The Future of NFTs: More Than a Digital Asset

Dec 19, 2021
Dirk Steller

The dawn of non-fungible tokens (NFTs) has the potential to cause disruption throughout the fabric of the world’s economy, and across all industries. Owning assets is becoming more dynamic by the day; people are jumping aboard the ship of exclusivity; and celebrities haven’t been hesitant in utilising this new asset class.

The increased rate of adoption of digital assets is manifested in its growing valuation. A recent article in The Economist claims that cryptocurrencies and other digital assets are worth about $2.2 trillion, over one-fifth of the value of the global gold market.

According to data published by Messari, the value of transaction on the Ethereum network in the second quarter of 2021 amounted to about $2.5 trillion… about the same as processed through Visa for the same period. The high transaction volume was contributed to by the NFT craze, as most are built on the Ethereum network.

To appreciate what NFTs are about, we need to take a closer look at this new asset class, what it represents, and how it has come from obscurity.

What is a Non-Fungible Token (NFT)?

A token refers to a unit of any cryptocurrency. Technically, a token is a digital store of value developed by a project, protocol, or organisation that runs on pre-existing blockchain networks.

Non-fungible refers to a unique or distinct material of value that has no specific exchange value, even for similar material. In essence, the value of a non-fungible asset is determined by the holder, and other factors, like scarcity and uniqueness.

According to the Merriam-Webster dictionary, an NFT is a unique digital identifier that cannot be copied, substituted, or subdivided; that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it).

NFTs can take the form of any digital file – they can be pictures, GIFs, videos, or audio or even a tweet! 

Jack Dorsey, CEO of Twitter, sold his first tweet as an NFT for over $2.9 million!

just setting up my twttr

— jack⚡️ (@jack) March 21, 2006
How does it work?

The majority of NFTs are ERC-721 compliant. These token types are governed by the Ethereum blockchain protocol, ensuring each token’s data is distinct, immutable, and non-transferrable. Such characteristics have been the foundation on which NFTs have become valuable. Similar token standards have been released by rival blockchain networks, and several NFTs have been built on them too.

How Far NFTs have come

Before the turn of this year, NFT was a relatively novel concept, viewed as a geeky collectible tied to the crypto craze, and few members of the general public paid attention. The turning point for NFTs came when British auction house, Christie’s, auctioned Beeple’s artwork Everydays: the First 5000 Days for a whopping $69.3 million. NFT fever soon crept up the spines of many and inspired creations from the likes of Southern rock bank Kings of Leon and rapper The Game. It also made its way to sports with NBA Top Shots with highlights minted as NFTs, and a memorial to Muhammed Ali sold as a charity fundraiser.

Lebron James "Cosmic Dunk" NFT. Source: NBA Top Shot Marketplace

The NFT idea has come a long way from first manifesting as Coloured Coins on the blockchain network. It wasn’t until 2014, when Counterparty, the online protocol, launched cards and meme trading that the space began to gain some traction. A year later, Spells of Genesis pioneered the issuance of blockchain-based in-game assets, and everything suddenly seemed possible.

Before the development of ERC-721 standards, Cryptopunks launched the first marketplace of rare digital arts on the Ethereum blockchain on the hybrid of ERC-20 and ERC-721. The NFT space remained relatively quiet till it suddenly seemed profitable to buy, sell, and trade virtual cats on the blockchain game, Cryptokitties. The game was the first to be supported by the ERC-721 standard.

Unlike Beeple, some creators have put together some of the most valuable collections by leveraging on the combination of rarity and a niche community. The Bored Ape Yacht Club (BAYC) created a community with exclusive rights and access to virtual social gatherings with personalities like Steph Curry, DJ Khaled, The Chainsmokers, and Jimmy Fallon. These features make them the most valuable, second only to Cryptopunks, at a market cap of $1.8 million.

Bored Ape Yacht Club doubles as an NFT collection and membership to a club. Source: Bored Ape Yacht Club

Benefits of NFTs

The growth of NFTs could be hindered by legality issues and the fuzzy notion of assets being owned by one but downloadable by all. However, NFTs have revolutionised how art is created and perceived. It has improved the utility and use cases of solutions based on the blockchain. Some of the benefits made possible by NFTs include:

  1. Artists and content creators can profit much more directly from their work with full copyrights and ownership intact.
  2. Every time NFTs are sold, the original creator of the asset can benefit through smart contract rewarding systems.
  3. Artists, musicians, and creators can now connect on a one-on-one basis with their fans. This can be through members-only events, special discounts, and merchandise. Such interactions may snowball into engaging communities and broaden creators’ reach.
  4. Investing and collecting art just got simpler with no intermediaries.

NFTs and the Metaverse

A metaverse is a digital world and made possible by the visualisation components of AR and VR. For a metaverse to be convincing, real-life assets and elements would need to be built in. NFTs are gradually representing real-world assets in the metaverse because they are getting the DeFi upgrade.

Taking a cue from the rounds making the news about the digital world, metaverse NFTs will be gamified and integrated with DeFi properties. This enables them to function as tradable assets with real-world value and application.

The Decentraland Metaverse Festival. Source: Decentraland

Going Forward

The possibilities and how NFTs can be utilised are still being discovered. There have been postulations that collectors could use their NFT collections as collateral for loans and access other financial services. However, the valuation conversation is still far from being finalised.

The DeFi-NFT combination may just be an invaluable tag team. Why? NFTs are markers of asset ownership, digital or not, while DeFi makes it possible for transparent financial interactions and transactions with zero intermediaries. The union of NFT and DeFi could be the gateway for the easy transfer of assets that ordinarily would demand multiple signatures and handshakes. Who needs multiple lawyers and accountants to moderate a real estate agreement when ownership can be transferred simply via an NFT?

Indeed, an apartment has already been sold via NFT – TechCrunch founder Michael Arrington sold an apartment in Kiev via the Propy platform earlier this year. While this kind of NFT-over-physical-asset sale remains relatively rare, the possibilities are very real.

More people interacting with crypto and NFTs will drive the market’s liquidity and possibly improve the overall wealth distribution. But there’s the drawback of market volatility: people can profit and lose money in the same margin. Experts have also cited the environmental impact as a potential obstacle to NFTs growth as concerns for growing carbon emissions heighten.

The world of NFTs has grown exponentially in the last year, with million dollar sales now commonplace. NFTs still have a long way to go in value definition, regulation, and carbon neutrality, like the crypto market itself.

From being just a digital representation of the rights and ownership of an intangible asset to which it is pegged, NFTs will grow to be much more by leveraging on the digital real estate provided by Play-to-Earn games and the metaverse; and the potential for proving ownership in the real physical world.