The wider view of the rise of non-fungible tokens, or NFTs, is the decentralisation of financial services. With the application of the blockchain and its integration with artificial intelligence (AI) and IoT devices[1] (e.g. NFCs and RFIDs), finance has become more efficient and accessible. There are several key drivers that are making decentralised finance work _ tokenisation of real-world assets, maturity of stable coins and the improved implementation or acceptance of some regulations and standardisation. We are also witnessing two fast-growing trends merge and complement each other. The first is tokenisation, where all illiquid assets in the world, from securities to luxury goods and collectibles, become liquid and all liquid assets can be traded more efficiently. The second is the rise of a new tokenised economy where intermediaries have a reduced role in transactions and counterparties transact directly with each other. Inevitably, new transactional rules will be established within this next phase of digital transformation of the economy that must guide economic behaviours to be productive, sustainable, fair and just.
TOKENISATION OF THE ECONOMY
Tokenisation has become one of the most important and influential trends in the digital space. Essentially, tokens are a representation for ‘something’ on the blockchain that does not necessarily have to be a currency (like Bitcoin) but could also be a wide range of other types of tangible or intangible assets, or even a hybrid of both.
By tokenising assets, we can digitally map out and transform illiquid assets to highly liquid assets with higher cost-effectiveness. Given that the asset categories within the private securities market are in the trillions of dollars (where the illiquidity discount can be as high as 20 to 30%)[2].
The basic idea of tokenisation is the use of smart contracts on a blockchain to create a virtual representation of a certain asset in the form of a token. Depending on the type of asset to be tokenised, different tokens and token standards have been developed for the tokenisation process, and the different challenges and opportunities come with it. Tokenising tangible real-world commodities differs from the tokenisation of intangible assets like a software license. Tokenising fungible assets like identical types of shares differs from the tokenisation of non-fungible assets like a unique work of fine art (see Figure 1). Regardless of the type of asset to be tokenised, the basic purposes and benefits are the same: by tokenising assets and thus equipping them with a virtual representation in the form of a token on a blockchain, it is possible to cut away costly and inefficient middlemen – decentralised trade and exchange, which is faster and easier. Developing blockchain and smart contract-based tokenisation platforms will create solutions for tokenisation of all kinds of real-world assets from intellectual rights to commodities to collectibles to real estate with the purpose of increasing liquidity, cutting costs, enabling fractional ownership of assets and opening up the estimated US$280 trillion market of real-world assets for investment. This makes it possible for anyone, anywhere in the world to invest and create a future global investment market far more democratised than the market of today[3].
NFTS CLASSIFICATION WITHIN THE DEFI ECOSYSTEM
A digital asset can be any digital document, sound content, image, utility, and so on, that is a self-contained collection of binary data, which is uniquely identifiable and has value. Platforms often earn more than creators when they display a digital content (or asset) because of the possibility of exposure, and so on. In the case of NFTs, however, creators do not transfer ownership of the digital content to the platform. Instead, ownership is intrinsic to the token itself, embedded in the content. The funds raised from the sale of the content belong to the creator, who can also claim royalties. Owning a digital asset is valuable because the marketplace makes it so through verifiable ownership. NFT creators can sell their work, which corresponds to a unique identity worldwide within the NFT network. They can claim the copyright on the token and when it is resold. Depending on the industry and application, NFTs have several demonstrable and revolutionary benefits. Within art, there are many existing digital works whose provenance could not be protected prior to this technology. By introducing rarity and uniqueness, NFTs have redistributed power within a world monopolised by galleries, auction houses, and investors.
WHY NFTS ARE THE RAGE
Today, tokenised art is visible to anyone, and everyone can access such a marketplace. Virtually anyone can enter a contemporary art gallery and choose to become the owner of a unique and valuable piece. Thus, digital asset creators or owners can also showcase themselves according to their own preferences.
What many people continue to wonder is why they should pay for something that is easily downloadable and stored on any device. The problem is that the downloaded image on your computer has no real value; it does not have the same value as the original image. It is exactly like downloading an image of a Picasso, Monet or van Gogh: you may possess the best resolution of the artwork image, which is unquestionably valuable, but it will never have the same value as the original. The value of cryptographic assets (e.g. crypto art, etc.) is based on the rarity and non-reproducibility. What is difficult to understand is that the true public value of the purchase made is not only the work and what it represents but resides in the token itself.
For other applications, however, the value is based on the ability of NFTs to be transferable. This allows, for example, game enthusiasts to be able to buy several NFTs and collect them within another platform. This ability, due to the creation of peer-to-peer standards, makes NFTs even more desirable. Within the gaming world, spending money to have a certain skin for in-game characters was customary even before the appearance of NFTs. Minting an NFT means always making that skin authentic and traceable back to its original owner. Thus, it is the blockchain technology that makes it possible for NFTs to take on value, and it is the same technology that makes possible their applications in business, industry, gaming, art, music, tourism, real estate, and much more in the future.
ISSUES AND CRITICISMS OF NFTS
A critical deliberation has arisen around the ecological issue of NFTs, which involves the environmental impact of the crypto world. The infrastructure is powered by electricity, mainly produced by fossil fuels (accounting for 64% of the world’s electricity; coal accounts for 38%, while oil and gas is 26%). Currently, a single Ethereum transaction consumes as much electricity as an average U.S. household usage in a workweek – and has a carbon footprint equivalent to 140,893 Visa credit card transactions or 10,595 hours of watching YouTube[4]. In addition, NFTs involve more complex transactions and multiple chain reactions, such as bids, sells, and property exchanges.
Also, as digital assets become readily available and accessible via multi-channel platforms, there is hyperactivity between supply and demand, meaning continuous movement that results in hyper production and hyper consumption, which may impact some artists from getting noticed.
However, it is most important to recognise that while the blockchain itself is immutable, the storage of tokens may be the weakest link since they are highly susceptible to hacks and theft. The more valuable the NFTs, the harder they will be to defend, and new technologies are usually most vulnerable in their most nascent stages[5].
Lastly, digital sceptics often view cryptos and NFTs as tools for money laundering or black-market transactional currency because despite their traceability, the counterparties can still maintain some anonymity behind hash codes.
RECENT DEVELOPMENTS IN SINGAPORE AND TRENDS OF NFTS WORLDWIDE
In Singapore, NFTs are growing too. Notably, Singapore-based NFT marketplace Mintable raised US$13 million in Series A funding from several astute investors like Mark Cuban, Ripple Labs, and MetaPurse. Mintable has since launched NFTs in conjunction with companies such as BAPE and CNBC. Other notable developments are Brytehall, a Singaporean NFT platform, launched in 2021. It was created to bring luxury art and fashion into the metaverse. Created by the founders of Media Publishares, Brytehall was also responsible for launching Vogue and Esquire’s NFT collections in Singapore. The latest edition to Singapore’s NFT scene is ARC, an exclusive digital community founded by Kiat Lin, the son of Singaporean billionaire Peter Lim. ARC has ambitions to launch its own iteration of the metaverse soon[6].
NFTs bring peak programmability to the table, which is one of their most attractive attributes, allowing them to offer a wide range of utility to their users. Hence, they can create new subscription models and online social perks[7].
For metaverse-based social clubs, NFTs function similarly to a digital identity, offering holders access to exclusive perks, content, and events. Employing NFTs as the identity layer of metaverse projects will likely become more popular, due to the uniqueness and restriction or suppression resistance of each token. Profile picture (PFP) and avatar NFT projects are among the most successful in the history of NFTs. The stage for these projects was set in 2017 with the release of the now infamous CryptoPunks.
Ten thousand CryptoPunk NFTs were algorithmically generated and given away for free in 2017 to any interested party with an Ethereum wallet. Fast-forward to 2021, and the cheapest of the ten thousand NFTs is worth over US$400,000 and over US$4 billion has been traded over the NFT series. Today, you can spot CryptoPunks on Jay-Z, Visa, Snoop Dogg, and Odell Beckham Jr.’s Twitter pages, and even on the red carpet at the Met Gala.
The film industry stands to be disrupted by the potential of NFTs, as Quentin Tarantino became one of the first well-known directors to auction seven uncut scenes from Pulp Fiction as NFTs. The NFTs will include the uncut first handwritten scripts for the movie, as well as Tarantino’s exclusive commentary. Naturally, the content will only be viewable by the owner of the NFT. And this is just the beginning for NFTs entering the world of entertainment. Others include:
- Fox Entertainment has invested $100 million behind several NFT projects, including a new animated series on the blockchain.
- Warner Bros released collectible NFTs, along with the debut of the film, Dune.
- Vuele released an Anthony Hopkins film as an NFT.
- Steve Aoki has secured funding for a new NFT show.
- Disney released digital collectible NFTs paired with subscriptions to Disney+.
- Jambb is letting comedians sell jokes and comedy specials as NFTs.
The music industry may be in tow as Loud Market, a music NFT marketplace, is aiming to disintermediate the music industry. Loud Market enables musicians to mint their songs as NFTs and sell them directly to their fans. Loud Market is a great example of how NFTs can remove profit-seeking middlemen and facilitate trustless[8], peer-to-peer transactions. Decentralised music streaming platform Audius is also aiming to democratise the music industry, by offering artists 90% of the sales revenue, with the other 10% going to decentralised node operators securing the network.
The publishing industry also stands to benefit from the rise of NFTs as one of Hong Kong’s oldest newspapers, the South China Morning Post (SCMP), has announced the launch of ARTIFACT, a standardised metadata structure for recording historical assets as NFTs. By tokenising accounts of important historical events, SCMP hopes to create more transparency in the legacy publishing industry, since every tokenised news story is publicly traceable and censorship resistant.
As time goes on, NFTs may develop further and look entirely unrecognisable from what it is today. Evaluating solutions that include greater transparency from major marketplaces, focusing on renewable energy resources, or minimising on-chain transactions could be far more useful for the future of the digital world. The goal is to open new possibilities and implement solutions to overcome present bottlenecks, and all of this should be done without harming the stability of the financial system while keeping public trust intact. ⬛
1 IoT is short for Internet of Things, and these devices include near-field communication (NFC) devices and radio-frequency identification devices (RFIDs) whose applications include QR codes/readers and contactless payment terminals like PayWave
2 Voshmgir, S. Token Economy: How the Web3 Reinvents the Internet. Creative Commons, 2020. Accessed on 2022, February 2 from: https://token.kitchen/#book
3 Mohamed, H. Decentralizing Finance via Cryptocurrencies, Tokenization of Assets and Peer-to-Peer Platforms. IJIE: International Journal of Islamic Economics, [S.l.], v. 3, n. 1, July 2021. pp. 1-16. Available at: https://e-journal.metrouniv.ac.id/index.php/IJIE/article/view/3128
4 Bluestein, A. Ethereum risks it all on going green. Fortune Media IP Limited. 2021, July 29. Retrieved from: https://fortune.com/2021/07/29/ethereum-going-green-ether-crypto-carbon-footprint/
5 Mohamed H. Chapter 5: Managing Islamic Financial Risks and New Technological Risks. in Sarea, A. M., Elsayed, A. H., and Bin-Nashwan, S. A. Artificial Intelligence and Islamic Finance: Practical Applications for Financial Risk Management (1st ed.). Routledge. 2021, December 31. pp. 57-73
6 Worldrepublicnews. A Look at Key Developments and the Rise of NFTs in Singapore. n.d. Retrieved from: https://worldrepublicnews.com/a-look-at-key-developments-and-the-rise-of-nfts-in-singapore/
7 Vardai, Z. Top 5 NFT Trends to Watch in 2022. Forkast. 2022, January 4. Retrieved from: https://forkast.news/nft-2022-five-trends-to-watch/
8 This means that one does not need to trust a counterparty. The mechanism for their transacting is the trust machine due to blockchain’s ability to verify and authenticate information/transaction
Dr Hazik Mohamed is a multi-skilled professional, whose focus is on business growth strategies for start-ups, tech-related research, and various consulting projects. His past corporate clients include the ASEAN Secretariat, national finance offices, and the United Nations Capital Development Fund. He is also the author of three internationally published books: Belief and Rule-compliance (Academic Press, 2018), Blockchain, Fintech and Islamic Finance (De Gruyter, 2019) and Beyond Fintech (World Scientific, 2021).
