Non-Fungible Tokens (NFTs) are digital assets that represent unique items such as artworks, collectibles, and in-game items. NFTs are traded online using fiat or cryptocurrency and are typically encoded in smart contracts on a blockchain. They represent ownership and originality of digital files, such as images and videos, by embedding their metadata into the token code using decentralized storage platforms like IPFS, and specifying the owner in the token's interface code.
NFTs were first experimented within the gaming industry and are now being tested in industries related to digital content creation, such as music, video, and art. NFTs can be used to issue and trade ownership of valuable real-world items, expanding their scope from digital art and music to in-game items and even tangible real estate. The clear recognition and transferability of ownership through NFTs have attracted early adopters by providing new revenue opportunities for creators. In 2021, the digital artist Mike Winkelmann, known as Beeple, made headlines when his work "Everyday: The First 5000 Days" sold for $69.3 million at a Christie's auction, marking the highest sale price for a living artist's work and bringing significant media attention to NFTs. The NFT market boomed in 2021, with weekly transaction volumes averaging $3.2 billion in 2022.
The Rise and Fall of the NFT Market
The early adopters of NFTs are typically intuitive, revolutionary, willing to take risks, and interested in future opportunities. Despite the underdeveloped state of blockchain technology, copyright, and ownership frameworks, the NFT market garnered significant attention from these early adopters. They willingly purchased NFTs and artists began selling their works as NFTs to generate revenue. The market was further fueled by speculative investments driven by low interest rates in the U.S. and the connection to the metaverse during the COVID-19 pandemic. Despite numerous warnings of Ponzi schemes and speculative bubbles, market participants were willing to take risks, dismissing concerns as outdated. However, with rising interest rates post-pandemic, the NFT market's popularity declined, with weekly trading volumes dropping to $50 million by October 2023. As of 2024, while cryptocurrencies seem to be gaining acceptance with price increases due to ETF approvals in the U.S., the NFT market has not shown similar growth, failing to provide value beyond 2022 levels.
Overcoming the Chasm
To surpass the chasm, the adoption of NFTs by early major adopters is essential. These adopters are analytical, risk-averse, and seek certainty. However, NFTs still carry risks and uncertainties. Purchasing NFTs involves learning complex methods and new terminology. The legal framework regarding the actual copyright ownership of digital assets remains unclear, and the connection between physical and digital assets for authentication is unreliable. Moreover, the blockchain technology underlying NFTs still has inherent flaws.
Current Trends and Future Prospects
Due to these issues, the NFT market has been contracting since 2023. However, Nike achieved $185 million in sales in 2023 by integrating NFTs into their marketing strategy. Nike linked their NFTs to physical products like sneakers and hoodies and used augmented reality (AR) to create a community. Customers who purchased sneaker NFTs received similar physical sneakers, and an AR filter allowed users to see themselves wearing the NFT sneakers, providing a novel marketing experience. Although the investment appeal of NFTs in the art world has diminished, they are being adopted as certificates of authenticity in niche markets like new media art, leveraging their original purpose. Whether these niche markets can become a bridge to overcoming the current challenges faced by NFTs, or whether NFTs will expand their use beyond simple marketing tools and certificates to contracts and deeds, remains to be seen.
Sources:
- IT Daily, February 2024, "Nike Earns $7 Million from Dunk NFTs... NFT Finds New Avenue in Corporate Marketing" Link
- Economist, November 2023, "Nike Earns 240 Billion Won Solely from NFTs... Companies Knocking on the NFT Door Despite Market Slump" Link
- Nadini, M., Alessandretti, L., Di Giacinto, F. et al. "Mapping the NFT Revolution: Market Trends, Trade Networks, and Visual Features," Sci Rep 11, 20902 (2021)
