The new hot spot in the digital world of blockchain and cryptocurrency is non-fungible tokens (NFTs). A non-fungible token is a unique digital asset that can be sold or transferred. There may be some significant applications for NFTs in business, art, and finance.
NFTs use blockchain, just like cryptocurrencies, and garner similar benefits. Their ownership is verifiable and traceable; they exist with a permanent record on blockchain. Unlike cryptocurrencies, they are non-fungible. A fungible asset is one that is mutually exchangeable with another like asset.
Ten U.S. dollars equals 10 U.S. dollars. It does not matter which 10 dollars you have; they are mutually exchangeable. One Bitcoin equals any other one Bitcoin, and it also does not matter which one is yours.
With non-fungible assets, the particular one does matter. They are unique; they have particular attributes that add to or detract from their value, relative to other similar items. Diamonds, for example are not the same; each is unique, and it matters very much which diamond is yours.
Similarly, art and real estate are unique: A masterpiece is not any other painting, and an apartment on Park Avenue is not the same as any other real estate parcel.
Non-fungible tokens have gotten off to a solid start in digital art and in some logistics applications. Digital art is a natural fit for NFTs, the ownership belonging to the holder of the token, no matter how many duplicates or copies may be floating around the web. Ownership is the only thing with value, a copy of digital art may be enjoyable but is financially without value.
In addition to the benefits of a clear ownership chain and indisputable public record of ownership, digital art and other NFTs sell without the need for a financial intermediary, aka a middleman. This can speed up transfers but more importantly eliminates the financial cost of an intermediary.
Logistically, NFTs allow for a chain of custody and other metadata to be attached to specific items, which allows produce and other goods to be sold with a clear history. This can be useful from a product safety standpoint or a value-added standpoint for free trade goods or other items that may trade at a premium if their history is readily verifiable.
Emerging and Potential Uses
The emerging and potential uses of NFTs appears unbounded. Nearly anything unique, or limited in quantity, could be represented by a NFT and easily and verifiably be transferred with a permanent record.
For example, an event ticket could fit the bill as either being unique (if for a particular seat at a particular event) or of limited quantity (say, for general admission to an event). In either case the ticket could be represented by a NFT and transferred without an intermediary and the NFT would provide proof of ownership.
NFTs could represent identities and be used for passports or other secure identification needs.
They could be used to represent votes and prevent the possibility of duplicate voting or other voting irregularities. No manual counting, no hanging chads. Every vote counts and every vote counts once.
NFTs can be used to represent ownership of other unique physical items, such as real estate. Real estate transfers are generally complex. NFTs could make real estate ownership simpler and easier to transfer — and also open up a host of new opportunities. Fractional ownership of real estate — or any other property, including artwork — can be easily handled by NFTs.
NFTs could not only handle identical fractional ownership, but also allow for ownership of a specific part of an asset, potentially allowing for certain aspects of an asset to be valued differently.
Real estate is a great example of the benefits of NFTs and potentially the tip of the iceberg. The financial world is not noted for ease of transactions. The financial world revolves around intermediaries who make a lot of money facilitating transactions.
NFTs can potentially streamline transactions and reduce the need for the intermediaries who make transactions more expensive. They have the potential to be a great aid in fintech’s evolving democratization of the financial landscape.
Risks and Downsides
Non-fungible tokens are a risk reducer. They allow for additional metadata to be associated with an asset and provide a permanent record of ownership on blockchain. The risks associated with NFTs are their ability to facilitate transactions without barrier to entry.
This is not unique to NFTs; it is an issue with the democratization of finance in general: Individuals continue to gain access to products and services that may not be in their best interest of their financial situation. More access comes with fewer gatekeepers.
The democratization of finance begs for financial literacy.
As the financial technology world continues to develop, fintech companies have a unique role and responsibility to help educate consumers to make appropriate financial decisions and maximize their personal benefit with these technologies.
A downside that always bears repeating anytime blockchain is involved is energy usage. The blockchain is extremely energy intensive and utilizing blockchain means utilizing a lot of energy.
There are concrete steps being taken to improve blockchain’s large energy footprint, but it remains a major consumer of energy. You simply cannot process blockchain transactions without using a lot of energy.
The Bottom Line
Non-fungible tokens have the potential to be a game changer. Cumbersome financial transactions can potentially be handled securely and verifiably. The role presently played by financial intermediaries may be reduced as this technology reduces the need for such services.
The benefits are not reaped by investors alone. Artists and others who wish to sell can do so and avoid expensive middlemen and secure future royalties far easier than with legacy systems.
NFTs have the potential to change business both internally — as an aid in managing and administering inventories and transactions — and externally, in facilitating what have traditionally been complex transactions.
As society moves toward more coownership of assets, such as group ownership of autos or other transportation, NFTs may enable and enhance the development of these changes.