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NFTs are much bigger than an art fad – here’s how they could change the world

April 26, 2021 6.24am EDT
[41]James Bowden, University of Strathclyde , Edward Thomas Jones,
Bangor University

Authors

1. [42]James Bowden
Lecturer in Financial Technology, University of Strathclyde
2. [43]Edward Thomas Jones
Lecturer in Economics, Bangor University

Disclosure statement

The authors do not work for, consult, own shares in or receive funding
from any company or organization that would benefit from this article,
and have disclosed no relevant affiliations beyond their academic
appointment.

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[44]Bangor University

[45]University of Strathclyde

[46]Bangor University and [47]University of Strathclyde provide funding
as members of The Conversation UK.

[48]View all partners
Depiction of a house being turned into an NFT
Homes fit for zeroes (and ones). [49]Julien Tromeur
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Sotheby’s has become the latest establishment name in art to dive into
NFTs (non-fungible tokens) through its collaboration with anonymous
[56]digital artist Pak and NFT marketplace [57]Nifty Gateway.

The auction house sold [58]The Fungible Collection, a “novel collection
of digital art redefining our understanding of value”, for more than
[59]US$17 million (£12 million).

Some pieces, such as “The Switch”, a monochrome 3D construction that is
going to be changed by the artist at some unspecified moment in the
future, received bids well in excess of [60]US$1 million.

[61]For the uninitiated, NFTs are tokenised versions of assets that can
be traded on a blockchain, the digital ledger technology behind
cryptocurrencies like bitcoin and ethereum. Whereas one bitcoin is
directly interchangeable with another, meaning they are fungible, NFTs
are the opposite because the underlying assets are unique in some way
and can’t be exchanged like for like.

This uniqueness enabled Christie’s to sell digital artist Beeple’s
[62]“Everydays” NFT in March for an eye-watering US$68 million. For
those that don’t have that sort of money, NFTs are also being used for
trading collectables like [63]baseball cards and [64]computer gaming
items like swords and avatar skins.
[65]The Switch, by Pak The Switch, by Pak. [66]Sotheby's

Bubble trouble?

The excitement around NFTs feeds a similar narrative to other recent
price surges such as [67]GameStop and [68]dogecoin, in that these are
[69]speculative bubbles brought about by [70]stimulus cheques in the
US, lockdown boredom and low interest rates.

Look no further than [71]celebrities like music star Grimes and
YouTuber Logan Paul releasing their own flagship NFTs to ride the wave.
Even Vignesh Sundaresan, the entrepreneur who bought Beeple’s
record-breaking artwork, [72]sees investing in NFTs as a “huge risk”
and “even crazier than investing in crypto”.

But history also tells us to be careful about dismissing NFTs as a
passing fad, since the importance of technological innovations often
becomes clearer once the hype dies down. Many commentators dismissed
the influx of tech companies around the dotcom bubble of the late
1990s, and the first wave of mass cryptocurrency enthusiasm in 2017,
only to be proven hopelessly wrong when Amazon and bitcoin re-emerged.

NFTs themselves are actually well down from their highs, with a [73]70%
drop in average price since February. Perhaps this is less the bursting
of a bubble than a “weeding out” of gimmicky tokens now that the
initial hype has begun to die down.

This phenomenon is captured well in US consultancy Gartner’s [74]hype
cycle, which illustrates the typical progression of a new technology.
With NFTs, we are probably emerging from the “peak of inflated
expectations” on a journey towards the same “plateau of productivity”
that Amazon reached a long time ago.

Gartner’s hype cycle
[75]Gartner's hype cycle [76]Gartner

This ties in with what Austrian economist Joseph Schumpeter said about
why capitalism works. Schumpeter viewed capitalism as a relentless
churn of old into new, as the latest and most innovative enterprises
replace those that came before – he called this “[77]creative
destruction”.

In this light, NFTs are the newcomers challenging how we perceive and
register ownership of assets. And the tension between [78]innovation
and incumbency also [79]contributes to the scepticism that always
surrounds such new technologies.

What happens next

NFTs create opportunities for new business models that didn’t exist
before. Artists can attach stipulations to an NFT that ensures they get
some of the proceeds every time it gets resold, meaning they benefit if
their work increases in value. Admittedly football teams have [80]been
using similar contractual clauses when selling on players for a while,
but NFTs remove the need to track an asset’s progress and enforce such
entitlements on each sale.

New art platforms, such as [81]Niio Art, are able to demonstrate in a
really simple way that they own digital works. When customers borrow or
buy art from the platform, they can display it on a screen in the
knowledge that there is no issue with copyright or originality because
the NFT and blockchain ensures that ownership is authentic.

NFTs give musicians the potential [82]to provide enhanced media and
special perks to their fans. And with sports memorabilia, [83]between
50% and 80% of items are thought to be fake. Putting these items into
NFTs with a clear transaction history back to the creator could
overcome this counterfeiting problem.

IFRAME:
[84]https://www.youtube.com/embed/E6iLV4q58QU?wmode=transparent&start=0

But beyond these fields, the potential of NFTs goes much further
because they completely change the rules of ownership. Transactions in
which ownership of something changes hands have usually depended on
layers of middlemen to establish trust in the transaction, exchange
contracts and ensure that money changes hands.

None of this will be necessary in future. Transactions recorded on
blockchains are reliable because the information cannot be changed.
Smart contracts can be used in place of lawyers and escrow accounts to
automatically ensure that money and assets change hands and both
parties honour their agreements. NFTs convert assets into tokens so
that they can move around within this system.

This has the potential to completely transform markets like property
and vehicles, for instance. NFTs could also be part of the solution in
resolving issues with [85]land ownership. Only [86]30% of the global
population has legally registered rights to their land and property.
Those without clearly defined rights find it much harder to access
finance and credit. Also, if more of our lives are spent in [87]virtual
worlds in future, the things that we buy there will probably be bought
and sold as NFTs too.

There will be many other developments in this decentralised economy
that have yet to be imagined. What we can say is that it will be a much
more transparent and direct type of market than what we are used to.
Those who think they are seeing a flash in the pan are unlikely to be
prepared when it arrives.
* [88]Dogecoin
* [89]Digital art
* [90]creative destruction
* [91]GameStop
* [92]NFTs
* [93]non-fungible tokens

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