What are non-fungible tokens (NFTs) and where are they useful?

The first non-fungible tokens (NFTs) were created in 2014. Back then they were largely used by a tech savvy crowd. Everything began to change in 2021, when Beeple, CryptoPunks, and the Bored Ape Yacht Club made multi-million-dollar NFT sales during a peak of activity in the marketplace, as illustrated in the chart below from CryptoSlam and The Block. Suddenly, the acronym NFT was everywhere. Dictionary publisher HarperCollins named NFT its Word of the Year as the world sat up and took notice.

During that peak period, monthly NFT trading volumes crested at more than $6 billion, with thousands of buyers and sellers trading these digital assets.

But a market correction followed soon afterwards. A new World Economic Forum and Bain & Company report says that “transaction volumes decreased by 70% between May and June 2022, signalling the end of the hype period, with the numbers of unique buyers and sellers also plummeting by the end of Q3 2022.”

Despite that fall in trading values, the report suggests it’s too early to write off NFTs. In an effort to understand the future of NFTs, the Evolution of Non-Fungible Tokens report analyzes the complexities of the NFT landscape and highlights the primary opportunities and challenges ahead. The report’s conclusions are based on findings from over 40 expert interviews, cross-industry working groups, and steering committee meetings, all with a focus on finding valuable use cases of these technology applications.

To understand the future of NFTs it’s important to understand what they are, common misconceptions, and how they work.

The following is the definition from the Forum’s report: “An NFT or non-fungible token is a unique digital asset stored on the blockchain that serves as proof of ownership or authenticity for a digital or physical item/right. Unlike fungible assets, NFTs are one-of-a-kind and cannot be replaced. They use blockchain technology to provide decentralized, secure, and transparent records of ownership and transfers.”

For context, blockchain is the technology that underpins cryptocurrencies such as Bitcoin and Ethereum. There is a close link between NFTs and cryptocurrencies as many NFTs are traded in cryptocurrencies and the fortunes of NFTs have tracked the performance of crypto as well as broader economic trends.

While NFTs are no longer creating the buzz they once did, our research shows major brands are continuing to see potential value. In 2022, against a dire economic backdrop, Prada, Warner Records, and Starbucks all launched their own NFTs.

Fundamentally, NFTs are digital certificates that hold the potential to deliver significant value for both organizations and end users. For companies, NFTs provide a new way to connect with customers and create loyal communities. For users, they provide a new avenue for inclusive ownership in digital goods.

The report has identified a series of use cases for NFTs, from collectibles in both physical and digital form, loyalty programs, secure identity credentials, and new gaming experiences. One of the major challenges for the development of the NFT industry has been a lack of standardization. This creates difficulties for organizations looking to enter the market and for regulators looking to protect consumers. By codifying use cases under these 10 categories above, the industry can create a greater level of certainty for all stakeholders.

The research detailed in the Forum’s report indicates that NFTs could provide significant value creation. They have the potential to create novel and innovative ways to connect with consumers and foster more meaningful customer relationships.

The recent volatility in the NFT space has highlighted the risks associated with a market driven by hype and unsustainable values. Instead, organizations planning to release NFTs should integrate them into existing operations and ensure a comprehensive strategy is in place prior to launch.

Governments and regulatory authorities also have an important role in creating policies and standards that will protect investors and build confidence in the NFT market.

It may have all started with digital collectibles, but as NFTs evolve they show early signs of promise across a variety of verticals. With the right checks and balances in place, the future of NFTs could be exciting for us all.