This year’s hottest emerging use case of digital assets, particularly in the art and gaming industries, is the use of non-fungible tokens, or NFTs. NFTs as a concept are not something new, but recent explosive popularity in 2021 put the market in awe, from the sale of Jack Dorsey’s first tweet at $2.9M to Beeple’s digital artwork at $69M. In this article, we will take you through the world of NFTs, including current use cases beyond the art and gaming industries, and opportunities and potential to transform the financial sector.
What Exactly is an NFT?
An NFT is a unique digital asset token that represents ownership of digital or physical assets. You can think of NFTs as digital certificates of authenticity and ownership.
Generally, tokens traded on any blockchain fall into two categories, fungible and non-fungible. Fungible tokens, like Bitcoin, are those that can be traded interchangeably. This is similar to trading a one-dollar bill in which all one-dollar bills contain the same nominal value. On the other hand, NFTs fall into the latter category, as each NFT is distinct and therefore not interchangeable – no two NFTs are the same.
Despite the growing hype, NFTs are encountering three key challenges:
- expensive transaction fees stemming from the nature of the blockchain layer used by the NFT project;
- ongoing questions on the legal enforceability of the NFT, such as what the buyer actually owns when they buy an NFT; and
- environmental impact due to high energy consumption in proof-of-work blockchains.
A Quick Overview of NFT Landscape
NFT sales volume experienced tremendous growth to $2.5B in H1 2021 from $94M in 2020 as more participants such as celebrities, artists, and companies are joining the space. It appears to have potential for future mainstream adoption.
In terms of funding, according to CB Insights, in the past year roughly 15% or 18 deals of blockchain funding deals by top blockchain investors are digital collectibles and NFTs compared to only 2 deals in the previous year. The top blockchain investors include but are not limited to Digital Currency Group, Pantera Capital, and Andressen Horowitz (a16z).
Diving into the top-funded companies in this space, many NFT marketplaces have emerged to serve the rising demand. Dapper Labs, an NFT development platform, raised a total of $635.6M and was recently valued at $7.35B in September 2021. Additionally, one of the most well-known marketplaces, Opeasea, recently closed a $100M Series B round led by a16z in July 2021. Other marketplace players include Sorare, SuperRare, Rarible.
Thai NFT Landscape
We also see growing adoption in the Thai NFT market. Several NFT projects have emerged, ranging from local celebrities to pageant fans. Bitkub Group partnered with Miss Universe Thailand to bring NFTs to pageants to stimulate fans’ engagement both before and after the competition. In addition, Jay Mart plans to launch JNFT marketplace and collaborate with celebrities to introduce its NFT collection in order to boost the use case of JFin tokens.
However, mass adoption of NFTs may face challenges on the regulatory side. In June 2021, the Thai Securities and Exchange Commission prohibited digital asset exchanges from offering trading of fan-based tokens and NFTs. The regulator aims to stop the trading of digital assets which have no clear objective and whose price could be manipulated by social media trends.
NFT Ecosystem Stakeholders
The main stakeholders of the NFT ecosystem are the creator/artists, the collectors, and the platform providers. Benefits that these stakeholders could receive from NFTs include:
Creator/Artist: The creator/artist could be anyone who owns a digital asset, e.g. artwork, music, or tweets, and wants to monetize it securely. Tokenizing the digital asset into NFTs can help keep the artwork safe, differentiate the original from the copies, and create value from scarcity, resulting in a higher asset value. Retail businesses can expand their product range to include NFTs, creating new revenue streams.
Collectors: Those who are looking to own a valuable digital asset. They could benefit from NFTs in several ways, such as supporting their favorite creators, holding a piece of history, capital gains from market fluctuations, or keeping money protected from inflation.
Platform providers: Providers can generate revenue from transaction fees; for example, OpenSea, the largest peer-to-peer online marketplace for NFTs, makes money by collecting fees from successful transactions. OpenSea is free for NFT buyers, but it charges sellers of NFTs a 2.5% commission on any transaction made through the platform. Different platforms have different models for how they charge fees.
NFT Use Cases Across Industries
NFT applications serve well in any industry where authentication and proof of ownership are crucial. We can observe many real-world use cases of NFTs across different sectors including art, gaming, retail, supply chain management and logistics, and real estate.
Opportunities of NFTs for Financial Institutions (FIs)
- How FIs can get involved or provide support in the NFT ecosystem
Some marketplaces, like Mintable, allow their users to pay for NFTs using a credit card. These users can purchase NFTs on the marketplace without needing any digital assets in their wallets (they still need to have a wallet to store purchased NFTs). Financial institutions could enter the NFT space by partnering with NFT marketplaces to allow their users to use credit cards on the platform. For example, Visa has taken steps in this NFT universe by making it convenient for users to convert and spend digital assets with a Visa card.
NFTs transactions can involve large amounts of money, posing risks of money laundering, malicious transactions, illegal activity, or scams. Financial institutions can take part in the space by conducting due diligence on customers involved in NFT and digital asset transactions.
NFT Market Operator
FIs can take part in the NFT market by participating as an NFT marketplace to capture the growing demand and explore new space while leveraging their trusted brand. FIs can support the creators to help launch new NFTs on the platform and earn a fee or percentage cut from each peer-to-peer transaction.
FIs can also launch NFT funds for investors to have exposure in digital art, digital collectibles, and metaverse, and to own a part of several NFTs without direct exposure to the NFT market. FIs can leverage their existing large customer bases, as well as drawing in new clients to invest in their NFT funds.
- Application of NFTs in the Financial Sector
Application of NFTs is still in a very early stage for the financial services sector but it has the potential to be integrated deeper into the space to improve operational efficiencies as well as create new revenue models.
To improve efficiencies for FIs, NFTs can be used to record ownership and transfer of assets. They can be utilized to ensure the provenance of goods (point of origin), for fraud protection, and for debt management, including tracking and managing debts. On the potential revenue-generating side, it is possible for FIs to explore the convergence of decentralized finance and NFTs by allowing the holder of the NFTs to earn yield (staking) or use their NFTs as loan collateral.
How to Get Involved in the NFT Market
This section will guide you through the general process of how to create NFT collections and store and sell NFTs to have a better understanding of how the process works.
Step 1: Determining an appropriate blockchain
Every creator will start their NFT journey by deciding which blockchain they should adopt. Most NFT activities we observe today are built on Ethereum, due to its capability to attract a broad set of users and developers. In the future, we can expect to see more blockchains entering the market. Users should consider tradeoffs and pick one that suits well with their objectives.
Step 2: Minting NFTs
After picking which blockchain to use, the next step is to transform the digital assets into NFTs. This process is called minting. Several platforms can help with minting, such as OpenSea, Rarible, or Bitski. One important thing to keep in mind when deciding on what platform to use is controllability. We should pick one that gives us as much control over NFT features, such as provenance, attributes of the NFT, or storage of the underlying asset. Once NFTs are minted, they will be stored on the blockchain, unchangeable and tamper-proof.
Step 3: Storing digital content file
During the minting process, users will have options to store their digital content file either on the blockchain itself, or in other places. While storing files directly on blockchain (e.g. on Ethereum) may limit storage space, some users might find it more convenient to use third-party storage as it is more reasonable in terms of price and storage space. Currently, both centralized and decentralized storage options exist. Centralized storage makes NFTs more dependent on storage providers, and if such a provider is out of the business, the NFT will link to nothing. Decentralized storage has evolved to mitigate this issue because the architecture of this method completes the full circle of blockchain principles and operates without the intervention of any intermediary.
Step 4: Storing NFTs
Once the creators successfully mint NFTs, they have to keep them in a digital asset wallet like other digital assets. There are two models of wallets, custodial and non-custodial. For the custodial solution, third-party providers will store private keys of wallets on behalf of customers. Creators should only use a custodial service from a trusted brand with strong security. In contrast, the non-custodial solution is that customers are responsible for storing their own private key to access their wallets.
Step 5: Distributing NFTs across the marketplace
Nowadays, we have many NFT marketplaces in the space. Well-known players in this space include OpenSea, SuperRare, Rarible, Nifty Gateway, Foundation, Enjin, and many more.
By considering its underlying technology and current use cases, mainstream adoption of NFTs may be in the foreseeable future. Big brands and public figures in the traditional world are joining the NFT ecosystem which then stimulates and increases awareness among the general public. Nevertheless, regulations related to NFT, including the classification and anti-money laundering need to be monitored, as this type of digital asset is still in the early-stage, and regulators may attempt to closely monitor and control it as it grows. Looking into the future with proven technology, NFT has the potential to go beyond what we see today in the digital art and gaming industries. It could potentially transform existing sectors from retail to financial services, which may present an even greater opportunity for NFTs in forthcoming years.