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Much ado about NFTs and how they could disrupt the status quo

Trading could be in millions of dollars and the secondary market could be extremely volatile

Published: Tue 26 Apr 2022, 11:30 PM

Updated: Fri 17 Jun 2022, 6:51 PM

  • By
  • Shalini Verma

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Twitter has been trending recently. Not just because of the special attention from tech billionaire Elon Musk, but also because of the NFT (Non-fungible token) of Twitter founder’s maiden tweet posted in 2006.

The NFT comprises of a picture of Jack Dorsey’s first tweet that reads ‘just setting up my twttr’. A few weeks ago, the NFT fell from grace. It wasn’t just your average drop in price. In the heady days of March 2021, the NFT had sold for $2.9 million. Today it is fetching less than US$10,000.

This brings us to the question, do NFTs matter?

NFTs are not to be confused with cryptocurrencies, although both are based on the blockchain technology. The Ethereum blockchain created a standard called ERC-721 that helped blockchains look beyond cryptocurrencies and spawn entirely new objects or tokens. NFTs began as a refreshing avenue for monetising art. Later big brands, especially luxury brands started minting their own NFTs. Thus began the great NFT gold rush of 2021.

The generation of kids that traded in Pokémon cards grew up, and mustered investment dollars to dream up all kinds of NFTs. From Non-fungible toilet paper to virtual meals that you can never eat, to fantasy lands on metaverse, NFTs rule where our imagination takes us.

The tokens may appear wispy, but holders of NFTs have the promise of privilege. For instance, they give access to online gated communities. These could be exclusive members-only clubs and sporting events. Dubai is hosting the world’s first ever pay-per-view livestream sporting event – a boxing match at Burj Al Arab’s helipad.

As retail investors throng the market, anyone can create an NFT on a whim. So, one requires proficiency to sift through collections of pointless NFTs to find valuable ones. Despite the well-documented risks people are busy buying NFTs.

The idea of ownership is deeply appealing and even addictive for humans. The value of possession is tied to our sense of identity. At the heart of NFTs is a piece of software code called the smart contract, which together with the hashing mechanism of the Blockchain, securely records an immutable record of ownership. The tokenisation allows a buyer to own the original item, sometimes even partially through a process called asset fractionalization. NFTs create a sense of scarcity even if it is an image of a bored ape that could be widely available online.

Today, NFT transactions are collectibles, much like the yesteryear stamp collections. Except now the trading could be in millions of dollars, and the secondary market could be extremely volatile. The illiquidity of NFTs has been somewhat of a saving grace, which prevents investors from making rash decisions. Sina Estavi claims that he may never sell the NFT of Dorsey’s first tweet for lack of a good price. The NFT gold rush has stemmed momentarily as buyers and sellers exercise caution, which is not a bad development for a nascent technology market.

NFTs hold the promise of greater inclusiveness. Yet, the divide between the haves and have-nots have persisted in this market. The haves consist of players who have cash to spare, the ones who can take massive risks without batting an eye. Inequality has set in even before NFTs became mature. According to Chainalysis, between February and November of 2021, there were around 360,000 NFT owners holding roughly 2.7 million NFTs. However, only 9 per cent of NFT holders owned around 80 per cent of the market value.

NFTs’ appeal has also been the possible removal of intermediaries. It is, however, too early to declare the end of intermediaries. Curated exchange platforms could easily be elbowed out by bigger platforms like Opensea. Other intermediaries such as regulators and courts will step in.

There are unresolved issues about NFT ownership. The legal community is unsure if the NFT is a legal contract or a license. No wonder copies of the original picture of say a grumpy cat created by a startup could be freely available without any legal recourse for the NFT holder. If the NFT is based on an asset that no longer exists after the startup went out of business, then the NFT could tragically be pointing to a nonexistent file and a rather expensive 404 error. The legal status of the intangible NFT is uncertain as numerous lawsuits suggest. Will it be the same as the physical asset? The copyright of a song does not automatically pass on to the NFT buyer? Will securities regulations come into play?

While the courts sort this out, we will continue to see NFTs disrupting the status quo, wherever ownership and authentication can be monetized. As we head towards the inevitable tokenization of everything, NFTs will fill our lives in ways that are hard to imagine today. Through numerous market corrections and consolidations, NFTs will determine how digital goods will change hands.

Shalini Verma is CEO of PIVOT Technologies and Co-founder of NurtureAI. She tweets at @shaliniverma1



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