Non-Fungible Tokens: The New Frontier

We’ve recently been writing about virtual currency, blockchains, and a regulatory sandbox for Fintechs. If you follow any of those topics with interest, you’ll very likely have heard of non-fungible tokens, or NFTs. NFTs are no longer questionable internet pictures but have moved into the mainstream. (Even Dolce & Gabbana has joined the NFT bandwagon.) Whether the trend has staying power is another question, but to early investors the NFT world is one filled with opportunity.

Here are the basics:

A NFT is akin to a certificate of authenticity, like the title to your car or the deed to your home. It shows ownership of a certain property. NFTs are secured, or stored, on the blockchain. Remember that the power and utility of a blockchain is that it is a decentralized and distributed ledger that records data in a way that would make it virtually impossible to modify. Therefore, when your ownership in a NFT is secured by the blockchain (Ethereum is a common method), it proves your ownership of that token. In many cases, owners can sell their NFTs and the new owner will be registered to the blockchain—again, much like the deed to a home.

Most commonly, you may have been introduced to NFTs as a form of digital artwork. Some now-famous examples include Everydays: The First 5000 Days (which sold for $69.3 million), Nyan Cat, and Cryptopunks. Also recently, Andy Warhol, a famous pop artist, had his some of his work reproduced digitally and minted into NFTs. They ended up selling for over $3 million at auction.  Buying those NFTs meant that you would be recorded as the owner of that artwork. Songs, video game items, and films have also found their way into the NFT space. Some companies have released “metaverses,” virtual reality spaces, which incorporate NFTs as a way to show off the artworks.

But what else is out there?

While art and collecting art is a fascinating hobby, are there any other use cases for NFTs? Video games are a billion-dollar industry worldwide. Right now, there is constant tension between consumers and companies regarding monetization. Traditionally, games would cost money to develop, and companies would recoup their expenses by selling the games for money. But more recently, another method to capitalize has gain tremendous popularity: releasing games for absolutely free, but then offering additional content and cosmetics to players in exchange for cash. NFTs could invade this space and allow quick, real-money transactions that no longer require an in-game marketplace and may transcend the game itself. Once these items have real-world value, they may no longer be tethered to the game.

Events, movies, and concerts have also begun to offer ticketing through NFTs. Instead of a physical ticket, a NFT is registered in your name, and allows access. Identification could also be a use case. Real world documents, such as IDs, medical records, or documentation of any kind could be “tokenized” to help streamline the process by which you access those records. In an increasingly virtual world, the blockchain and NFTs could be the global alternative to records storage/retrieval rather than individual companies. Real estate and insurance companies could use NFTs and smart contracts.

The new world of blockchain and NFTs could be just a bubble. Or it could stick around and revolutionize industries in a host of new ways. Currently, NFTs are being used mostly in the same space as luxury goods: art, fashion, and memorabilia that is being collected and displayed. The amount spent on such items already portends that perhaps the NFT craze is here to stay.