NFT is the common term for non-fungible tokens, which are tokenized digital assets not unlike cryptocurrency. Proponents argue that NFTs are going to change the way we interact online, while opponents claim that they’re just a fad. Where does the truth lie? And is there a future for these digital assets?
The Many Faces of NFTs
First, understand that NFTs come in many different forms. Almost any digital asset could be transformed into an NFT; commonly, people present NFTs as tokenization of digital files like JPGs of artwork, but NFTs can also be created and distributed like traditional trading cards.
In some ways, it becomes impossible to criticize or support all NFTs in the same way that it’s impossible to criticize or support all stocks on the stock market. Each individual asset is unique; just as some stocks pay off and some fail, some NFTs will pay off and others will fail.
With that in mind, is there a general trend we can predict for the future of NFTs?
Asset Tokenization, the Blockchain, and the Future
NFTs are one manifestation of asset tokenization, the process of using the blockchain to turn a multitude of different assets into digital tokens that can then be exchanged on a highly secure, blockchain-backed ledger. Asset tokenization itself has many crucial advantages, such as:
· Fractional ownership. Asset tokenization allows you to introduce fractional ownership to any asset, including those that are not immediately divisible. Previously, shares of ownership in digital artwork couldn’t be distributed the same way shares of ownership in a company could be. In the near future, asset tokenization could also help us divide assets like physical properties; it then becomes possible for investors to own 5 percent or 10 percent of a building, rather than being forced into an all-or-nothing situation.
· Decentralization. Blockchain transactions are also decentralized. They’re not dependent on any single institution, and therefore it can be run independently. This leaves NFTs, like cryptocurrencies, completely exempt from authoritarian control and not subject to traditional regulations.
· Security and authorization. Cryptocurrency enthusiasts will be quick to tell you that blockchain technology is highly impervious to fraud and manipulation. While there have been some documented crypto hacks in the past, and there will likely be some in the future, this is still much more secure than other forms of economic transaction.
· Preparation for the digital world. The world is shifting to become more and more digital, and in a way, NFTs are a natural byproduct of trying to digitize our physical world. As we become more and more reliant on digital technology for all our needs, NFTs could make more and more practical sense.
The Potential for NFTs to Crumble
Of course, there is significant potential for the NFT fad to crumble.
· The nebulous nature of digital ownership. One common criticism of NFTs is that they represent ownership of a digital asset that is easy to copy and distribute. What good is your ownership of a digital JPG file when anyone who wants to make copy and redistribute that JPG as they see fit?
· Electricity and environmental concerns. Some people have vocalized at the rise of NFTs is linked to much higher electricity usage and consumption. It takes a tremendous amount of power to institute a blockchain ledger for a given digital asset, ultimately resulting in a spike in energy use and pollution. If too many of these digital assets are in circulation, it could cause significantly negative environmental impact.
· Overinflated prices. Some NFTs have already been sold for tens of millions of dollars, and it’s likely we’ll see even higher prices and more outrageous sales in the near future. Economic analysts are rightly cautious about the potential for overinflated prices. NFTs are very new and exciting, which makes them prone to excessive volatility. Even if asset tokenization has a bright future ahead of it in the long term, there will almost certainly be a reckoning when it comes to these inflated prices in the short term. At the very least, investors should be preparing for volatility.
· Toward a better version. NFTs are just one manifested form of asset tokenization. That means there’s a lot of potential for a better version to be developed and released in the near future. If there’s this much interest in digital assets represented in the blockchain, it’s only a matter of time before we develop an even better technology that eliminates many of the drawbacks of NFTs.
In their current form, NFTs are an interesting and unique asset. They’ll likely have many years of development ahead of them, even if they don’t have the staying power to fundamentally change the world.
Still, it’s unclear whether NFTs are only a fad or whether they’re going to evolve into something bigger, better, and much more attractive.