NFT: Overview, Advantages, Opportunities and Challenges

Apr 29, 2022
5 min read

The rise in popularity of Non-Fungible Tokens (NFTs) can be attributed to its unique features such as verifiability, tamper-resistance, usability and tradability. An NFT is a cryptographically unique, non-replicable and verifiable token representing a given asset on a blockchain. With all these properties, NFTs are truly revolutionizing the world of ownership and are reshaping different industries like finance, art, gaming and media. NFTs became popular in the gaming industry through the virtual game CryptoKitties, and the NFT for one of the most expensive CryptoKitties was sold for USD 170,000. NFTs hit the art world in 2021 when Christie’s auctioned Beeple’s “5000 Everydays” for USD 69.3 million and ranked as the third most expensive work sold at auction by a living artist. Apart from the industries mentioned above, the NFTs are continuously expanding in various sectors, spanning from entertainment and real estate to advertising.

NFTs were first introduced on the Ethereum blockchain, and although other blockchains can be used, the majority still use the Ethereum blockchain. The concept of a non-fungible token standard is introduced with the ERC-721 protocol. There are other smart contract protocols for creating NFTs with their distinct features. ERC-1155, also known as the multi-token standard, provides greater flexibility in creating and managing NFTs by offering support for batch operations, reducing gas fees and, subsequently, carbon emissions. Another standard, EIP-2981, enables universal support for royalty payments in all NFT marketplaces and ecosystems. EIP-2981 is another worth mentioning standard that addresses the issue of lack of standardization and interoperability across ecosystems when resale right is to be enforced across different platforms. Finally, F-NFTs or Fractionalised NFTs provide fractional ownership support.

Advantages of NFTs

Collectors, creators and institutions can take advantage of NFTs in various ways:

· Collectors: Giant ROI from NFTs is attracting collectors to explore the NFT space. NFT market is emotion-driven. Collectors can buy, hold or engage in spread investing/ speculative trading in NFTs. Scarcity introduced by NFTs makes investment in digital art rarer and of higher value. Apart from investment potential, the buyer also gets the bragging rights of owning new and rate digital assets.

· Creators: NFTs offered creators easy access to reach a global audience at the comfort of their homes or workspace. It also reduced the cost of shipping a piece of art across the globe and provided equal access to everyone regardless of their location in the world. The possibility of getting royalties every time the collectors or the speculators sell a creator's art provides the creator with a better value from their work. NFTs enabled creators to assert their ownership of the content created on the network. Smart contracts made it possible for creators to attach any kind of benefits that they like to offer to the buyers of their NFTs.

· Institutions: As the NFT transactions are traceable and authentic, the corporates can purchase NFTs as an asset held for future sale. Corporates can use Fractionalised NFTs to offer fractional ownership of their interesting digital projects. In addition, Corporates can use NFTs for decentralized applications and projects.

Opportunities

According to a Bloomberg report, the NFT Market has surpassed USD 40 billion in 2021. NFTs are at the early development stage and present a profitable business opportunity for startups and corporates working in different industries. The Advent of NFT technology opened up ample opportunities in the following fields:

· Metaverse: A metaverse is a collaborative immersive virtual shared space that allows users to interact with each other, create in-world objects and landscapes, construct experiences and all other digital activities. It covers a set of techniques such as augmented reality and the Internet to construct the virtual world. Blockchain offers an optimal decentralized environment for the interactive virtual online world. Metaverse generally has its own built-in currencies and economies with which participants can buy, sell and trade in virtual real estate, avatars, items, accessories and more. It provides profit-earning opportunities to the users as they can lease the buildings (such as studios) to others or raise rare pets and sell them. Due to the complexity of the technology, it is still in a nascent stage.

· Secure Digital Collectibles: Digital collectables comprise various types, spanning from digital images, videos, wines, trading cards, virtual real estate, crypto stamps, diamonds, domain names and other intellectual properties. It is very easy to replicate or forge a piece of art in a digital era. With the advancements in technology, Watermarking the original works have also become futile. NFT represents a verified and undisputable ownership. NFT is an efficient way for a buyer to manage and secure the certificate of ownership.

· Gaming Industry: NFTs are at a nascent stage in the gaming industry. They offer benefits for both players and gaming developers by offering financial rewards, a play-to-earn model, interoperability of game items and more. There are two ways to earn via play-to-earn games – earning in-game rewards or trading NFTs and cryptocurrencies. This also leads to the emergence of the concept of the play-to-earn guild in which guild members rent in-game assets to new players, and the lender receives a percentage of income as the new player progresses in-game. Finally, the element of interoperability of NFT games is transforming the gaming industry.

· Virtual Events: One of the most prominent developments in the events industry took place in 2021 when Kings of Leon released their new album When You See Yourself in NFT format. NFT-based tickets eliminated the risk of buying invalid or fraudulent tickets. The holder of an NFT-based ticket cannot resell the ticket once it is sold as it is unique and scarce. The NFTs are transforming the events industry's organizational, financial and artistic aspects.

Challenges

There are several challenges that have to be overcome to facilitate the development of NFT applications. Even though the NFTs are trending in the market, very few actually understand this complex technology. Apart from being complex, there are several challenges associated with the NFT technology. Some of the key issues are mentioned below:

· Environmental challenges: NFT has caught up with severe criticism from environmentalists. The energy consumption associated with generating NFTs is substantial, especially with the Ethereum blockchain, which at present is the most widely adopted blockchain. According to some studies, the energy utilized is almost equivalent to the consumption by an average EU citizen in a period of over three decades.

· Intellectual Property Right Issue: NFTs holder does not get the intellectual property right just because they have owned it. IP rights should be embedded in the smart contract and/or terms of sale of the NFT. Without a license of these underlying rights, one can not reproduce the original work or NFT. This provides the owner with the right to refrain others to spread, publish and change NFT.

· Security and Privacy Issues: Following the multi-million dollar sales in the NFT space, scammers and cybercriminals have unavoidably flocked to the NFT market to make quick gains and cheat the unsuspecting users. Impostors are taking the benefit of the fact that the onus of verifying the token is on the buyer. NFTs are not governed by any regulations so far. An NFT holder has to keep the safeguard the security key as whoever has control of the secret key has complete ownership over the NFT. Like other digital assets, NFTs are vulnerable to all related cybersecurity risks.

Conclusion

NFT technology holds great potential. Presently, NFTs are at a nascent stage with applicability in numerous industries. Keeping in mind the advantages NFTs offer to the creators, it is expected to keep creating a buzz in the creator economy. Though NFTs are not entirely secure, technological advancement is expected to overcome the issues.