Despite the crash in NFT sales around May of 2021, the underlying technology indicates that NFTs can be used in several applications in decentralized finance, ownership tokenization, digital asset representation, and the very human need for the feeling of ownership and being a part of a community.
First, a bit of background: non fungible tokens, while existing as early as 2014, only took off around February, where seemingly simply digital assets such as art pieces, trading cards, and even a Tweet -- Jack Dorsey’s first ever -- sold for eye-watering millions of dollars. The NFTs themselves are blockchain (commonly Ethereum) tokens that can’t be copied or modified.
Digital art became one of the primary uses for NFTs, as artists loved the new blockchain phenomenon for its ability to verify ownership and authenticity, as well as certain advantages (such as the coding of royalties, where artists could make money off of every resale of their art piece).
As for the buyers, NFTs essentially give them digital bragging rights. For example, the gentleman who paid $70 million for “Everydays: the First 5000 Days” received a JPEG and an NFT. Anyone can view the JPEG with a simple Google Image search… but as the collector, he can say that he has the original JPEG.
You might think it’s strange - even nonsensical - that people would spend hundreds to millions of dollars on bragging rights - and you’d be absolutely correct. From February to May, USD spent on NFTs dramatically increased as the massive trading prices enticed buyers and created a fear of missing out. The market crashed in May, as NFTs are illiquid. According to Reuters’ “After first quarter frenzy, NFT market shows signs of stabilising”, sales on popular marketplaces OpenSea and Nifty Gateway dipped in April after reaching peaks around March.
Despite the market crash, however, NFTs likely won’t go away anytime soon; participation in sectors such as sports collectibles still remains high and NFTs are seeing numerous use cases.
NFTs are making their way into decentralized finance (on-the-blockchain financial transactions). In the case of lending, both decentralized and traditional finance use collateral. NFTs play a role: DeFi lending platform Aave now supports the usage of NFTs as collateral. The challenge in collateralising NFTs is the liquidity issues, since it’s quite difficult to provide a valuation for the NFT. However, Mintable co founder Zach Burks tells me that NFT valuations can be based on “average of sale price[s]” or “paired with a stablecoin to peg the value.” The utility of NFTs in DeFi lending may have issues right now, but the space has plenty of room to grow.
NFTs will trigger a digital asset ecosystem. NFTs contain data that can verify unique ownership of assets, both digital and physical. Arizona State University’s computer science research professor Dragan Boscovic told Crypto News that the use of NFTs as “origin and ownership verification” is a “good application,” with examples being “car title[s]” or “property insurance certificate[s].” In other words, NFTs can link with items that, by nature, must be unique, such as certificates and licenses.
Large corporations such as LVMH and Nike have begun tokenising assets: LVMH have worked with the Aura Blockchain Consortium, which provides data on product origin and ownership verification. Nike have launched CryptoKicks, where NFTs represent shoes. Tokenisation also makes assets more liquid and tradeable. For example, IPwe and IBM have partnered to represent patents as NFTs. Tokenising patents will make it easier to be “treated as a liquid asset,” as patents were “notoriously difficult to manage, value and transact.”
Then there is the advent of “social tokens”, where brands and influencers can monetise themselves by selling their own tokens. Buyers receive benefits depending on the subject. For example, Whale Shark’s tokens allow users to have a stake in their NFT collections. Social tokens include Bitclout and Steem Coin. These developments indicate that NFTs are more than a fad; the underlying technology can pave the way for digital ownership through tokens - ownership tokenisation, in other words.
NFTs have made their way into the sports merchandising industry, as their nature appeals to the human desire for being a part of a community and being able to own and exhibit coveted items. For example, the MLB has partnered with Candy Digital to launch baseball themed NFTs, while NBA Top Shot has weathered the market crash. As the aforementioned Reuters article explains, NBA Top Shot participation in April is “still going strong” with 324,000 unique buyers, despite a “slip” in sales during the same month. Sports merchandise NFTs make sense; it’s been noted before that “the more loyal a fan is to a team, the more they will engage to consume [and] view their expenditures as an avenue of supporting the team” (da Silva, et al, 41). The sports community has demonstrated eagerness to buy them as fans enjoy demonstrating their team loyalty and boasting about their collectibles. NFTs are another avenue for fans to purchase items to support their community and enjoy the feeling of owning important memorabilia. These NFTs also come with certain benefits, as the nature of the technology allows for the linking of physical items. For example, Fantastec SWAP offers licensed NFTs that are linked with game tickets and autographed memorabilia from soccer teams. Thus, fans get tangible and desirable assets along with their NFTs.
Despite the market crash, there are several emerging sectors that NFTs can prove to be very useful for. NFTs are an important aspect of decentralized finance; they can tokenize assets that are otherwise difficult to liquidate and trade; lastly, they appeal to the human desire for the need to be a part of a community and own valuables.