TLDR: A dynamic NFT (dNFT) is an NFT whose features can change over time. The features of the NFT change when the token's metadata is changed, but the digital ownership record stays the same.
It is somewhat surprising that dynamic NFTs (dNFTs) are not talked about more often. The concept is both simple and amazing, opening up ample opportunities for real-world use cases of NFTs.
So what are dynamic NFTs? In simple terms it is an NFT whose features can change over time based on external factors and data points. For example, an NFT could change its features every time it is resold, based on the time of day or season, or a player's level of progress through a game. The features of the NFT change by way of updating the metadata of the token. Therefore, the token can react and communicate with external data sources.
These updates can be programmed into the NFT and linked to an external data source (an oracle), so that the NFT updates automatically. So if as an example, you hold a collectible sports NFT, it might change depending on the team’s or athlete’s performance over time.
Loyalty and fan engagement through NFTs have always been touted as one of the key use cases for NFTs, and adding the dynamic element to it means that the brands can offer a more immersive way for customers and fans to engage with the products and events. However, this ability to update the metadata can forge a path for NFTs to be adopted across other asset classes like real-estate and cars, creating an ability to immutably track data attached to a physical asset, hence unlocking more efficiencies when it comes to trading or selling those assets.
The immutable on-chain record that an NFT represents is undoubtedly an innovative technology with many potential uses cases. However, when it comes to the real world assets and use cases, the static nature of the non-fungible token is not always very practical. For example if we consider NFT application in the real estate market, the record of the house may have to change based on what improvements have been made to the property or what permissions to build were obtained from the local government authority. This will likely affect the value of the property when compared to the prices of other properties in the area. Therefore, having an immutable on-chain record that can be updated rather than having to issue an entirely new token may prove to be a much more efficient way to apply this technology to this particular use case.
For digital assets that NFTs represent, adding a dynamic layer also unlocks exciting opportunities when it comes to gamification and holder engagement.
“Dynamic NFTs allow brands to offer a more immersive and engaging experience,” says Tara Fung, co-founder and CEO of Co:Create, a web3 community engagement platform engineered to enable developers to build and deploy token-driven communities. “Dynamic NFTs have an infinite number of potential use cases. Being fully programmable, these tokens can morph and evolve based on all manner of conditions and parameters, such as user actions, real-world events, and so on,” she continues.
dNFTs use a different token standard to its static counterparts. The former uses ERC-1155 standard, allowing for the metadata to be changed while the static token generally uses ERC-721 standard. The ERC-1155 standard essentially incorporates the features of both ERC-721 non-fungible and ERC-20 fungible tokens. Then there is the added hurdle of having to use a decentralized oracle as an external data source to effect the change in the metadata.
Fung explains that the greater complexity of choosing dNFTs also lies in the strategic foresight and planning required. “The organization issuing the NFT must plan for how that token will evolve and what those triggers will be. This is the storytelling and creative components that require forethought”. She also explains that the technical complexities can be solved using various headless tech solutions that already exist in the market, Co:Create being an example of such a solution.
Use cases for dNFTs are vast and include (but not limited to) gaming, collectibles, digital art, loyalty and rewards tokens, digital identity and real-world asset tokenization like real-estate and cars.
In 2022, the Australian Open tennis tournament launched an official NFT called AO ArtBall. Each ArtBall was linked to a plot on the actual physical court and if the winning shot from any of the ~400 AO matches landed on that plot, the ArtBall was updated in near real-time to highlight the match information and upgrades to the ball casing, tickets to AO23 matches and various other perks.
“Our goal was to get fans invested in the AO for the duration of the tournament and beyond," says Sarah May, chief marketing officer at Run It Wild, the Web3 studio that worked with Tennis Australia on the project. "Dynamic NFTs allowed us to offer a more engaging experience because match-linked NFTs created a reason to check if your NFT scored a match-point after each game."
May goes on to highlight that this gamification was a key reason collectors bought and traded the NFTs, creating a deeper connection with the community. The project was first of its kind and hugely successful.
Linking the NFT to real-time match data was a more complex option than minting a static token and in the case of AO ArtBall required an additional level of validation. “Most complexity comes in validating off-chain data from Hawk-Eye, the ball tracking data used to officiate Australian Open matches. There are several quality control checks by humans to check which plot and NFT score the points before it’s converted as near real-time metadata updates,” explains May.
While application of dNFTs are fairly widespread in digital art, sports and other collectibles, we are still a while away from the tech being used on real-world assets. It is however, easy to imagine how transformative these will be in areas of loyalty and fan engagement particularly when linked to ticketing and events. It will likely take longer before the tech makes any meaningful progress in the areas tightly controlled by the governments, such as digital identity and real-estate but when it eventually does, it will surely be a game-changer.
Liya Dashkina is a VC, contributor to a number of DAOs, Web3 consultant, chapter lead at the Australian DeFi Association and an advocate for women in Web3.
This article and all the information in it does not constitute financial advice. If you don’t want to invest money or time in Web3, you don’t have to. As always: Do your own research.
