Beyond art: names, tickets and tokenised assets

Pictures made NFTs famous, but the underlying idea is plain: a unique token that one address holds. That is useful wherever something must not be duplicated. This lesson looks at four such uses and the one question to ask about each.

Names

A wallet address is a long string that is easy to mistype. The Ethereum Name Service, or ENS, lets you register a readable name ending in .eth and point it at your addresses. Someone can then send to the name.

Three things to know:

• The name is an NFT. ENS describes names as held onchain as NFTs. Whoever holds the token controls the name.
• It is rented by the year. You pay a yearly fee. If you do not renew before the name expires, you can lose it, and someone else can register it.
• The risk is misdirected money. If a name you gave out lapses and another person registers it, payments sent to that name go to them.

A name is also easy to imitate with a look-alike spelling. Lesson 31 covered checking an address before you send. Check where a name resolves in the same way.

Tickets and access

The ERC-721 documentation lists access keys and numbered seats for concerts and sports matches among the uses of the standard. The token acts as a ticket. A venue or a website checks that your address holds it.

The token proves only who holds it. Whether the door opens depends on the organiser honouring it.

Receipts for a place in a queue

Some protocols use NFTs as receipts. Lido is one example. When you ask to withdraw staked ETH, Lido gives you an NFT that stands for your withdrawal request. When the request is ready, the holder of that NFT claims the ETH.

Two consequences:

• The receipt can be transferred, so whoever holds it can claim.
• If you send it away by mistake or sign an approval that lets a scammer take it, the claim goes with it.

Treat an NFT like this as the money it stands for.

Tokenised assets

Tokenisation means creating tokens that stand for assets from outside crypto. A US Federal Reserve paper defines it as constructing digital representations for non-crypto assets, which it calls reference assets. The reference asset might be a bond, a share in a fund, gold or property.

The token moves on a blockchain. The asset does not. The bond stays in an account and the gold in a vault, held by an issuer or a custodian.

So the token is a claim, and a claim is only as good as the party that must honour it. The Fed paper also points out that tokenisation ties crypto markets more closely to the traditional financial system, so trouble in one can spread to the other.

Stablecoins work on the same principle. Lesson 10 explained that a stablecoin is a token backed by reserves held by an issuer.

The one question

For any NFT or token that claims to stand for something else, ask:

Who has to honour this, and what happens if they do not?

• A name: the naming system's contracts, and you, by renewing on time.
• A ticket: the organiser.
• A queue receipt: the protocol's contracts.
• A tokenised asset: the issuer, the custodian and the law of the country they operate in.

If the answer is a smart contract, the risk is in the code. Lesson 45 covered that. If the answer is a company, the risk is the company. Either way, the blockchain records who holds the token. It does not make anyone deliver.