Promising sectors of the NFT market

Eugeny Kudrin
bartersmartplace
Published in
7 min readMar 15, 2022

The past year has been a year of hype for the NFT industry: According to DappRadar statistics, the trading volume in the NFT industry reached $25 billion in 2021. However, for most people, non-fungible tokens are still primarily associated with digital art or collectible gaming items. This is due to high-profile headlines about the sale of digital works of art, allegedly bought for a lot of money. For example, in March last year, the sale of a digital collage of 5,000 Beeple paintings for $69.3 million in ETH caught the attention of the masses. The digital art market is overheated, but NFTs have a ton of other uses that people haven’t fully grasped yet. In this article, we will look at the most promising areas for using NFT technology.

Marking of real assets

Marking real assets with NFTs opens up a whole range of new possibilities. Consider real estate as a prime example:

Three approaches to real estate tokenization can be distinguished: fractional ownership, the entire asset, and varying degrees of rights to use. When it comes to fractional ownership, NFT fragmentation is great for this as an ERC-1155 token standard. Here, NFTs represent shares in the project, depending on how many token fragments were issued for real estate in total and how many of these fragments belong to each investor.

Full tokenization of real estate is difficult from a legal point of view, since in the existing legal field it will necessarily require a document of ownership and complex verification procedures (KYC). Many companies are hesitant to go in this direction precisely because this industry will require too much work with regulators. Also, when transferring property rights in digital form, it is necessary to integrate electronic contracts and qualified electronic signatures for their signing.

If we talk about different degrees of use rights, then NFT can symbolize not only the right to own, but also the right to use. For example, NFT is embedded in a smart contract related to “smart home” control. If the tenant did not pay the money on time, then the system disables access to all amenities for him, you can imagine locks that work with NFT instead of keys. The same approach is well superimposed on other real assets, such as transport.

In the case of transport, NFT is convenient not only for tokenizing the rights of use, but also for marking an asset for its subsequent tracking using various geolocation systems and the Internet of things. This functionality can be useful, for example, for carsharing.

Everything is already ready for technical implementation, but the legal framework in this direction is still poorly developed. Working with real estate or transport scares away many companies by the need to work closely with regulators.

Financial NFTs

Non-fungible tokens have a huge potential for usage in the financial industry.

For example, NFTs can create an alternative to the traditional lending system that relies on banks and legal institutions. If you want to develop lending outside of traditional institutional intermediaries, you need a mechanism that will enforce terms, if necessary- in this case, smart contracts.

The role of NFTs in this case can be seen as tokenized financial rights. For example, you lend Billy 200 USDT, which he undertakes to repay within a year, in return for which you receive NFT, which allows you to automatically deduct interest on the loan from Vasya using a smart contract. Suppose the loan is not repaid. In this case, you can automatically claim funds using the rights obtained from the NFT, while the whole process takes place without the mediation of traditional financial or legal institutions. So, thanks to NFT, peer-to-peer lending, with low commissions, which does not need to be trusted by a centralized body, becomes possible.

The reasons why NFTs are so rarely used in the financial sector today are trivial — such tokens can easily be considered as securities from a legal point of view and therefore will quickly attract excessive attention from various institutions dedicated to financial monitoring.

Tickets

Due to their non-fungible nature, NFTs are great as event tickets to combat fraud and resale.

Although this method of application has not yet received a sufficiently wide distribution, there are already enough examples. Yellowheart company is helping record labels gain tighter control over ticket sales. The NFT.Kred service allows any event organizer to create an NFT as a ticket in just a few clicks.

GameFi

The technology of non-fungible tokens is already widely used in the gaming industry in the GameFi sector (Gaming + Finance). The GameFi industry offers players the Play2Earn model, which gives the opportunity to earn money via gameplay itself. If earlier making money on games was the privilege of only developers, publishers, streamers and cyberathletes, now a player can earn unique NFTs while playing and sell them for cryptocurrency, and the platform receives a percentage from the fee. We are talking about trading tokenized in-game assets such as equipment, skins, in-game properties, maps, etc.

Of course, some players have traded “leveled-up” accounts before, but game companies often penalized players for such behavior. However, they could close the player’s account with all virtual assets for any other bogus reason. There was a need to trade in-game assets, but without the arbitrariness of gaming companies. Thus, the GameFi industry has become one of the driving forces of the NFT market in 2021, as confirmed by the DappRadar report.

But developers are in such a hurry to make money that games often come out minimalistic and raw. According to the news, Axie Infinity reached 3.5 billion NFT transactions in 2021, but the statistics of active players look very suspicious. According to ActivePlayer data, Axie Infinity has had an average of 2.2 million active players over the past 30 days, and the daily active players have started to decline over the past two months. Although before that it had been growing almost continuously for two years. And that’s if we’re talking about one of GameFi’s most successful games, the lifespan of most GameFi projects is still short. Here, the potential of the industry is not realized precisely because the developers are in a hurry to release their product to the market, instead of first bringing the game component to mind. Unlike the other two industries mentioned, it is not the legal framework that prevents us from realizing our full potential, but the greed of developers and fake activities with the help of bots. After all, many are in a hurry to make money on their offspring, promising mountains of gold in the distant future, showing a very raw version of the game with inflated metrics in terms of the number of transactions and users.

Summarizing

NFTs have a high potential for applications beyond digital art: real asset tmarking, financial instruments, and GameFi. There are four main challenges that need to be overcome in order for NFTs to be used more widely:

  1. NFTs should stop being associated en masse only with digital pictures. This can be implemented if there are massive cases of sale and purchase of individual assets marked with the help of NFTs in the media space;
  2. An adequate legal framework is needed. So far, the legal status of non-fungible tokens is rather vague, it is necessary that it be clearly spelled out in legislation as a type of digital property right.
  3. Thirdly, this is the trivial greed of the owners of NFT projects, who just want to make money on hype, but make a low-quality raw product, which is why the average person has the idea that NFT is trading the air and deceit. Especially when they try to sell newly created next digital pictures for millions of dollars from unknown artists;
  4. Fourth, this is the need for a registry of digitized property rights with a history of the transfer of property rights with fixed values. In particular, when issuing NFTs, it is necessary to adequately assess the value for resale, this problem will be solved by value appraisers and integration with existing registries, for example, real estate, where the cadastral value of the object will be known, from which you can start.

There are very specific solutions to these problems, so the widespread use of NFTs is only a matter of time. NFTs in the form of pictures are gradually failing due to declining interest, because buyers were often presented with future increased value for these pictures. When the new owner of the promoted NFT art cannot sell this “art” to anyone else, then he realizes his investment mistake and begins to have a negative attitude towards the entire NFT market.

NFT technology, when used wisely in the real sector of the economy, is a very useful tool due to the diverse set of logic in smart contracts. After all, NFT is, first of all, a unique identifier for a particular object. How this will be applied depends on the mutual communication between developers and regulators.

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