The NFT market (non-fungible tokens) is evolving into the next phase. PFP and art collectibles — the previous drivers of growth are being overtaken by new initiatives. Phygital collectibles like toys that are linked to NFTs and utility NFTs are grabbing the headlines today.
However, there’s another exciting development in the form of dynamic NFTs (dNFTs). These NFTs are programmed to evolve and respond to external events and user actions after minting.
This makes digital ownership more “active” and opens new avenues for ongoing engagement.
Now, what are dynamic NFTs or dNFTs, how do they work, and what are the possible use cases of dNFTs in the real world?
In this blog, we’ll delve deeper into what dynamic NFTs are, their functioning, and possible use cases, and look at how developers can create dNFTs.
What is a dNFT?
Dynamic NFTs are programmable NFTs that can evolve and adapt in response to specific triggers or conditions. Unlike traditional NFTs that are static, dNFTs have programmable and interactive metadata — a set of data that gives the NFT its characteristics and properties.
At the core of a dNFT is a smart contract that enables its programmability. It can be coded to respond to various inputs like market prices or user interactions like gaming milestones. These can result in changing its appearance or unlocking new content.
Zooming out, essentially what dNFT does is update the token’s metadata, courtesy of oracles — a bridge between the blockchain and external data sources.
Here is an example of dynamic NFTs:
Frazel and Dazel are innovative dynamic NFTs avatars created by Zapper. They represent the performance of a user's investment portfolio uniquely. Their metadata is adaptive, allowing them to change based on the fluctuations in the users’ portfolio value.
How does a dynamic NFT work?
Here are three major components that dNFTs employ to offer a level of interactivity that static NFTs cannot.
dNFTs primarily employ the ERC-1155 standard, unlike the traditional NFTs that follow the ERC-721 standard which is tailored to the non-fungibility of digital assets. Each ERC-721 NFT is marked by a unique identifier which limits the flexibility needed for more complex applications.
However, ERC-1155 supports the creation and management of both fungible (similar to cryptocurrencies) and non-fungible tokens within a single contract. It uses a single URI uniform resource identifier (URI) template with an ID substitution mechanism for all tokens in a contract.
That means the contract can be programmed in multiple ways for the same token ID allowing for dynamic updates to the metadata.
Furthermore, it’s also possible to batch transfers in ERC-1155 which reduces transaction costs and improves efficiency.
dNFT smart contracts are designed to manage multiple token types — fungible, non-fungible, and semi-fungible — within a single contract.
For example, in a game, the in-game currency can be completely fungible. Each token is identical and interchangeable. The character skins or avatars that players wear or flaunt are unique and, thereby non-fungible. Each skin is distinct and owned individually by players.
Apart from all these, there are semi-fungible items like weapons that start as identical (fungible), but they can be upgraded to enhance their abilities, at which point they become unique (non-fungible).
dNFT smart contracts can manage them all, at once. They can also manage ownership rights and royalty distributions.
Furthermore, by referencing multiple data points using oracles, dNFTs can update metadata to create more flexible royalty structures. For instance, dNFTs can have royalty rates that change based on market conditions.
Smart contracts in dNFTs rely heavily on oracles — the bridge between off-chain and on-chain data.
They fetch real-time data and verify its accuracy and reliability before transmitting the information to the blockchain. This allows smart contacts to update dNFTs based on real-world events and data almost instantly.
Now that we know how dNFTs work, let’s take a look at the numerous use cases they can be employed in.
Use cases of dynamic NFTs
dNFTs go beyond the limitations of traditional NFTs, offering enhanced interactivity, relevance, and utility. Delving into the specifics, here are five ways they can be used:
dNFTs can reshape the landscape of loyalty programs, offering a win-win scenario for both customers and brands. They can evolve as customers achieve certain milestones like referrals or making purchases that are worth a certain amount. This adds an element of gamification to loyalty programs.
Furthermore, the interaction data from dNFTs offers brands deep insights into customer preferences and behaviors.
In gaming, dNFTs can represent game characters or achievement badges that evolve in appearance based on the player’s skills, abilities, or in-game milestones. They also open up the possibility of secondary marketplaces, allowing players to buy, sell, or trade their unique in-game assets.
Game developers can benefit from dNFTs through new revenue streams such as royalties from secondary market transactions.
dNFTs encapsulate a person's digital identity, encompassing various aspects like social profiles, professional credentials, and records of events attended. This creates a comprehensive and dynamic digital profile that evolves over time. They can be used to streamline verification and authentication processes, serving as digital passports or IDs.
dNFTs can supercharge the tokenization of real-world assets (RWAs) and enhance transparency and trust. Imagine tokenized real estate where the dNFT dynamically updates its metadata to reflect current market values, renovations, or ownership changes.
Less spoken but dNFTs can improve intellectual property management by acting as real-time, verifiable records of licensing agreements, usage rights, or renewal statuses.
dNFTs can improve open-source development in terms of creating new models for collaboration and contribution. They can be used to reward developers for their work on open-source projects. Open-source projects can also link these dNFTs to voting power giving a say in the project’s development.
To conclude, dNFTs with a unique blend of interactivity and adaptability open up a wide range of possibilities for developers and brands.
How do you create a dynamic NFT?
Creating a dynamic NFT using the ERC-1155 standard generally involves the following steps:
Writing the smart contract
Developers need to write a smart contract using Solidity, the programming language for Ethereum smart contracts. This contract should adhere to the ERC-1155 standard. In this step, business logic is embedded into the code — defining how the dynamic NFT behaves and interacts with on-chain and off-chain activities.
Testing the contract
Before deploying, it's crucial to test the smart contract to ensure it functions as intended. This can be done on test networks or testnets that simulate Ethereum at no real cost to the developer.
Deploying the contract
Once tested, the smart contract is made live on the Ethereum network while incurring gas fees.
Alternatively, developers can use thirdweb’s ready-to-deploy smart contract templates to launch ERC-1155 dNFTs. They come with built-in flexibility to define terms like allowlists, release dates, and claim limits.
After deployment, developers can interact with the smart contract to mint new ERC-1155 tokens. This process involves specifying the properties of the tokens, such as their metadata, supply, and whether they are fungible or non-fungible.
Final thoughts: Is the future of NFTs dynamic?
Dynamic NFTs or dNFTs are not just about adding interaction to traditional NFTs. They provide a larger playground for developers and brands alike to embed more business logic or gamify the NFTs. This ability to adapt and interact with users can make dNFTs an asset class of their own.
We hope this blog post has helped you better understand what the dynamic NFTs are, how they work, their practical use cases, and how you can get started with creating them.
And if you want to build web3 apps with dynamic NFTs, get started with thirdweb’s web3 tools & SDKs — they’re free!