The NFT phenomenon
Created more than 12 years ago, blockchain is an increasingly mature technology. It has led to the emergence of a large number of initiatives and new players that have prompted financial institutions to question themselves. 2021 was conducive to the development of Non-Fungible Tokens (NFT). It now has numerous and varied uses, and not a day goes by without the term appearing in the press.
It all started in 2017, with the creation of CryptoKitties, those virtual cats to collect and trade on a blockchain. But now, it has really accelerated.
What is an NFT? In what cases is it used?
An NFT is a digital certificate registered in a blockchain registry, mainly Ethereum via new protocols (“ERC 721”), or Flow or Tezos blockchains. In simple terms, it is a non-interchangeable certificate of digital asset ownership. Each NFT is unique and non-breakable, in contrast to Bitcoin or bank notes (we can exchange a €50 note for five €10 notes). The final registration of an NFT within a blockchain guarantees its authenticity and traceability. Holding an NFT means officially holding a digital loan. You can, for example, own the first tweet written by Twitter founder Jack Dorsey (sold for $2.9 million), a piece of digital art, a piece of music, etc.
A number of transactional platforms have been created in different segments such as sport (NBA Topshoot, Sorare, F1 Delta time), gamification (Cryptomotors), art (Superare, cryptopunks), the fictional virtual world Metaverse, music, etc.
The creation of scarcity and authenticity represent NFTs’ unique value proposals and are the source of the keen interest in this market. The graph below shows the number of transactions carried out on the market on a weekly basis.
According to data from AppRadar2 (analysis website), transactional platform OpenSea currently has over 200,000 users who traded $4 billion in one week in early September 2021. Opensea is now entering the world of unicorns, valued at $1.5 billion3 following the recent fundraising of $100 million. Impressive, for a company founded only three years ago.
NFT and strategy
This extremely innovative sector has seen the emergence of a large number of players. Many sectors, such as those mentioned above, have taken advantage of this technology to reinvent themselves. E-sports, gaming and even art have now entered the digital era thanks to blockchain technology.
It is still too early to see the implications for the financial sector in this area, but banks have already conducted studies on the subject and some of them are taking the lead by investing in platforms. Visa, the payments giant, has entered the market through the acquisition of a CryptoPunk, one of the first non-fungible tokens on the blockchain Ethereum, for $150,000. Alibaba, the Chinese online payment and sales platform, has launched a new marketplace allowing trademark holders to sell NFTs representing user licenses and copyrights.
In the future, will the financial sector be able to support its clients in digitising and conserving their assets? Could it provide a secondary market for this type of asset? The bank would then fulfil its role as a safe, but in this case, a digital one. Alternative investment funds have already invested in this area.
History on this subject has yet to be written, but it is clear that the lack of regulation on NFTs and decentralised finance is an obstacle to the financial sector’s active development in this area. In the meantime, banks are keeping an eye on innovations and how they develop in order to become a player when regulators lay down their guidelines.
Article published in AGEFI Luxembourg in September 2021.
1Nonfungible.com - 6/9/21