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This post was written by Tal Elyashiv, founder and CEO of SPiCE VC.
Over the past few months, non-fungible tokens, also known as NFTs, have burst into the public consciousness, expanding and even challenging our collective understanding of digital ownership. NFT refers to the perceived value of any particular collectible or investible item, but the value of each NFT is in the eye of the beholder, and NFTs can be bought or sold based on what others are willing to pay for it. NFTs connect the physical and virtual worlds by leveraging the best of what blockchain has to offer.
So, for the skeptics or even the investors that think that NFTs are a fad that will boom and/or bust, or even a bubble that’s bound to burst, I’ve got news for you. NFTs are here to stay and will become second nature to all of us in just a few years. Instead of the phrase, “There’s an app for that,” we’ll all be saying, “There’s an NFT for that” soon enough.
We’ve got NFTs all wrong
A “bubble” in an economic context, generally refers to a situation where the price for something—an individual stock, a financial asset, or even an entire market sector—exceeds its fundamental value by a large margin. Just by definition, an NFT bubble is impossible because the value of each NFT is solely based on the value of the item it represents. NFTs are not actually a defined asset or form of cryptocurrency.
So what exactly is an NFT? A unique token conceived on the blockchain, an NFT is governed by blockchain-based smart contracts, and transfers of ownership are written into the blockchain. The uniqueness of each non-fungible token is defined by the information stored in the token’s metadata, including a token ID that points to an image, artwork, web domain, or any valuable digital resource.
Contrary to popular belief, NFTs are not actually cryptocurrency or a form of money, but instead, they represent what they were created for as a digital certification of the value of an item that lives on the blockchain. Instead of long, extensive and complex paper trails that go along with transactional ownership of a variety of items, NFTs create digital contracts, proof of ownership, proof of authenticity, certification, as well as information about the item and business rules related to the item, that attach to that item throughout its lifespan, defining what the item actually is and its value over time.
To put it plainly, an NFT is an untampered and tamperproof certificate of authenticity and ownership. Currently, the art market has fully embraced NFTs. But, while digital art, virtual gaming assets and virtual collectibles may have been the first use cases, they will certainly not be the last. The expansion of NFTs in other areas of the “collectible” marketplace is already happening, including music, video games and more.
This is all new and exciting, but only scratches the surface of what NFTs can do and how they can be used.
What does the future hold for NFTs?
NFTs are moving digital assets into the public imagination, but if they are to become the onramp for more mainstream adoption of blockchain-based systems, they need to prove that they can earn users’ trust and evolve.
Right now, NFTs are static and mainly represent digital collectibles, but we’ll eventually move to a phase where NFTs become dynamic and exist, evolve and update in real-time with the item they represent throughout its lifespan. There are so many real-world goods and processes out there that could be represented as dynamic NFTs to build a new class of auto-updating assets that are more fluid, data-driven and accessible.
NFTs are fairly popular in the art world, and a lot of people think that art is one of the only use cases when there are actually a plethora of use cases out there. The utility of NFTs goes far beyond artwork, collectible trading cards and the gaming industry. For example, governments can issue fraud-proof digital passports connected to NFT counterparts on the blockchain.
Land deeds and property ownership can be represented on-chain as NFTs that are automatically appraised in real-time. A digital trading card for a soccer player could include performance stats like goals scored and automatically update the stats in real-time during the player’s live game. NFTs could also be created for luxury or rare automobiles to represent exchanges of ownership and value in real-time over the lifespan of the vehicle. NFTs can be sold as silent auction items, along with the standard sports tickets, flights and luxury hotel stays. And NFTs can help protect intellectual property rights by enabling the creator’s IP to be traced to the digital asset.
NFTs are truly the next safety deposit box. For decades, people have trusted banks to keep their most valuable items in an air tight, fireproof box that requires a physical key or sometimes a code to enter. But the NFT is the safety deposit box of the 21st century and beyond. Rather than a physical box, the NFT can be a digital box that represents any and all of a person’s most precious collectables and documents, including wills, testaments, jewelry certification and ownership and important financial documents.
Must-haves for the next phase of NFT evolution
Despite the recent popularity of the NFT market, the NFT ecosystem is still in an experimental phase. The future use cases of NFTs are endless and that’s why NFTs are not just a fad. They’re definitely here to stay.
But in order for NFTs to be pervasive, a few things need to happen, including a drastically improved user experience. NFTs currently have a cryptocurrency user experience. The user experience needs to evolve to an Apple or Amazon Prime type of experience. Here are a few critical actions that need to happen for the real potential of NFTs to unfold:
Discovery and search
If NFTs are ever going to live up to their potential for mainstream consumers, then they need to be represented and available in mid-market landscapes and not just in luxury, top-of-the-line opportunities. The average consumer needs access and the ability to search, compare and shop. The discovery phase in a person’s buyer journey is critical. Many don’t know exactly what they want until they see it, then they want to read comments and compare the product to other offerings. And let’s not underestimate the power of impulse purchases. This will likely also drive specialization of NFT marketplaces based on specific use cases.
Standards and regulation
NFTs have the opportunity to correct the mistakes of the crypto past by leveraging advanced blockchain technology, backed by mainstream institutional players, as well as responsible regulations. Critical mass adoption relies on secure platforms, ease of use and transparency. To truly realize the potential of NFTs, standards around the content and information included in each NFT need to be made and met. Regulations around the creation, marketing and sale of NFTs should also be put in place to make sure that fraud is reduced and standards of ownership are upheld. Additionally, larger institutional intermediaries, that can include auction houses, insurance institutions, banks and other organizations, can offer safe guards and guarantees during the creation and throughout the lifecycle of the NFT – providing owners and investors with additional layers of protection and added reassurance.
Non-crypto user experience
Let’s face it, most consumers and financial investors don’t deal in crypto every day. What they do interact with is their seamlessly beautiful mobile device, intuitive apps and websites and experiences that make their life easier throughout the day. The crypto UI/UX is not always user-friendly, especially for those who are crypto illiterate. Therefore, when I began my own process to create an NFT for a piece of my artwork, I wasn’t surprised by what I encountered – a complex and lengthy experience that mirrored today’s disconnected crypto experience.
As a lifelong “techie” and an experienced crypto investor, even I had trouble with some of the tasks, including connecting to my virtual and physical wallets and trying to transfer funds struggling with versions that weren’t compatible. Then, when I had to complete the NFT transaction – due to congestion on the underlying Ethereum blockchain sealing the transaction took about an hour or so. Someone who is not as well-versed in this ecosystem would’ve been frustrated, confused and most likely walked away.
For NFTs to achieve critical mass and adoption in a variety of industries and verticals, the tech and user experience need to shield the users from the feel of the underlying blockchain and move towards the seamless and frictionless experience we’ve all come to demand (and love) on our favorite websites and apps.
NFTs are here to stay
NFTs are certainly not going anywhere. In fact, they will only grow in popularity and in use cases. As with any investment, people need to do their homework and fully understand the market and item that they are investing in. Just because an NFT has been created for something doesn’t always mean that it’s a valid investment. Markets and prices fluctuate and they will continue to do so as NFTs gain speed.
With the NFT market growing, larger mainstream investors are taking notice and participating. As clear regulations start to take shape, NFTs will become a natural extension of our everyday digital lives.
So, to adequately answer the question of whether or not NFTs are in a “boom or bust” market, its less about the behavior of NFTs and more about how investors and organizations view the entire ecosystem. Those that realize the power of NFTs early on and embrace their usefulness in all aspects of our financial lives, will most certainly experience a “boom.” For those skeptics that miss the opportunity to participate in this ecosystem that’s in its infancy but on a rapid growth trajectory – will unfortunately find themselves feeling the burn of a “bust.”
Tal Elyashiv, a serial entrepreneur, is founder and managing partner of SPiCE VC, which funds early stage companies.
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