NFTs, the emerging asset class:Reports
By Bharat Web3 Association
What is an NFT?
NFTs or Non-Fungible Tokens are unique identifiers to digital art and other virtual assets. They are called non-fungible because, unlike few other crypto-assets, they are not mutually interchangeable and thus are not fungible. The primary purpose of NFTs is to denote authenticity and ownership of an asset. Each NFT is recorded on the blockchain. This helps to permanently document the identifier which cannot be copied, substituted, or divided, thus ensuring a single, formal record of ownership is maintained.
The inception of NFTs dates back several years to 2014, when the first known NFT of a video was created to “monetize graphics.” However, the sale of ‘Everyday: The First 5,000 Days’, a digital collage of 5,000 images, as an NFT for USD 69 million in 2021 is what put the asset class on the map. Unsurprisingly, they have been on the rise ever since. And while it is easy to mistake NFTs as digital knock-offs for a marketplace for buying and selling art, there are several unique advantages that they offer, to both the buyer and the seller, which make minting NFTs specifically enticing.
Unlike physical artworks, NFTs have a permanently documented cycle of ownership which is always attached to them. Since NFTs are inherently digital, it is impossible to separate this form of digital identity from them. Moreover, since NFTs are fundamentally unique codes which essentially serve as ownership tags, duplicating them is impossible, owing to their unique entries. As a result, the buyers can be certain that what they are receiving when they are buying an NFT is an original piece of work that they own as per the terms of the smart contract.
Every NFT sale is recorded on blockchain and is a permanent part of the record of the asset. Since the financing of the NFT is always recorded in a single digital ledger, in blockchain, original creators of the NFT can constantly receive royalties over the art they created. Thus, the benefits from the sale do not end once the artist gives up the creation.
Use Cases
Many companies across a variety of sectors have started to recognize and capitalize on these characteristics to make NFTs a part of their business model. NFTs have thus been able to vastly expand in scope and scale as more and more companies from a wide variety of sectors have started to take notice. The digital art market has formalized the existence of the asset with online NFT marketplaces like OpenSea, which has delivered daily trading volume of up to USD 2.7 billion, leading the charge. Participation from conventional companies and organizations with a non-crypto background have also helped expand the niche customer base. Adobe has undertaken efforts to integrate NFTs into its social media platform, Behance. Leading auction houses like Christie’s and Sotheby’s have started to successfully auction off NFTs for millions. Even major sports organizations like the NBA, ICC and FIFA have incorporated NFTs into their ecosystem to maximize user participation and engagement.
More comprehensive use cases for NFTs have also been emerging in other sectors as their popularity has grown. The Gaming sector is an ideal showcase for the same. Blockchain based games like Cryptokitties and Axie Infinity make NFTs central to their core gameplay loop by using the NFTs purchased by users as real time in-game assets. This creates new opportunities for players to earn from their in-game achievements as they can use and trade their in-game character or item based on the NFT they own. Additionally, NFTs have opened a new way for game developers to monetize their games. Major gaming studios like Ubisoft and Electronic Arts are also making a pivot towards minting NFTs.
This world is also being embraced by the movie and music industry, with major blockbuster films like Deadpool 2 and Godzilla vs. Kong releasing NFTs for sale with several film studios and individuals also pivoting towards doing something similar. In November 2021, Quentin Tarantino released NFTs based on his 1993 film Pulp Fiction. Companies like Spotify have started creating curated playlists specifically for people who own NFTs to personalize the experience. Soon, NFTs are also expected to contribute significantly to the Metaverses, as more and more of them start emerging. Users can buy their virtual plots of land and build their home, all with the help of the NFTs. In cases like these, the true potential of the asset comes to light. NFTs are on the rise now but they are still relatively young in the market and far away from achieving their optimum capability.
Market Size and Road Ahead
Given the unique potential that NFTs possess and the space they have been able to carve out in the market, their advent into the mainstream is no surprise. The 2020s have witnessed a booming marketplace with a rising year on year growth. According to Statista, the revenue generated from NFTs grew from USD 0.72 million in 2019 to USD 2.4 billion in 2022, increasing roughly 3,400 times over a period of 3 years. The sale of ‘Everyday: The First 5,000 Days’ alone in 2021 tripled the total market size of the preceding year. The recorded most expensive NFT was sold in December 2021 for USD 91 million. The growth in the market has hardly slowed down since then. This is because the decline in market value of cryptocurrency was offset by an increase in the number of NFT sales.
Furthermore, revenue in the NFT segment is projected to reach USD 3,546 million in 2023 with the market cap for the industry expected to exceed USD 230 billion by 2030. Nonetheless, NFTs have risks, just like any other asset class. Only a few NFT collections are limited in supply and have a clear roadmap. While this may present a frightening picture, the same can be said of the numerous stocks listed on the Stock Exchange. It is crucial to Do Your Own Research (DYOR), ascertain risks and understand the features of the NFT one is purchasing.
NFTs bring unique traits such as true digital ownership, scarcity and verifiability, which makes them suitable to be used in almost every industry. Additionally, the integration of NFTs with other emerging technologies such as artificial intelligence, 5G networks, and the Internet of Things will open up new use cases and opportunities for NFTs.