The case for tokenization is relatively straightforward. When we tokenize commodities such as fiat or gold, it makes them tradable 24/7 via borderless and frictionless transactions. These tokens, like the underlying, are fungible. A gold bar can be replaced by another gold bar of equal weight; a bitcoin can be replaced by a bitcoin.
Non-fungible goods however, are irreplaceable, unique, and limited in quantity. These can also be represented on the blockchain via non-fungible tokens (NFTs).
NFTs can represent artwork, collectibles, memorabilia, and personal data. Other examples include gaming characters, digital identities, and certificates.
The Use Case for NFTs
NFTs are usually not divisible. However, there are projects that are developing fractional ownership arrangements allowing to invest in NFTs or even in just a fraction. Divisible ownership (F-NFT) would enable retail investors to participate in, say, a $20 million artwork by investing in $1,000 worth of NFTs that represent the piece.
By using a smart contract, a creator can establish new revenue streams such as royalty payments. For example, a smart contract on tokenized artwork could enforce a percentage of sales to be sent to an original address. Artists, musicians and other creators could see periodic royalty payments in addition to proceeds from the original sale.
Just as fractional trading boosted liquidity in commodities markets, we can expect similar dynamics in the market for rare commodities. Just to get a sense: the size of the collectibles market worldwide is $370 billion. Video gaming is $151 billion globally; $64 billion for artwork; and $13.7 billion for digital identity.
Can NFTs promote financial inclusion?
Are we going to see the world’s poor get in on Picasso? Probably not on a large scale. While it’s technically possible, the impoverished might not be in a position to “save” and while Bitcoin might help as a highly liquid, disinflationary asset, holding fractional ownership in a Picasso may not be everyone’s first choice.
But it doesn’t mean it can’t happen.
There are case studies that show a way towards value creation and utility. An art teacher in Africa can invest in high-value paintings, and reserve a (price-appreciating) NFT as inheritance for his children. A competitive video gamer can monetize unlocked rare characters by selling NFTs to fans in Asia.
Learn more about Blockchain and Video Gaming.
The Issue With Originality
NFTs bring enhanced security and authentication to a market. Trust is critical when doing business, and blockchain – requiring no reliance on third parties – can increase trade and commercial activity in risky markets.
A chain can immutably capture the originality of a collectible; track the item; create an operational and legal chain of custody; and document sequence of control, ownership, and transfer of pieces. Depending on how innovators design an application for intended use cases, a chain can also record a non-fungible asset’s history; add timestamps of key events; and list auction prices and other verified information.
However, when it comes to digital artworks, while one might hold the NFT to prove ownership, copying the artwork is easy of course. Some might wonder what the point is of holding ownership when anyone can download the ‘image’ for themselves, for free.
Learn more about the rise of Crypto Art.
However, placed in a socialized network of verifiability where ‘ownership’ is undisputed, it is unlikely that such NFTs have a non-zero value, even if copies exist on the net. The reality is that people value authenticity.
Especially when dealing with famous or controversial pieces it is likely that there will always be collectors out there willing to pay a price. Having said that, few would disagree that the NFT space is currently overheated, and over the coming months we can expect to see continued volatility in this space.
Nonetheless, we believe NFTs will play an increasingly important role in transitioning to a Web3 digital environment where trust, verifiability and digital sovereignty are central. Learn more about Web3.