NFTs — Assured and Persistent Digital Asset Ownership
I have been watching with curious interest the recent hype and digital asset price speculation surrounding NFTs. It seems like every day a new record price has been paid for a piece of digital artwork.
So, what is all the fuss about?
It is understandable that investors, collectors and speculators are attracted to NFTs for the high potential for significant gain and growth in their value over time. The opportunity to make large profits in relatively short periods of time is very tantalising.
Looking beyond the initial speculative interest and opportunity for profit, are there deeper insights to be gained from the world of NFTs?
Why are NFTs so important?
1. Could it be that artists will finally be getting paid for their craft?
Yes, this certainly appears to be happening. Understanding the nature of NFTs and their ability to be securely stored on a blockchain is helping artists get paid for their artwork. Assisted by the blockchain, the artist is able to transfer the digital rights of the NFT to a customer who has paid them for the digital asset. In addition, the artist may choose to license the digital asset in return for royalty payments.
Maybe the days of the poor struggling artist has come to an end.
2. New Monetisation Models for Intellectual Property (IP)
Digital artworks are a form of Intellectual Property (IP). Digital artists now have access to numerous forms of monetisation and licensing models that range from outright asset sales through to revenue streams associated with royalties.
This area alone will most assuredly spawn many new models for payment and rights usage.
In addition, NFT investors, collectors and speculators are provided with a level of trust and security that their digital assets are “safe” and that they in fact own them. This will enable the development of secondary marketplaces for buying, selling and trading of NFTs and other similar digital assets.
3. Royalty Payment Accuracy and Certainty
Since NFTs are blockchain based, the ability to accurately track ownership and provenance becomes very straight forward and simple. This in turn makes it easier to determine the payment of royalties and licensing rights. For the digital artist who decides to license rather than sell their digital assets, they will be able to track and determine how their digital assets are used.
For blockchain-based NFTs, establishing ownership and provenance is simple and immutable. Using inherent blockchain audit capabilities, it is easy to determine who owned the digital asset and if ownership was transferred. So, when royalties and license payments become due, determining who and how much each owner is entitled to is readily established. The level of certainty and accuracy can be further improved with the use and application of immutable smart contracts.
4. Metaverses
The metaverse is described as a collective, shared virtual space that is created when the physical realm converges with the virtual realm, which includes virtual reality, augmented reality and the internet. The ethos behind the metaverse is the creation of a digital space for each of us to live, socialise and work, that transcends the space-time of our physical world.
Now this is where NFTs get interesting. As the development of metaverses such as Fortnite gather significant momentum, participants in such virtual environments begin to acquire in-game items such as skill levels, skins, avatars and emotes.
Further, the in-game users have worked long and hard to acquire these digital assets. They have a unique memory of how and when these assets were earnt and with whom they were with when this occurred. This is called hedonic value.
Hedonic value is derived from the entertainment and emotional aspects as a result of the “fun and play” experience. The hedonic value is derived from the symbolic meaning and the emotional activation associated with each user. The hedonic value can be further increased when an in-game asset is gifted to a close friend and fellow player.
Hedonic value is usually high for NFT collectors and for online gaming enthusiasts.
In contrast, utilitarian/functional behaviour can be described as task-related and rational. This means a product is purchased in a deliberant and efficient manner resulting from some type of conscious pursuit of an intended consequence. The utilitarian approach in this case may be related to the actions of investors or speculators who purchase the NFTs in the hope that they will appreciate in value over time. Their key motivation is profit.
In recent foundational research, users had formed emotional attachments to irreplaceable digital virtual goods. However, technical and legal restrictions on digital asset ownership were found to hinder attachment formations. They had concerns for the lack of control over the safety of their digital assets. Centralised gaming platforms were subject to the whims and controls of faceless corporations. Users were wary of developing attachments to digital assets that might at any moment be taken from them.
Enter NFTs. At their very core, NFTs are designed to provide their owners with assured and persistent digital asset ownership. Essentially, this means that the owner (via encrypted digital keys/signatures) holds all of the ownership rights to the digital asset. It cannot simply be taken away from them. They can determine how it is used, who has access to it, who owns it and can transfer ownership or digital rights to the asset to whomever they choose. They can also monetise their digital asset rights.
The assured component derives from the fact that the owner of the NFT also holds the encrypted digital signature or private keys associated the digital asset. The persistent component is derived from the blockchain that the NFT resides upon and relies upon this blockchain being stable and secure from the perspective of network consensus and remains resistant to network attacks.
Knowing that many users spend significant time and effort acquiring these digital assets, having the ability to own and control these assets becomes very valuable to them. In addition, users can now monetise their NFTs via an outright sale of the item or earn royalties and revenue streams from its usage.
In response to this demand from users, new Blockchain-based metaverses are now emerging. Users enter these new metaverses knowing that the assets they acquire will remain theirs for as long as they choose and for as long as the blockchain upon which they are based remains stable and secure.
Further, this will enable interoperability of digital assets as more blockchain-based digital assets will be able to be used across gaming platforms. Making it far more interesting and engaging when playing across multiple metaverses. All of ones’ efforts and hard work can be rewarded and value extracted from multiple gaming platforms and metaverses. This also saves the gamer a great deal of time and effort in having to start from the beginning in each new game/metaverse.
5. Facebook and the Metaverse
Recently, Facebook announced that it would be focussing its resources on becoming a metaverse company. Based upon Facebook’s centralised format of the past, it is most likely to repeat this pattern with regard to the structure of its metaverse.
What this means is that Facebook will continue to own the metaverse and everything within it. This includes all of the in-game digital assets, avatars and more valuably your personal data. Further, they will continue to profit and monetise your data by selling it to third parties. They will also be able to take, disable or remove any of these digital assets from the metaverse at their whim, with their decision being final.
In addition, if Facebook decides to use a private or permissioned blockchain as the backbone for the metaverse digital assets, the result will effectively be the same.
So, Facebook metaverse users beware. If you are participating in the Facebook metaverse, you will have to play by their rules and like it.
Now, with NFTs, you have a viable alternative.
6. Long-term Value Preservation
In order for NFTs to remain viable in a long-term format, their ability to retain or increase in value needs to be assured. This is most important for investors, collectors and speculators who purchase NFTs in the hope that they will increase significantly in value over time.
In order for the NFT marketplace to have long-term viability and sustainability beyond the present hype, the ability to securely store NFTs is critical to its success. This will provide marketplace stability and liquidity for when they wish to sell their NFTs at a profit.
In order for NFTs to have real, lasting and sustainable value, they must exist independent of any centralised organisation who may choose to remove, delete or disable the digital asset. Hence, NFTs that are stored and secured on public blockchains are most likely to exhibit these characteristics because they are protected by a broad, deep network consensus rather than a centralised authority with unilateral control over the digital assets. Further, a robust public blockchain is more resistant to network-based attacks.
In conclusion, NFTs are key to providing digital artists, investors, collectors and speculators with assured and persistent digital asset ownership, with access to new monetisation models including royalty and licence payments.
NFTs also enable digital artworks to become scarce and potentially valuable. In addition, NFTs enable digital assets within metaverses and online-gaming platforms to become valuable when their ownership remains in the hands of the in-game users who earnt them.
Finally, in order for NFTs to be a viable long-term store of value and speculation, these digital assets must exist independently of centralised control, preferably on a robust public blockchain.
So that’s why NFTs are so valuable and important.
Nathan van den Bosch is a Behavioural Economist and Blockchain Strategist, with more than 30 years of experience in emerging and disruptive technologies.
