Did You Know NFTs Could Change Global Business Models?
Through its cooperation with anonymous digital artist Pak and NFT marketplace Nifty Gateway, Sotheby’s has become the latest established brand in the art to dive into NFTs (non-fungible tokens). The Fungible Collection, a “new collection of digital art altering our idea of value,” was sold for more than $17 million (£12 million) by the auction house.
Some works, such as “The Switch,” a monochromatic 3D structure that the artist will modify at an undefined time in the future, drew bids considerably above $1 million. NFTs are tokenized versions of assets exchanged on a blockchain, the digital ledger technology that underpins cryptocurrencies such as bitcoin and ethereum. NFTs are the polar opposite of bitcoins, which are fungible and can be exchanged like for like. The underlying assets are unique in some sense and cannot be transferred like for like.
Because of its rarity, Christie’s was able to sell digital artist Beeple’s “Every day” NFT for an eye-popping $68 million in March. NFTs are also being used for trading memorabilia like baseball cards and computer gaming things like swords and avatar skins for folks who don’t have that kind of money.
The frenzy around NFTs supports a narrative similar to that surrounding other recent price rises, such as GameStop and Dogecoin. They are speculative bubbles fueled by US stimulus, lockdown boredom, and low-interest rates. Celebrities such as Grimes, a musician, and Logan Paul, a YouTuber, have released their own flagship NFTs to ride the wave. Even the entrepreneur who purchased Beeple’s world-record-breaking artwork, Vignesh Sundaresan, considers investing in NFTs to be a “big risk” and “even crazier than investing in crypto.”
However, history teaches us not to dismiss NFTs as a transitory trend because the significance of technological advancements typically becomes obvious after the enthusiasm has died down. Many observers rejected the surge of IT businesses during the late 1990s dot-com bubble, as well as the first wave of popular cryptocurrency enthusiasm in 2017, only to be shown catastrophically wrong when Amazon and bitcoin resurfaced.
Since February, the average price of NFTs has dropped by 70% February, putting them significantly below their highs. Perhaps, since the original hoopla has died down, this is more of a “weeding out” of gimmicky tokens than a bubble bursting. This phenomenon is effectively depicted in Gartner’s hype cycle, which depicts the normal progression of new technology in the United States. We’re emerging from the “peak of exaggerated expectations” with NFTs, on our way to the same “productive plateau” that Amazon reached a long time ago.
This is consistent with Austrian economist Joseph Schumpeter’s explanation of why capitalism works. As the freshest and most inventive firms replace those that came before, Schumpeter saw capitalism as a constant churn of old into new, which he dubbed “creative destruction.” NFTs are the newcomers in this regard, challenging how we view and recognize asset ownership. Also contributing to the skepticism that constantly surrounds new technology is the struggle between innovation and incumbency.
What Will Happen Next?
NFTs allow for the development of hitherto unimagined business models. Artists can include provisions in an NFT that ensure they receive a portion of the revenues every time it is resold, so they benefit if the value of their work rises. Although football teams have used similar contractual conditions when selling players, NFTs eliminate the need to follow an asset’s progress and enforce such entitlements on each sale.
New art platforms, such as Niio Art, allow users to easily demonstrate their digital artwork. Customers who borrow or buy art from the platform can exhibit it on a screen with confidence that there are no copyright or authenticity issues because the NFT and blockchain assure that ownership is real. NFTs allow musicians to reward their audience with better media and other rewards. In sports memorabilia, between 50% and 80% of items are regarded to be false. This counterfeiting problem could be solved by putting these products into NFTs with a clear transaction history back to the inventor.
However, the promise of NFTs extends far beyond these fields because they radically alter the rules of ownership. To create trust in the transaction, exchange contracts, and ensure that money changes hands, transactions in which ownership of something changes hands have traditionally relied on layers of middlemen.
In the future, none of this will be necessary. Because the information on blockchains cannot be modified, transactions recorded on them are trustworthy. Smart contracts can be used instead of attorneys and escrow accounts to verify that money and assets are transferred correctly and that both parties follow through on their agreements. Assets are converted into tokens by NFTs so that they can be moved around inside the system.
This can dramatically change markets such as real estate and automobiles. NFTs may potentially be a component of the answer for resolving land ownership disputes. Only 30 percent of the world’s population has legally registered land and property rights. It is significantly more difficult to obtain finance and credit for those who do not have established rights. Also, if we spend more time in virtual worlds in the future, the products we buy there will most likely be bought and sold as NFTs.
There will be a slew of other developments in this decentralized economy that no one can predict. We may predict that it will be a far more transparent and direct market than we are accustomed to. Those who believe they are witnessing a fad are unlikely to be ready when it occurs.