Non-fungible tokens, or NFTs, were the ironic joke on ‘The Simpsons’ this month. A floating pizza cat tells Homer, “The NFT craze is over.” The mock-Nyan cat isn’t wrong – but it’s not exactly right, either.
The noise around NFTs has died – at least for NFT images, like the ones the show itself once issued for fans to trade. For other types of NFTs, the craze is just beginning.
Like fungible tokens, NFTs are digital representations of ownership that reside on the blockchain. Leveraging smart contracts and the tamper-proof, transparent ledger, these tokens can be used to record and move data (including assets) immutably with minimum human intervention.
What sets NFTs apart is their unique cryptographic identity, which ensures each one is unique even when compared to otherwise identical data. They’re non-interchangeable and utilize blockchain, making them powerful tools for proving ownership of unique assets.
When NFTs hit the markets in 2017, only a handful of crypto enthusiasts were familiar with the projects –mostly ones in art, gaming, and fashion. 2021 was a breakout year that saw the NFT community explode, with tokens selling for upwards of millions, culminating in a yearly spend of $41 billion in the NFT market.
One project – Beeple’s collection, sold by auction house Christie – went for $69.3 million. The large trading volume and media hype brought billions of dollars (and eyes) to blockchain ecosystems.
Suddenly, it seemed that everyone had a Bored Ape Yacht Club profile picture or equivalent. Flash forward to 2023, and the NFT market has declined to its lowest level ($1.39b) falling more than 89% in trading volume compared to the beginning of 2022 ($12.6b). Now, most talk about NFTs is about their failed potential and outlook on market recovery.
Instead, most of the hype is on real-world assets (RWAs). These are tokenized traditional assets such as stocks and bonds, real estate, fine art, music, royalties, and commodities.
RWAs are the exciting bridge between traditional finance (TradFi) and decentralized finance (DeFi), bringing collateral, yield, and expanded financial opportunities to DeFi ecosystems. As more institutions integrate blockchain, the market for tokenized RWAs is predicted to reach as high as $10 trillion by 2030.
The list of benefits RWA tokenization offers is long: enhanced liquidity, transparency, efficiency, less reliance on intermediaries, reduced counterparty risk, faster transactions, improved asset management, less overhead fees, less costly human error, and more. Through programmable infrastructure and fractionalization, tokenization also allows for the creation of entirely new asset classes, investment opportunities, and ownership models.
The little-known secret is that, while RWAs can be fungible or non-fungible, many RWAs will require an NFT.
Real estate – one of blockchain’s most transformative use cases, with a global market valued at over $3.8 trillion – is going to be a major driver in the NFT market. One of the main reasons? Real estate assets are often inherently non-fungible: no two properties or pieces of land are exactly interchangeable.
Let’s say a property owner wants to tokenize their land and offer 100 interchangeable shares to investors. In that case, fungible tokens will do. But if they want to offer 100 unique investments, for each individual square meter of land, they’ll use NFTs.
As NFTs are digital files, what’s actually tokenized will be a document relating to the real estate asset. Examples might be mortgage agreements or property deeds, which are unique in the terms, parties, and properties they pertain to.
Also prime for NFT tokenization are other financial contracts such as loans, invoices, derivative contracts, credit letters, bills, forward contracts, insurance contracts, and financial lease agreements. These documents are the backbone of finance, used for business ventures, payment, hedging, over-the-counter trading, funding, and more.
NFT tokenization embeds financial contracts with extra liability and protection, as well as improves efficiency and lowers operational costs. Once encoded into NFTs, financial contracts can be unalterable and completely traceable, reducing the possibility of manipulation. Additionally, contract terms can be written directly into code to automatically self-execute payment, delivery, and other actions once pre-defined criteria are met.
For loans, NFT tokenization can improve collateral – the token can be automatically transferred back to the lender if the borrower fails to repay the debt. NFT tokenization can also increase liquidity in financial contracts – it’s easier to transfer ownership or exit a contract early.
One of the most exciting applications of contract enforcement on the blockchain is intellectual property and revenue distribution – especially in creative industries.
NFTs can be used to manage IP rights and ensure creators receive fair compensation as per royalty agreements. Smart contracts can automate revenue distribution, allowing investors to earn royalties from artists’ work and providing a predictable income for artists to continue. For the music industry – rife with manipulation from record labels and other third-party intermediaries – the potential here is immense.
In 2022, the recorded music industry was worth $31.2 billion. Who knows how much of that actually went into the hands of the artists?
Web3 music projects – such as TokenTraxx, which works with artists to issue music NFTs – will liberate artists from reliance on record labels for funding and distribution. Artists will be able to connect directly with fans, who can invest in their work for a share in the royalties, allowing actual ownership of the revenue stream for both.
The NFT noise has died. But it’s poised to become louder (literally) with asset tokenization, which introduces blockchain technology to large markets like trade finance, real estate, and music. Through programmable infrastructure, these tokenized real world assets promise to accelerate the benefits that image ownership and monkey.jpegs pioneered.
