency.

Do you have 2,000 hours of Elder Scrolls logged, and want to be competitive with your friends who play minecraft, but don’t want to spend another thousand hours getting items?

Introducing: GameCoin

Earn coins by playing, or purchase with fiat. Use Gamecoin to purchase collectibles, items, weapons, and any other in-game item. Buy from your friends, or search for what you want from the marketplace. Low on real money? Simply transfer your GameCoin back to fiat currency.

I think this concept has the ability to slingshot a “certain company” *wink* to the forefront of a $300B and growing industry. The hypothetical “GameCoins” could even be mined by simply playing your favorite games, and can be transferrable for real money. Lots of semantics need working out first, but this is the most promising use case for NFT tokens and coins in my opinion for leisure and entertainment activities.

OK, now to find an industry that will be revolutionized by both true digital ownership and smart contracts. You’re probably saying “but you already listed them above, why are you trying to make it suspenseful??”

Anyway..

3. The Stock Market, Derivatives, and the End of the Manipulation

First, The types of manipulation:

If you look up “naked short selling” the definition  on google is something along the lines of  “selling an asset without first buying or borrowing that asset“. This would be akin to borrowing the title of someone’s car, making 50 copies, and then selling them on the open market without disclosing whether or not the original, with the goal of buying them back once they decrease in value. If I did that, it would be completely illegal and I’d go to jail for a long time. When a market maker naked shorts a company into oblivion, the company generally goes under, due to inflation of the stock certificate supply AND increased perceived sell-side trades in the eyes of the market. Naked short selling should be illegal, and IS illegal, except for the only people capable of doing it. Market makers have an exemption for vague and unconvincing reasons. Something like “maintain efficient flow of liquidity” or something like that. This is why Toys-R-Us, Sears, and thousands of other companies which were doing fine went under suddenly. Someone decided it was time for them to end, and they were shorted into oblivion, which became a self fulfilling prophecy.

To be clear: I am not arguing against the ability to legitimately and fairly short a company, but entities which participate in naked short selling destroy good companies that were otherwise fine, spend no money creating shares, then keep all of the profits from the buyers. When the company goes under or gets delisted, they keep all of their profit tax free!

Above all, it is impossible to know whether you are being sold a real or fake share unless you directly register your shares. How hard is it to directly register your shares? I can assure you it is difficult. In fact, it is difficult on purpose. so much so that it is actually Illegal for a broker to give you instruction on how to directly register your shares of a company. The DTCC, where the shares are kept, knows exactly how many real and fake shares exist, but since its a self-regulatory agency and not actually part of the government, they are under no obligation to tell anyone.

Other problems exist which are manipulative, such as market-makers front running trades. Front running trades goes like this: When you buy or sell a share, either limit or market, you tell your broker exactly what price you are willing to purchase/sell that share for. If they can find one for less/more, they can pocket the difference and give you /sell the share at the price you requested. This is a privilege only brokers and market makers have, which isn’t exactly fair. This ends up being even more expensive than paying for a broker on a monthly subscription if you trade regularly or in large orders.

There’s also the issue of Dark Pool Trading. Originally, Dark Pools (which sound like the title of a horror novel where scum live, and that’s much like what they are in real life) were made to allow indexes to buy and sell huge blocks of trades without creating insane volatility on index-shuffling days. Like if a company gets added to the S&P 500, hundreds of thousands of shares are bought in a single day. On a lit market, this would send this stock to the moon, so unlit markets were created, where these sales are not shown on the ticker. These dark pools are certainly being used and abused today. in 2014, dark pool trades accounted for 14% of total volume in the US stock market. By 2017, that was up to 40%. Extrapolating out to today, and god only knows what percent of retail trades are routed to the dark pools. If market makers are long a company, they can route trades that bring down a share price to unlit markets, while routing buy-side trades to lit markets. This brings the share price up. If they are short a company, they can do just the opposite to knock the price down. Certain publicly traded companies have seen as much as 80%-95% of their daily volume traded in dark pools in 2021.

Now what if each share of every US company was systematically replaced by a unique NFT and put on a new blockchain?

Well first of all, naked shorting would be impossible. The word “Non-Fungible” means “cannot be faked”. So the idea of creating and selling synthetic shares is no longer possible. The entire transaction history of each share could be found on the blockchain. It would also be possible to audit the entire blockchain to count the total number of shares that exist.

NFT’s could be traded Peer-to-Peer on the blockchain, so front running trades would no longer be possible. A decentralized exchange would manage the bid/ask spread and fairness would be built into the program.

Dark Pool Trading would no longer be possible. But were they ever really necessary? Hiding trades in a dark pool is like lying to the public about the trades that are happening among the institutions.  One of my favorite quotes of all time is by Robert Breedlove (I think) and on Lex Fridman’s podcast he said “Lies are debts to the truth which must be paid back”. As profound as that is, he went on to say this:

Lies are very energy inefficient. They sacrifice short run volatility but increase long-run volatility… Telling the truth is about the most energy efficient thing a person can do, you’re just recounting what happened. But when you lie you have to create for yourself a useful fiction, and if more questions are asked, you have to make another useful fiction, and another, and eventually you must pay back your debt to the truth.

-Robert Breedlove

Now lets look at the options market. You can use margin to apply leverage to your portfolio. You can buy calls and puts contracts which allow you to purchase or sell securities for a certain strike price. Oh did someone say the word “contract”? Now add in “Smart Contracts”. The shares which you can hold as NFT tokens, along with US Dollars, can be accessed by the smart contract in a very straightforward manner. The “If, Then” Boolean statement of the contract stays the same with an agreed upon strike price and whatnot, the ticker indicates the State-Sensing Protocol, and then you just need to built a decentralized stock trading platform that you can load a wallet onto that trades the NFT share tokens for US dollars.

Once this is accomplished, you have fair markets. No one can frontrun trades, because its a peer-to-peer network. No one can create synthetic shares because its not only illegal, but impossible for counterfeit shares to exist on the blockchain. Smart contracts will revolutionize the way options trading is carried out.

Conclusion

NFT’s in their current form are pretty useless. Its just expensive art used for tax fraud or flexing your cash with new technology. But I do believe this will become a technology that is as disruptive, if not more disruptive, than the internet was. The technology is still in its infancy, and some things need to be worked out, but I am excited to see how NFT’s and Smart Contracts revolutionize industries.

Let me know in the comments how you can see NFT’s or Smart Contracts impacting your industry, or any other industry for that matter!