Deep Dive: The Future of NFTs

The NFT market has slowed considerably since the 2021/22 bull run, with trading volumes dropping from $2.8 billion in August 2021 to below $100 million in August 2023. A recent study has also made a shocking discovery, revealing that more than 23 million (95%) NFT collectors hold worthless investments.

According to this research report, the NFT market currently has a higher supply than demand, with 18% of top NFTs recording a floor price of $0. This indicates that even the most popular NFT collections struggle to find sufficient demand. Interestingly, the floor price of 41% of the top NFTs ranges between $5 and $100, while less than 1% register a floor price above $6,000.

Source: dappGambl

Although these figures illustrate just how risky non-fungible tokens are as investments and how rare valuable assets are, NFTs are not dead. High-quality collections will likely survive and transform into brands and communities that transcend the Web3 landscape. They will go mainstream, allowing them to potentially retain some or all of their value.

Furthermore, NFTs should become a part of our everyday lives, not as overvalued profile pictures, but as a technology with great utility.

What is an NFT?

A non-fungible token (NFT) is a unique digital asset representing any natively virtual item on the blockchain, such as digital art, game assets or any token for that matter. It can also represent real-world assets like sports collectibles and physical art. An NFT serves as an irrefutable proof of ownership and authenticity in the item it is linked to (if it is linked to something tangible at all).

The unique quality of NFTs makes them non-fungible, meaning you cannot replace one with another. For example, each Crypto Punk NFT is distinctive and cannot be exchanged with another NFT from the same or different collection.

NFTs are minted under different token standards depending on the anchor blockchain. For instance, Ethereum has ERC-721 and ERC-1155, the most prominent token standards in the industry today.

How does an NFT really work?

An NFT is essentially a token that lives on the blockchain. However, the image, audio file, or video it represents is typically recorded off-chain as it would otherwise clog the chain, raising transaction fees. As a result, these files are stored elsewhere, and only the link is stored in the smart contract.

NFTs are created using smart contracts, which assign and reassign ownership. The smart contract automatically gives ownership to the creator at the time of minting and reassigns it when they transfer or sell the NFT. The smart contract can also be used to provide an NFT with utility.

Metadata is the core of an NFT. It describes the NFT name, properties, attributes, and the link pointing to an NFT’s digital file. Creators are responsible for deciding which metadata will be stored on-chain and what information will be hosted on an off-chain storage solution.

Here’s an example of an NFT’s data structure.

Source: Medium

Why NFTs?

NFTs feature transferability, permanent data storage, and ownership. In Web3, ownership means holding and controlling the private key to the wallet where an NFT is stored. However, NFT ownership may not be as straightforward from a legal point of view. For instance, Warner Bros’ movie-based NFTs are issued via a limited license, which means buyers will not legally own these non-fungible tokens.

Regarding transferability, NFTs can be transmitted from one person to another without a centralized authority, and a record of this transfer and history of ownership is permanently stored on the blockchain.

Utility is another NFT feature that will be seen in new-generation NFTs. It is vital since it unlocks the real value of NFTs. Additionally, it could help the market attract more demand, leading to mainstream adoption, as it allows owners to do more with their NFTs.

Top NFT use cases

Mainstream companies are now issuing NFTs, even though they may not necessarily use the term “NFT” to describe their collections. Generally, traditional brands launch limited digital collections as a way to experiment with non-fungible tokens.

The top three mainstream brands issuing NFTs by total revenue are Nike, Dolce & Gabbana, and Tiffany, as of July 2023. Other issuers are displayed in the table below.

Source: Dune Analytics

These issuers and many others are using NFTs in a variety of ways. Below are the top NFT use cases.

Token-gate content, products, or experiences

NFTs can be utilized to restrict access to content, products, and experiences the same way tickets give buyers access to an exclusive event or VIP admission. Token-gating helps make customers feel special and closely connected to their favorite brands.

Augment and incentivize community building

Companies are issuing NFTs as incentives for discounts on future product releases or access to exclusive content. This encourages customers to become active members of a brand’s community.

Co-create digital goods that are “owned” by users

Brands can collaborate with the community to co-create NFTs, giving them the opportunity to own part of the brand and culture they have helped build. 

Monetize IP

NFTs have given digital artists, comedians, musicians, writers, and other creators a way to monetize their intellectual property (IP) and potentially generate long-term value.

Loyalty

Companies can use NFTs to reward customers for their loyalty, engage with their client base, and increase the value of their products.

Connect physical goods to virtual counterparts, i.e., verification and provenance

NFTs give physical goods an immutable digital identity on the blockchain, allowing anyone to verify their authenticity and provenance (origin and ownership history). When an NFT is resold, the original sale recorded on the blockchain acts as a certificate of authenticity. It is transferred to the new owner together with ownership rights in the product.

As we have seen from the use cases above, NFTs can help promote customer loyalty, increase customer engagement, and verify the provenance of products. The ability of customers to prove a product’s provenance and authenticity is especially essential to brands that want to minimize counterfeiting. Since NFTs act as digital certificates of authenticity, fraudsters can find it tricky to imitate the underlying items. 

Companies in the luxury goods industry are leveraging NFTs and NFC chips to combat counterfeiting. So, besides the blockchain-stored proof of authenticity, these companies are attaching an NFC chip to the physical item, enabling buyers to access the digital certificate of authenticity. The NFC chip contains details about the product’s provenance, date of manufacture, country of production, and the materials used.

The use of blockchain and NFC chips in the luxury goods sector is in the early stages of adoption. However, it has the potential to diminish counterfeiting and enhance customer experience. 

The other benefits of NFTs are improved brand awareness and increased revenues for creators.

Regulation around NFTs

Regulatory bodies across the globe have still not clarified whether NFTs are securities or collectibles, creating uncertainty for NFT issuers. Although some decisions have been made in the US and the UK through legal channels, the general NFT regulatory environment across the globe is full of uncertainty and minimal regulatory enforcement. 

In the recent lawsuits against Impact Theory and Stoner Cats, the SEC identified the NFTs issued by these companies as securities because of profit expectations. Impact Theory agreed to pay a fine of $6.1 million, while the Stoner Cats creator was fined $1 million.

Last year in the UK, the High Court of Justice ruled that NFTs represent “private property.” Nevertheless, the private property status does not cover the underlying content the NFT represents.

Based on the two US lawsuits mentioned above, NFTs are declared securities when profit is expected. However, some NFTs could be more like collectibles if projects are cautious about their messaging and avoid mentioning profit opportunities.

Laws surrounding copyrights in NFT ownership are also unclear. A little-known fact in the NFT sector is that NFT ownership doesn’t necessarily extend to owning copyrights of the underlying work. 

What’s in store for NFTs

The future of NFTs could substantially change if proposed improvements are implemented. Presently, Ethereum has three major NFT-related enhancement proposals in the pipeline.

EIP-7212 aims to integrate passkeys into the Ethereum Virtual Machine (EVM), allowing users to sign transactions on their mobile phones without additional software.

EIP-1153 will make on-chain metadata storage cost-effective and remove the need to store some data off-chain.

EIP-6551 offers to turn an NFT into a wallet. This means that an NFT smart contract can be programmed to send, receive, and hold ERC-20 tokens.

Final Thoughts

Although the NFT market is down, and issues such as insider trading, fraud, and money laundering are not unheard of, non-fungible tokens are here to stay. Their potential is just too great to ignore and underestimate. Therefore, it will not be surprising if NFTs sneak their way into the mainstream sector without people knowing it.

That said, challenges surrounding interoperability, scalability, user experience (UX), regulations, and software applications are currently in the way of mass adoption. Nonetheless, companies and protocols are working on solutions to address these problems, meaning they will soon be tackled.