Will NFTs Rewrite Finance As We Know It? (10/2023)

Non-fungible tokens, or NFTs, have recently become the latest blockchain-based innovation to enter the lexicon, and are fast outstripping bitcoin in both hype and popularity. Explore in this article how NFT can help bridge the gap between all sorts of traditional trade finance products and practices and the growing Decentralized Finance (DeFi) ecosystem

Technically, an NFT is a blockchain-based technology able to provide a certificate of ownership on digital assets. This enables us to convert any web content into an investment asset. In these early days, we cansummarizethe overall utility of the blockchain technology for humankind into a few words:maximizationof financial freedom.

Think about everything thats digital today, and picture how, in the future, maybe you will be able to sell a digital copy of a movie, novel or video game as an NFT in a digital marketplace. Now more than ever, NFTs with blockchain technology are changing the way people think about ownership rights to their new creation.

Most NFTs applications are built on top of Ethereum, a leading blockchain today. NFTs could have a major impact on finance and fintech by tokenizing a wide range of assets, and connecting real-world finance origination toDeFi(decentralized finance)markets.We are living in the era of digital transformation and video games, so NFTs are well-placed to impact on culture. New generations value digital goods as previous generations valued physical goods, and spend nearly as much time in the digital world as they do in the physical world.

The advantages of decentralizing investment could be: lower friction for transactions due to automation, much quicker (real-time) results and analysis of market conditions, greater security through transparency, and a higher level of customization for financial products and services.

NFTs can help bridge the gap between all sorts of traditional trade finance products and practices and the growing Decentralized Finance (DeFi) ecosystem. The possibilities include tokenization of real-world commodities and investment vehicles to allow easy access and trade all over the globe, new digital avenues for lending and borrowing, and by extension powerful innovative strategies for yield generation.

An alternative personal investment

First, NFTs are being used as a personal alternative investment by people that include digital assets in their portfolio, varying from digital art, collectibles, in-game assets, music, sports cards and utility tokens. These categories open to a new world of investment, since for the first time, you can own a piece of the web or content from yourfavoritecreator. This allows investors to invest in creators. If acreator is anyone using creativity to produce something new, and culture is the history of human creativity, then buying an NFT means investing in culture.

NFT industry is being validated with platform investment

Leading ventures have also validated the NFT industry by investing in some of the best apps and platforms.For example,Visa bought a CryptoPunk NFT, declaring to their stakeholders that “NFTs will play important role in the future of retail, social media, entertainment, and commerce and by buying a cultural icon for the crypto community were just at the beginning of our work into the space.”

With NFTs, the future of crowdfunding

Ethereum: The Infinite Garden is a documentary film about the history of Ethereum, entirely financed by a crypto crowdfunding campaign. Thanks to the tools created by Mirror, they were able to raise more than 3M $ in 24 hours. How was it possible to raise the funds in such a short time? By the incentives that NFTs provided to top contributors. Investors received exclusive NFTs and on-screen film credits based on their ranking in the crowdfunding leaderboard.

Other examples includevideogames.Parallel a video game developed on the blockchainusesNFTs for crowdfunding. NFT buyers will be able to use their NFTs in the game once it is ready, allowing early investors access to exclusive features.Since NFTs are assets transparently stored on the blockchain, the developers are able to verify the owner, and consequently the rights attached.

NFT tokens could be leveraged to solve the problem of financing long supply chains

Jean-BaptisteGaudemet, senior vice-president of data and analytics at treasury software provider Kyriba,proposestotokenisethe payment guarantee of the ultimate buyer in the form of an NFT, and create a financial mechanism potentially via a spread coded into the NFT smart contract toincentivisesuppliers to pass the NFT on to their own suppliers right along the supply chain. Richard Crook, director at LAB577 says “Everything from the provenance of goods, fraud prevention and even debt management can be streamlined and verified using blockchain-based NFTs”

The Drawbacks and Risks of NFTs

Every NFT is unique and non-fungible, and its ownership is stored on the blockchain. The blockchain is, by its nature, very hard to edit while new entries can be added, old ones are almost impossible to change.

NFTs have an owner, but ownership isnt measured with something like an ID. Instead, ownership is attached to two pieces of code: your private and public keys, both associated with an Ethereum “wallet.” Lose control of this wallet due to a hack, and your NFTs are no longer yours.

Theres also the problem of the blockchains energy consumption.

Estimates on how much of an impact NFTs are having vary, but we know that the cryptocurrency ecosystem including mining and blockchain verification consumes more energy than the country of Argentina.

How NFTs Are Likely to Change FinTech

NFTs are likely to continue making headlines into the near future. Theres a significant amount of money already invested in these tokens, and it seems the market is likely to grow significantly in the coming months. The rise of NFTs may have major implications for fintech. The combination of NFTs and DeFi is where the innovation for fintech will come, at least in the near term. As more digital assets become NFTs this could create entire new asset classes which could change the way consumers invest.

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