by Heather Ritchie & Editorial Team
May 22, 2023
The Utility of NFTs Explored
What’s reality, what’s B.S., and why the markets are so volatile.
The NFT market peaked at $19.1 billion in February 2022, according to Derek Andersen in a February 2023 Cointelegraph article, outperforming Bitcoin and Ether. By June 2022, following the Terra collapse in May, NFTs lost 88% of their value. At the end of November, the market hit its year low at $2.2 billion, and by December, the market was up 68% from that low. In January 2023, NFT sales increased 41.96% from the previous month, based on forecasts from Bitcoin.com.
Zooming out from the short-term track record of NFTs to a longer-term outlook, economists suspect that we’re in the nascent stages of a growing economic movement.
“Total NFT market cap recorded a growth of 11,664% in two years, increasing to around $10 billion from $85 million in December 2020,” writes Zeynep Geylan for CryptoSlate.
NFT technology, explained
NFTs, like cryptocurrencies such as Bitcoin and Ethereum, are tokens that can be bought, sold, and traded. Each NFT has value and can be converted into fiat currency.
NFTs are similar to cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) because their digital records remain on the blockchain. NFTs can be “owned” and come with proof of ownership on a public ledger on just about any blockchain.
BTC and ETC, unlike NFTs, are fungible.
What is meant by “fungible” is that it’s possible to trade a fraction of each token. Cash tenders such as $20 bills are also fungible because they can be broken down into smaller bills. One piece is the same as another piece, meaning that they are interchangeable like dollar bills.
NFTs are different from BTC and ETH, however, because they cannot be broken down into partial coins. What is meant by “nonfungible token” is that each NFT corresponds to one “asset” and carries a certificate of ownership. As an analogy, physical assets such as houses, cars, paintings, etc., are also nonfungible.
“NFTs are designed to give you something that can’t be copied: ownership of the work (though the artist can still retain the copyright and reproduction rights, just like with physical artwork),” writes Mitchell Clark for The Verge. “To put it in terms of physical art collecting: anyone can buy a Monet print. But only one person can own the original.”
The process of ‘minting’ is how an NFT becomes available on any blockchain. Following initial token sales, NFTs have given rise to secondary trading markets for collectibles.
NFTs represent an economic movement, through the creation of an entirely new way of transacting using digital assets and cryptocurrencies.
“Any digital work, including physical goods, which can be represented in digital form, such as a photo, video or a scan, can be turned into a nonfungible token,” writes Andrew Guadamuz, senior lecturer at the University of Sussex, in an article published in the World Economic Forum (WEF).
“There are various types of NFTs, but the most common is a metadata file containing information encoded with a digital version of the work that is being tokenized,” explains Guadamuz. “The other type is where the entire work is uploaded to the blockchain; these are less common as it is expensive to upload information to the blockchain.”
The utility of NFTs comes down to IP ownership
The applications of NFTs are expansive.
“NFTs can not only be used for digital artwork or collectibles but also as a representation of ownership of any unique asset that is non-interchangeable, such as the deed to a building in both the digital and physical realm,” writes Atal Bansal for Forbes.
NFTs have applications for the following use cases, according to Bansal:
- Deeds to houses and other real estate assets
- Gaming
- Counterfeit fashion detection
- Events and ticketing
- Licenses and certifications
Additional potential applications include travel rewards, identity management, crowdfunding, and of course, art.
“The true potential of NFTs lies in the code behind them. Known as smart contracts, this code can be programmed by the creator of the tokenized asset in an infinite number of ways,” explains RJ Fulton in an article for The Motley Fool.
“Creators can add particular criteria to their NFTs that add contingencies to current and future sales — price, royalties to be applied if the asset is ever resold, and even the block of time when the asset is available for sale.”
As an example, back in 2021-2022, Ticketmaster conducted an experiment with Dapper Labs’ Flow blockchain to mint approximately 6 million ticket NFTs in 6 months as part of an experiment.
“In it, Ticketmaster automatically issued ticket NFTs as memorabilia to attendees of specific events like the Super Bowl LVI,” explains Kate Irwin for Decrypt.
“I think one could make an argument that that’s where the world is going, but I’d like to see how some of these partnerships and activations materialize, and that I think will drive the direction of ticketing on the blockchain,” explained Mickey Maher, Dapper Labs’ senior vice president of partnerships, for Irwin’s Decrypt article.
As assets become digitized, NFTs provide legal infrastructure for a user-owned digital economy. With the Ticketmaster experiment as an example, NFTs provided a mechanism for attendees to own part of the event experience.
“But for Ticketmaster, this is really just about exploring the possibilities around web3, perhaps as a marketing tool or to see if it helps garner more fan engagement,” explains Ivan Mehta in an article for TechCrunch.
NFTs aren’t just arts, entertainment, and marketing, however. The underlying tech has the potential to solve real problems that modern digital privacy laws have struggled to address.
One example challenge is the management of health data.
“Data tokenization on the blockchain provides high levels of privacy and confers the potential for personal ownership of health data, which other privacy-preserving technologies such as federated learning and generative adversarial networks do not offer,” wrote researchers affiliated with the Singapore Eye Research Institute and Duke-NUS Medical School for Nature Medicine.
“The use of nonfungible tokens (NFTs) is a potential data-management solution for the governance of data at both personal and institutional levels.”
The researchers point to the scenario of a web-based smartphone application, in which patients maintain a health wallet, similar to a cryptocurrency wallet, for storing tokenized digital health data.
“Once the infrastructure is ready, health data can be minted as NFTs,” elaborate Teo and Ting. “Acquired health data will undergo minting into a health NFT and made available in a patient’s health wallet. Patients will then have ownership and access to their own data and may subsequently decide whether to share or transfer ownership of these data to other parties in the network.”
The legal picture isn’t clear-cut, however
Despite the promise of NFTs to support ownership and privacy, these topics are also a source of conceptual ambiguity. When someone purchases an NFT, what it is — exactly — that the buyer acquiring? And how do permanent digital records on the blockchain align with existing data privacy regulations, such as the GDPR’s ‘right to be forgotten’? Both questions scratch the surface of more complex legal discussions.
“When I first started writing and advising clients about using blockchain technology in media and entertainment in early 2016, one issue stood out above all others: the disconnect between how people thought the technology worked and how it really worked,” explains Sean M. Sullivan, partner at Davis Wright Tremaine (DWT) and member of the firm’s Media & Entertainment practice group.
“You can create a permanent, secured record of the asset on a blockchain, and that record can be ‘tied’ cryptographically to the asset wherever it lives off-chain, but they do not reside together. Think of it like a library: There is a card catalog that tells you where books are located and when they are borrowed, but the books reside separately on shelves.”
What happens if the digital asset gets deleted or reproduced? Sullivan elaborates that courts in the United States have refused to recognize a ‘digital first sale’ doctrine under copyright law due to digital assets being fungible. In part, NFTs have solved this problem.
“When a user buys the NFT, they are purchasing the token itself, not the digital asset that is linked to the token. The cryptographic link between the token and the asset does not automatically result in the transfer of any rights or obligations as to the asset—that occurs as a matter of contract between the buyer and seller.”
And that’s precisely what makes NFTs powerful as legal mechanisms — they are instruments to solidify relationships between buyers and sellers. The value comes down to the contractual relationship assigned to them.
It can be argued that the ambiguity of NFTs is exactly where their strengths are.
So how can NFTs reach their potential?
The answer to this question is deceptively simple — it comes down to human relationships between buyers and sellers.
In an article for Harvard Business Review, NFT collector Steve Kaczynski and Harvard Business professor Scott Duke Kominers describe NFTs as a tool for market design. NFTs solve the problem of transferring ownership in transactional environments.
“[NFTs give] parties something they can agree represents ownership,” write Kaczynski and Kominers. “In doing so, they make it possible to build markets around new types of transactions — buying and selling products that could never be sold before, or enabling transactions to happen in innovative ways that are more efficient and valuable.”
NFTs can help create digital markets where none previously existed, resulting in the creation of net-new economic value as a result.
“Because blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders,” elaborate Kaczynski and Kominers.
The formula is to (1) respond to a market need, (2) organize a community of users, and (3) maintain ongoing relationships. After all, isn’t that what the history of commerce has always been about?
Contributors statement
This work was a collaboration between our editorial team. August Wang, Collin Woodward, and Cliff Stacy contributed to the story.
Disclosure statement
Copyright © 2023 nft42, Inc. All Rights Reserved. This material is for informational purposes only, and is not offered or intended to be used or relied upon as investment, accounting, financial, legal, or tax advice, or advice of any kind. The material is not an endorsement of any particular company, project or token. The material herein represents the opinions of the author(s) at the time of writing, and does not necessarily reflect the views of the publisher or editor. nft42, Inc. makes no warranties, express or implied, as to the accuracy, completeness, or timeliness of the information contained in the material. By using this website, you agree to the Terms of Use and Privacy Policy. If you have any questions, please contact us using the information provided in those documents.