INSIGHTS & ANALYSIS
NFTs, beyond the hype
What are NFTs and their potential for secondary trading beyond speculation? What this digital revolution means and how can you benefit from it?
A few months have passed since RTFKT Studios paired up with 18-year old artist FEWOCiOUS to create a new digital sneaker collection. The team sold all of its 600 pairs in only 7 minutes, making over 3.1 Million USD. Christie's - a famous auction house - sold a piece of digital artwork for over 69.3 Million USD - for just a simple JPEG File. In the first quarter of 2021, the trading volume of NFTs (Non-Fungible Tokens) was a whopping 2 billion USD.
Some people consider NFTs and other blockchain-based assets very speculative; others perceive the development as a digital revolution. But this digital revolution has already started, and NFTs become lighthouses whose radiance also appeals to a less technically interested target group. It's impossible to predict how sustainable such development is. Still, many companies, artists, and creators have started asking themselves what this digital revolution means for them and how they can benefit from it.
What are NFTs?
Simply put, NFTs are unique digital assets that exist on the blockchain. In collectID's case, they are created on Ethereum using the ERC-721 standard, but they can exist in other ecosystems as well. The acronym NFT stands for non-fungible token, which is a technical way to say that each asset is unique and therefore not interchangeable with other tokens of that type. A real-world example of a non-fungible asset is a house or a car; each one is different depending on physical attributes, ownership history, etc. To further help explain, an example of a real-world fungible asset would be the US dollar, an ounce of gold, or even something like individual bottles of wine from the same batch. The two most important aspects of an NFT are:
Uniqueness: When created, the token contains data describing itself, including its current owner. Every token has a unique and permanent identifier in the ERC-721 smart contract. With the token identifier and the smart contract address, it is possible to distinguish between every NFT in a given blockchain ecosystem.
Transferable: Thanks to the ERC-721 standard, the functions for interacting with NFTs are standardized, including the ability of the token owner to transfer it to another user. Because a smart contract's source is published for all other users to review and verify, all parties can interact without hesitation.
With these two properties, NFTs are an excellent method of digitally representing the existence and ownership of a unique asset.
The value of an NFT
The value of an NFT is a function of supply and demand or - in other words - what people are willing to pay for it. Since NFTs are intangible, it can be challenging to evaluate their intrinsic value, but their current market value is primarily a function of their artificial scarcity. Furthermore, the value of an NFT depends on additional factors, such as the importance of the creator or the visualisation of the token. Ultimately, however, artificial scarcity is always a primary driver of the value of an NFT.
Potential of NFTs beyond speculation
We believe that NFTs have much more potential than many think. Apart from the purely speculative value due to an artificial scarcity, NFTs can solve significant problems. With NFTs, it is possible to verify the authenticity of products. By that, brands, producers, and manufacturers can prevent counterfeiting in entire industries and protect the creative work of artists and designers. collectID takes advantage of this and protects the authenticity of physical products by linking NFTs with NFC tags. To achieve this, collectID integrates encrypted NFC tags directly into products, providing each of these products with a unique and clear ID. This ID is stored as an NFT on the Ethereum blockchain and subsequently assigned to the rightful owner of the product. In this way, each NFT in the collectID system unambiguously represents a matching physical product.
Combining NFTs and physical products opens up some exciting possibilities for companies. Blockchain technology is still elusive for many people, and acquiring and trading NFTs is not intuitive. By linking the NFT to a physical product that customers are familiar with, NFTs become easily accessible to a larger audience. Furthermore, NFTs gain intrinsic value as they are linked to a physical product. By that, NFTs become not only sustainably more valuable but also authenticate the physical products themselves.
On the one hand, because their authenticity is guaranteed and easy to be checked at all times. On the other hand, physical products are provided with an additional digital dimension. This allows companies to open up new business models (e.g. secondary trading) and revenue streams.
Potential for secondary trading
The link between NFTs and physical products opens up new opportunities for secondary trading. When the products are traded with the NFTs as a bundle, the authenticity of the products is guaranteed at all times and can be easily verified by the buyer. To do so, the buyer only needs to tap the product with his smartphone to scan the integrated NFC tag. In addition, the buyer can verify if the seller is the rightful owner of the product he is about to buy. In short, linking NFTs with physical products creates trust where there hasn't been trust before.
However, that is only the beginning. Independently from the physical product, an NFT can be traded as a future asset. For example, an NFT representing an exclusive bottle of wine can be bought and traded already during production. The physical bottle of wine will then be delivered a few years later - to the current owner of the NFT. Previously illiquid products become easily tradable, and companies are able to generate revenues already before or while they produced the products.