NFTs explained: what this new technology is and how it may affect the investment world

NFTs explained: what this new technology is and how it may affect the investment world
14 Apr 2021

For the past few weeks, media has been buzzing about something called NFTs. Some artist sold his JPEG for 69 million dollars. The NBA is selling Top Shot videos for millions worth of dollars, while these videos can be freely watched on YouTube. What is happening? How are they doing this and why are people willing to pay crazy money for something they can download for free? And do NFTs concern only the digital world, or can they influence real-world assets? Let us explain.

What are NFTs?

Let’s start from the beginning and define the term. NFT means Non-Fungible Token. Unlike any other real currency or any cryptocurrency that can be replaced, each NFT is totally original in its core. A 50-euro note might be replaced with another 50-euro note, and 50 bitcoins will always cost 50 bitcoins, hence, they are fungible. However, NFTs have a different approach.

Imagine you are in possession of Van Gogh’s original famous artwork “The Starry Night”. Now, can you exchange it for another copy of Van Gogh’s “The Starry Night”? No, because there is only one original painting by that author with this name and value. Yes, you may sell it or exchange it for another piece of artwork, but it wouldn’t be a fungible asset, because after the exchange you will be in possession of a completely different commodity. And the same goes for NFTs.

NFTs are based on the technology behind Ethereum’s token issuance standard ERC-20 that was transformed into ERC-721 to be used for NFT creation. Every single NFT that has been ever created has its own original identification codes and metadata, which are different from each other. These tokens can be assigned to different digital or tangible assets, and the ownership of an NFT determines the ownership of the asset assigned. By providing NFTs, developers have resolved the issue of securing ownership of digital assets. All the information about a token (including an owner, and what a token represents)  is entered into the blockchain. It is impossible to replace or delete this information.

So, summing up, what are NFTs? Investopedia gives an exhaustive annotation on that matter:

  • It’s a kind of digital token built on blockchain technology that is unique and can be neither counterfeited nor replaced.
  • Non-fungible tokens have a significant potential for business, investments, and finance, as they may also represent real, tangible objects.
  • Tokenizing tangible assets enables us to make the process of buying, selling, and trading them more efficient while decreasing the possibility of fraud.
  • And last but not least, NFTs may represent people’s personalities, ownership rights, and lots of other things.

NFT use cases

NFT usage is a rather new practice, but it has already gotten enough adoptions for us to talk about. You have definitely heard of at least one or two NFT use cases, especially the one with Instagram artist @beeple_crap, who sold his digital artwork in the format of a JPEG for 69 million dollars. Lots of impressive sales and purchases have been made recently, and here some of the examples of how NFTs might be used.

  • In the USA, the NBA started selling their digital version of Top Shot cards. Basically, instead of selling collectible cartoon cards with basketball players, they’ve started to sell videos with legendary shots by different players. For instance, LeBron James’s dunk video was bought for 208,000 USD. That may seem a bit odd, considering this video is freely available on the internet. Though the NFT owner of that video may now brag that their video is the original one, and the others are just copies. So, one way to use NFTs is basically a type of ‘digital collecting’.
  • Another popular use case for NFTs is online games, like CryptoKitties. CryptoKitties are digital versions of cats, each of which has original one-of-its-kind identification codes on the blockchain, which can be bought by users via NFT technology. Not only are the cats unique, but they may also ‘breed’ and create new kitties that also have unique identifications and a price. CryptoKitties launched in 2017, and in just a couple of weeks , users spent approximately 20 million USD for purchasing digital cats and digital goods for taking care of them.
  • NFTs are the way to make almost anything on the internet sellable. Jack Dorsey, the founder of social network Twitter, proved it by selling his first-ever tweet for almost 3 million USD. And the craziest part is, the new owner gets neither intellectual right for the tweet nor access to Dorsey’s account. He can look at this tweet just like any other user, but that’s it. Except the owner now has the ability to resell it. Or, perhaps, use it in advertising and stuff.

Of course, all these cases are interesting, but they are not enough to conclude that NFTs can bring about a business revolution. Don’t worry though, there is more. Acknowledging ownership rights for different digital objects is just one, and frankly the simplest way of using NFTs. If you dig deeper, you’ll see the real potential of NFTs. So, let’s consider how that would work.   

Embed: https://www.youtube.com/watch?v=Xdkkux6OxfM

NFTs for finance, investments, and business

The appearance of NFTs might start a revolution in investments and business. Today, financial systems include complicated trading and loan systems for various types of properties. Mixed with the advantages of a tamper-resistant blockchain, NFTs give the ability to safely represent the tangible property in digital form, and that is a definite game-changer for investments and business.

  • NFTs increase market efficiency. NFTs, representing an asset on the blockchain, remove the necessity for intermediaries and enable owners to have a direct connection with buyers.
  • NFTs have the power to make investing more democratic, by fractionalizing physical assets. It is much simpler to split a digital asset among a number of owners than a physical one. Hence, with the help of NFTs, an asset (an artwork, a building, etc.) does not necessarily have to have one holder, as its digital equivalent may be easily divided by multiple owners, each of whom would be in possession of a particular share of a property.
  • NFTs help with identification. No need for physical passports, as they can be transferred into NFTs, whose uniqueness for identifying characteristics makes it possible to safely accelerate the entry and exit processes for jurisdictions.
  • NFTs improve business processes. For instance, an NFT for a chocolate bar will make it simpler for various parties in the supply chain to interact with it through the whole process: it’ll help to track its origin, manufacturing, and sales data.
  • The cherry on the top: novel markets and types of investments. By splitting up a whole asset, when it’s big and consists of differently priced pieces, and representing each piece with an NFT, complex and bureaucratic affairs can be simplified, as each piece’s uniqueness will be determined by incorporating relevant metadata into each unique NFT.

NFTs have great potential to become a groundbreaking technology that will change the finance and investment systems at their core. NFTs are growing and getting more complex and will become more widely integrated within the financial infrastructure. As a result, they might help extend tokenization into various spheres, starting with real estate and art. It will make investments more democratic, more flexible, and decrease the level of bureaucracy. So let’s follow the evolution of NFTs and be the first to use this new technology for its many advantages.

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