Published: 08th January, 2023 at 15:00
Try 3 issues of BBC Science Focus Magazine for just £5!
The future of NFTs isn't art but digital certificates.
Non-fungible tokens (NFTs) have been getting a lot of media attention over the past year. This is, no doubt, partly a consequence of celebrities auctioning their NFTs for hundreds of thousands, if not millions, of dollars. For example, Twitter founder Jack Dorsey’s first tweet sold for $2.9m (£2.4m approx). This creates a sense of hype and celebrity status, giving the impression that everyone can create an NFT and then auction it off for millions of dollars.
Whenever there is money to be had, unscrupulous activity comes to the surface. Unfortunately, that’s human nature. We have observed all sorts of scams – from phishing scams to bidding scams to fake NFTs (for example, OpenSea reported that over 80 per cent of NFTs minted using its minting tool were fake). NFT marketplaces have taken measures to prevent fraudulent behaviour on their platforms, and we will see increasing consumer protection as the tech matures.
We must, however, look beyond the hype and the scams, as the core power of NFTs is authentication. NFTs are here to stay, because the possibilities are boundless and go beyond collectables and celebrities’ tweets or photos. The future of NFTs lies in business and economic applications.
Whatever we do in our everyday life is transaction-based. To facilitate any transaction and the transfer of ownership, authentication is key. A transfer of ownership will not occur without authenticating the assets being transferred and the persons (or entities), who are engaging in the transaction. This is the true power of NFTs, providing authentication and facilitating the transfer of ownership.
How NFTs will change future business
NFTs can create new ownership opportunities and facilitate transactions that were not feasible in traditional systems. BlockBar is an example for such a scenario. The BlockBar platform sells NFTs of rare or exclusive alcohol, including a Glenfiddich 1973 whisky and a 1976 Dictador rum in a Lalique bottle.
The NFTs authenticate the physical rare bottles, which are stored in a climate-controlled and bonded warehouse in Singapore. Each NFT represents an ownership of a physical bottle, and this ownership can be transferred or sold between people globally, without anyone having the bottle at their dinner table.
Theoretically, this exchange of ownership could proceed for years, until someone decides to open the bottle. When this happens, the NFT will be destroyed so it cannot change ownership any longer.
This type of transaction has not been feasible in traditional systems. Authenticating a physical bottle is a costly process, involving attorneys, notaries or other intermediaries, and thus has never been done before. NFTs enable such a transaction in an efficient and low-cost manner, which opens opportunities for ownership and value-added investments.
A digital certificate of ownership such as an NFT can prove ownership of anything. It is not limited to virtual or digital content such as photos, videos, audios or tweets. An NFT can prove that someone owns a car, or has a marriage licence or university degree. These NFT certificates can be stored in the user’s account on the blockchain, and shared when needed. Their utility and purpose are not as an asset or an investment to be traded, but rather as an authentication of a certificate, like in the traditional system.
NFTs have the potential to revolutionise the real estate industry by replacing land deeds, titles and all documentations verifying the ownership of the real-estate asset with NFTs. These NFT certificates are traceable and trackable, and transactions are fully transparent, which will significantly reduce cost and time of processing of any change to the asset or change and transfer of ownership.
Collectable avatars on Reddit are a good example, and their success is a testament of the power of NFTs. The initial goal was to empower artists to create and sell their work. Artists are paid for every collectable avatar sold on the Reddit platform and are entitled to receive royalties from secondary sales in other open marketplaces. The value of this avatar goes beyond a mere collectable.
The business and economic applications for NFTs are boundless, and their usage may continue to grow as they make transactions smoother, safer and more transparent, while protecting creators’ rights and providing a certificate of authentication.
Dr Merav Ozair
Dr Merav Ozair is a leading expert on blockchain and cryptocurrency, with a background in data science and quant strategy. Holding a PhD from the New York University Stern School of Business, she has in-depth knowledge of the global financial markets and its market microstructure. Her current research investigates the emerging Blockchain ecosystem.