The New Use Case for NFTs – Solving Online Identity Verification

Updated: 14 April 2021
Updated: 14 April 2021

Miklos Zoltan

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In this article you will learn about:

  • What NFTs are and how they work
  • What NFTs can be used for
  • Is there a catch to NFTs?
  • Can NFTs solve the issue of online identity verification
  • Are there any privacy concerns related to NFTs

Imagine a world where anything can be forged and duplicated with perfect quality, virtually undetectable from the original… even you. Welcome to the internet, my friend. Dangerous for the careless, unforgiving for the unlucky, and a place where you can lose your identity with a single, wrong click of a button.

Online identity verification continues to be the leading challenge for businesses and individuals who desperately want to provide value over the internet. The problem is, any digital asset placed on the internet will be copied and anonymously distributed across the globe in an instant. Artists know this all too well through the constant threat of pirated songs, movies and artworks, and they have since been forced to adopt the sub-optimal streaming model to compensate.

But now, online artists and netizens have finally found a way to fight back against online pirates… enter: the NFT.

NFTs and Identity Verification

Non-Fungible Tokens

No doubt about it, Non-Fungible Tokens (NFTs) have recently taken mainstream media by storm, and peaked the interest of many, including myself, since its introduction way back in 2018. However, this article is not about the recent popularity of artworks for sale at crazy asking prices for a Lebron James dunk Moment, nor a Beeple collage that sold for $69 million, nor a Jack Dorsey tweet. Rather, this article will dive into the technology of NFTs and ask the greater question:

Could NFTs finally solve the problem of online identity verification once and for all?

Imagine using this technology to power online ID cards, like a digital driver’s license. Through smart contracts, you’d be able to control who you share your data with and even get paid each time your data transfers from one business to another. Think: finally being able to enforce Data Subject Rights for GDPR and data privacy regulations.

It sounds too good to be true, so is it? Let’s start with the facts.

What are NFTs?

At a high-level, NFTs serve as a certificate of authenticity for digital artifacts. Each NFT, or token, has a unique set of characteristics with an independent value that cannot be duplicated on the blockchain.

NFTs are typically developed on Ethereum ERC72 Non- Fungible Token Standard, which allows Ethereum users to:

  • Know the owner of a specific token
  • Get the current token balance of an account
  • Transfer tokens from one account to another, even fractional tokens
  • Know the total supply of the token available on the network
  • Approve token transfer and amount by a third party

Reference here for the code-specifics

Once created, the NFT’s attributes (contract address, uint256 tokenId) will be a globally unique identifier for a specific asset on an Ethereum chain. From there, a smart contract is created to manage how the NFT functions on the blockchain.

A smart contract is a program deployed to the blockchain network that executes transactions automatically within defined parameters. For example, if an artist uses an NFT to tokenize their artwork, they can set a smart contract on top of the NFT to receive royalties every time the NFT is bought, sold and transferred.

Why Ethereum?

You may be wondering why NFTs aren’t on Bitcoin’s blockchain, so here’s the simple explanation.

For a blockchain to work as a publicly verifiable ledger, everyone on the blockchain must have consensus and agree that each transaction is legitimate i.e., not a duplicate or a forgery. The Bitcoin blockchain and the Ethereum 2.0 blockchain have two completely different consensus mechanisms.

Bitcoin uses a consensus mechanism called Proof of Work, which requires Bitcoin miners to compete with each other by solving complex cryptography problems with computing power. Whoever wins gets to add the transaction to the blockchain and receives Bitcoin tokens as a reward. In the past, Bitcoin miners have disagreed on the validity of transactions and this has caused a hard fork in the cryptocurrency, which basically means that one blockchain ledger splits into two. This is where we get LiteCoin and other crypto derivations.

The hard fork scenario presents an issue for NFTs, because it would split one NFT into two, which clearly defeats the purpose of a unique digital asset.

To combat this, Ethereum 2.0 uses a consensus mechanism called Proof of Stake, which requires participants to validate ledger transactions by staking tokens as collateral. Think of it as betting your tokens that a transaction is legitimate; if your stake is verified, then you earn some ETH, but if it isn’t, then you burn your staked ETH. In the end, the Proof of Stake consensus mechanism avoids hard fork scenarios and keeps the legitimacy of NFTs intact.

Why Do Artists Need NFTs?

Digital content creators and artists have started using NFTs as a digital watermark on their work, because every single owner, offer, bid, sale and transfer is publicly verifiable and indisputable. Not to mention, setting the appropriate smart contract on the NFT allows the original artist to earn a percentage of all subsequent sales in royalties, even if the NFT leaves the platform.

So if you are an artist who creates an NFT, you can:

  • Prove that you’re the original creator
  • Determine how many are available
  • Earn royalties every time it’s sold
  • Sell it on any NFT market, or even off-platform in a peer-to-peer fashion.

If you purchase and claim ownership of an NFT, you can:

  • Prove ownership
  • Securely retain your asset
  • Sell it or transfer it with a public, verifiable record

The Catch

NFTs come with a monetary cost called gas fees, as well as a large cost to the environment by way of carbon-emissions. Because of the massive amount of computing power needed to process and validate transactions on the blockchain, the energy costs are offset by way of gas fees — the monetary fee charged by NFT trading platforms for minting a token, as well as the fee for buying and selling; not to mention, users are also charged conversion fees to their digital wallet providers.

The gas prices change throughout the day depending on overall energy consumption, but it could rack up quickly and in some cases get up to a couple hundred dollars for a relatively low-value transaction.

To offset the energy consumption and carbon footprint, some blockchains companies are beginning to position themselves as the eco-friendly option. Besides Ethereum 2.0’s Proof of Stake model which uses less energy than the Proof of Work model (see above), other token providers like Mercado Bitcoin are pledging to offset all of its carbon footprint.

Non-Fungible Tokens & Online Identity Verification

The current use case for NFTs surrounds capturing and claiming ownership of digital assets, like videos, songs, tweets, artwork, virtual land and collectibles. As for the future, companies like real estate firms are toying with the idea of using NFTs to verify physical assets.

But can these same concepts be applied to people? Could there come a day when you must verify your online identity with an NFT attached to an online license just to be allowed to surf the web, in the same way you currently need a government-issued driver’s license to drive a car?

This may sound far-fetched, but countries like China have been trying to eliminate online anonymity for years, with limited success, by requiring real-name verification to sign into web browsers and post comments — not to mention the implementation of their all-encompassing Social Credit System, which has already taken effect.

Unfortunately in the Western part of the world, we’re far from immune to the surveillance regimes being implemented across the world, but ours masquerade as social media and corporate advertising. The point is, whether you like it or not, your data is being collected but as a regular netizen, there is little you can do besides protect yourself with private browsers, VPNs, unplugging your Alexa, and staying inside at all times.

From a privacy standpoint, NFTs could spell the end to online anonymity, but there are a fair amount of benefits to having a completely verified network, including a reduction of fraud, crime, and maybe even nasty comments.

Not to mention, with proper Smart Contracts in place on your NFT-verified online identity, the blockchain would grant you full visibility into who has access to your data, where your data goes, and even allow you to get paid each time your personal data switches hands!

This would finally allow countries and netizens to enforce Data Subject Rights spelled out in data privacy laws and regulations (e.g., GDPR, CCPA) that have so far had little teeth in controlling the full breadth of personal data collection and transfer.

NFTs could be the way to give power back to the people.

P.S. I am admittedly not a cryptocurrency expert nor an expert on NFTs, just a data privacy specialist with an eye towards the future. So if you are more well-versed in the tech and anything in this article doesn’t ring true to your experienced ears, drop me a line in the comments. I would love to chat.

Written by: Zachary Ignoffo

Connect with the author:

Data privacy specialist, consumer psychologist, and foreign policy researcher. Zachary gravitates towards the cutting edge fields of cybersecurity and privacy risk management to help organizations across industries safely pave the way into green pastures. Zachary has consulted IoT and IIoT companies on SSDLC and Privacy-by-Design, Fortune 500 retail companies on US and foreign governance documentation, and just about everything in between. Previously, Zachary got his start by working abroad in Shanghai as a Mandarin translator for a large, cybersecurity-consulting firm.

2 thoughts on “The New Use Case for NFTs – Solving Online Identity Verification”

  1. nt says:

    Sounds like NFTs are going to turn into something to control people online and perhaps even irl by limiting what they can buy or sell, or preventing them from buying or selling for any reason. I can only imagine what the rabid authoritarian left and social justice types would do with this. This is not a good technology.

    1. Miklos Zoltan says:

      Seems like they are already fizzling out, though. July 2021 and people barely even talk about them anymore.

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