The future of the NFT ecosystem

NFT Ecosystem graphic

The rise of cryptocurrency has undoubtedly contributed some unique terms to the investment world’s lexicon, and perhaps no term exemplifies this more than “non-fungible tokens” or NFTs.

First developed in 2015, NFTs are unique cryptographic tokens that exist on a blockchain – a “token” means a unit on a blockchain – and cannot be replicated. That’s where the “non-fungible” comes in: because there can only ever be one of that item, it can’t be fungible – a term that describes a currency, commodity (a gold bar, or a barrel of oil), security, or any other item that is interchangeable with other units of the same kind.

A cryptocurrency is a fungible digital asset; one Bitcoin is always equal to another Bitcoin. It’s that fungibility that makes it tradeable, and a trusted means of conducting transactions on the blockchain. But NFTs have unique individual characteristics that mean they are not interchangeable. Nor are NFTs divisible: they always remain whole.

This one-of-a-kind quality makes NFTs perfect for individual intellectual property tracing. Indeed, that is how they have become most widely known – as a means for creators to create unique digital artifacts and sell them to buyers for whom the NFTs represent ownership rights. Primarily NFTs have been used to sell digital works of art, pieces of music, in-game items, and videos. They are then bought and sold online, with their history of ownership and current owners stored on a blockchain. In this way, an NFT – for example, “EVERYDAYS: The First 5000 Days,” created by digital artist Mike Winklemann (better known as “Beeple”) – can be sold, as it was in March 2021, in an auction at Christie’s, for US$69.3 million ($90 million).

Beeple’s work is a composite of 5,000 daily drawings, which can be seen individually – and in its full “EVERYDAYS” form – online, and downloaded. Why would anyone want to pay US$69.3 million for it? So that they own that original digital file – the same reason why any art aficionado rich enough buys any of the artwork auctioned at Christie’s. The NFT contains built-in authentication, which serves as proof of ownership. NFT artists can sign their artwork by including their signature in the NFT. For digital collectors, the original is worth owning.

But the NFT ecosystem does not have to be limited to digital intellectual property – it can also be used for other digital assets. In this way, NFTs could feed into the metaverse – for instance, they could be used to “tokenize” digital “land” in virtual reality, and transact it in primary and secondary markets (with all of the price risk of physical markets.)

But NFTs could also be used in the physical world to enable the digital transfer of real-world goods and assets. Almost any real-world physical asset could be “tokenised” for easier proof of ownership and exchange of ownership. This is done by using blockchain technology to record who owns the asset.

The technology even lends itself to intangible assets, such as fans’ love of their favourite sporting teams. Teams can create and sell “limited edition” NFTs that carry experiences that fans could not otherwise buy, such as meetings with their favourite players, or fan engagement in decisions about which players to recruit.

There is a very real feeling that the nascent NFT world is only scratching the surface of the potential applications – and the potential scale.

This article was previously published in Live Wire.

Dan Annan

Dan Annan

Dan is the chief executive officer of Cosmos Asset Management (CAM) and is responsible for leading the business operations and strategic direction. He has extensive experience in the local and global funds management industry, with over 15 years dedicated to Exchange Traded Funds (ETFs). Before CAM, Dan was head of BetaShares Institutional ETF Business for three years. Prior to BetaShares, Dan held various roles within the iShares ETF business for BlackRock in the US and Australia. His final US post focused on capital markets, where he worked with global banks to incorporate equity and fixed income ETFs into their business models to support trading and liquidity of the ETF ecosystem. Dan started his career with AllianceBernstein in 2002 with coverage of US and Canadian pensions, corporates, foundations and endowments. Dan holds a Bachelor of Economics from St. Lawrence University, New York.

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