Creating value through NFTs

"Non-fungible tokens" or NFTs are a hot topic of conversation this year. Some claim that it is an inflated balloon, while others are of the opinion that the next Mona Lisa will be issued right on the blockchain, in the form of an NFT. For many, this is something unimaginable, but considering the digital transformation in the world, many agree that the Internet is missing one of the fundamental building blocks of society - the concept of personal property. How do NFTs intend to solve this problem?

Although most people have only heard the term NFT in the last year or two, this technology is already ten years old. The basic idea of the NFT technology is to prove the ownership or users right to a certain digital property. The easiest way to imagine the concept is as a digital certificate or an account with which it is possible to trade. This proof is stored in a public database called the blockchain, which contains unique information that can be used to prove who owns certain objects, tangible or intangible.

In the cryptocurrency world, there are two forms of tokens – fungible and non- fungible. Fungible tokens are like currency, where a $100 bill is worth exactly $100, regardless of the serial number written on the note. On the other hand, we have an NFT or a non-fungible token that is unique in the sense that it cannot be exchanged or replaced with any other token. The value of an NFT expresses both uniqueness and authenticity, as well as the fact that there are a limited number of them in circulation and they cannot be duplicated. So, non-fungible tokens use blockchain technology to digitally signify ownership, making the NFT more akin to owning a car rather than the car itself.

On the picture: Fungible vs. Non-fungible; Source: Learningcryptos

What return to expect when investing in NFTs?

The original purpose of NFTs is not passive income, but proof of ownership and all the benefits that come with it. The value of an NFT therefore increases based on both demand and deflationary principles, as the number of coins is limited and cannot be duplicated.

However, with the development of technology, innovative ideas are already emerging that focus on the passive monetization of digital property. It is worth mentioning here the digital properties that are currently being sold for astonishing sums of money, some even for several million euros. In the currently most popular virtual world, Sandbox, a yacht was sold for as much as $650,000.

The purpose of the digital world or “metaverse”, is a 3D representation of a virtual world that enables users to communicate, collaborate and explore activities. As in the real world, we can buy land and real estate here. Once we secure ownership, we can do whatever we want with the land (sell, build or rent). With rapid development and high interest from major companies such as Nike, Adidas and Samsung, we can expect virtual stores to open very quickly. The sports company Adidas bought a digital land some time ago, which it plans to fill with exclusive materials, events and products. For the purchase of 144 plots of land, they spent as much as 400 ETH or 1.7 million euros.

Such concepts are, for now, still in the experimental phase. No one knows how long this period will last, but if major companies realize the potential for innovation in the virtual world, the prices of such properties could be extremely high in the future.

On the picture: »Nikeland, igra Roblox«, source: Roblox

As an additional, passive, source of income, NFT technology allows creators of artworks to determine the terms of the license fee or “royalty fee”. This guarantees payment of a certain percentage of the purchase price every time their NFT changes hands on the secondary market. This means that creators can receive passive income even after selling their work to collectors. In the event that the license fee for the selected work is set to 5%, the original creator will receive 5% of the sales price each time their work is resold to a new owner.

With the help of NFT technology and thus the implementation of the concept of personal property in the digital world, creators protect themselves from the “transfer” of most of the value to the companies that own the NFT platforms.

Today, many young people are engaged in playing video games, where they earn digital currencies, which so far have no value in the real world. For the effort and time they spend playing and completing missions, they are rewarded with digital currency that can be used to buy a virtual house, car, clothes and other goods.

With conventional videogames, there is no incentive to play other than pure enjoyment. The relationship is one-sided: you pay to play, and unless you’re a professional eSports player or a streamer with a large following, you’ll never be able to monetize your playtime. The opposite applies to playing “play-to-earn” games, which offer players the opportunity to earn real money.

Also unlike conventional games, where in-game items are stored in closed data networks and owned by the companies that created the game, NFT allows players to own the assets they buy or earn. In addition, when you own an NFT you can also freely sell it outside the platform where it was created, which is not possible with normal games.

As a practical example, we can highlight the game Revv Racing, where racing car owners develop and build their cars, with which they later compete on the racetrack, and sell their inventions on the secondary market.

On the picture: »Revv Racing« tržnica, Source: Opensea

Axie Infinity and Sandbox are currently the most popular fully functional games, but they are made with slightly worse graphics. This is because their purpose is not top-notch graphics, but to prove the usefulness of the game concept and all the assets that the game may contain in the future.

On the picture: »Sandbox game«, Source: Animoca Brands

With the constant influx of funding into the blockchain gaming sector and the high interest from players, the development of games with more powerful graphics is relatively fast. 2022 is slated for the release of highly anticipated games such as Star Atlas and Illuvium, which will be released in beta. It could be said that the two games will be definitive prove if this sector will be able to compete with bigger rivals in the future, such as GTA (Grand Theft Auto), LOL (League of Legends) and Call of Duty.

On the picture: »Star Atlas game«, Source: Art Abyss

When Ubisoft released a collection of limited non-tradable tokens in the military shooter Ghost Recon Breakpoint in December, it should have been a watershed moment. The French company behind the popular Assassin’s Creed and Far Cry franchises has become the first major publisher to include NFT in a title, which could herald a key shift towards using the technology in games.

 

Instead, it was a dramatic mistake and a quick comeback. Players complained about the 600 hours of gameplay (almost a month of 24/7 gameplay) required to earn just one free item. Attempts to raise revenue were even more dismal: one report indicated that only 15 NFTs were purchased for a total of $400. The company later announced that the NFT technology was not fully integrated into the game’s economy, and that this resulted in errors.

 

Major game studios like Epic Games (creator of Fortnite game) are not very enthusiastic about the implementation of NFTs in their game. Mostly, due to the deprivation of certain rights, such as ownership of characters in the game. This is where other companies and game studios have stepped in, but they are ready for this revolution and want to be the main players in the development of these concepts.

 

With the lack of interest and the absence of major leading companies from the game development sector, this opens the door to many investment opportunities in companies that are passionate about blockchain game development and will be pioneers in this field. A well-known American investor, Mark Cuban, claims that these are the technologies of the future, and he supports this claim with his investments in gaming companies and games, including Axie Infinity.

On the picture: »Axie Infinity«, Source: Venturebeat

For the ultimate success of blockchain games, it will be necessary to attract huge numbers of players, which is not a problem for a popular game like Axie Infinity so far. The game has an average of 2 million daily active players, which can be compared to FIFA’s half a million daily active players.

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The problem with selling NFTs

The most popular and fairly user-friendly markets for buying NFT are currently OpenSea and Rarible. But for those who are not so skilled, there is also the MoonPay application, which acts as an intermediary between a physical person and larger NFT stores and allows to buy NFTs just by using a credit card. If you want to buy NFTs yourself, you need to create a Metamask wallet in your internet browser.

Compared to other cryptocurrencies, NFTs, due to their uniqueness and irreplaceability, are a rather risky investment, as the current market is still quite new. Since digital goods are still in their development phase, this is reflected in a very small number of potential buyers and sellers. This means that these commodities are extremely difficult to trade, as prices are highly volatile.

The most valuable NFTs are mostly only accessible on the Ethereum network, where the trading volume is far ahead of other networks such as Solana and Binance Smart Chain.

A big reason for the exclusivity of these “hot” projects and the unbelievable prices are the high costs of transactions on the Ethereum network, which represent an obstacle for many, as they range from 10 to more than 1000 dollars.

"NFT as an internet domain"

Some of you surely remember the popularity of internet domains and what dizzyly sums they were sold for later, when internet became widely spread. Combining the payments, the Web3 Internet and decentralized identity is the critical infrastructure to support cryptocurrencies. Here we are talking about blockchain domains like .eth, .crypto, .sol and others which are issued in the form of NFT.

Unlike traditional domain names controlled by central entities, these domains are not stored on a server but in a public registry on publicly accessible networks. While traditional domains are usually fairly one-dimensional and serve a specific purpose, blockchain domains have much more room for interaction and correction. On top of each blockchain domain, it is possible to build programs and applications to interact with them. With this, they also offer greater functionality for end users. The leading provider of digital identities or domains on the blockchain is currently ENS (Ethereum Name Service), with 760,000 registered domains, followed by Unstoppable domains.

On the picture: »Buying a domain«, Source: Unstoppable domains

You will pay somewhere between 20 and 100 dollars for crypto domain registration. Costs add up quickly in the case of a shorter or more unique domain, such as aldi.x. In 2021, the beer manufacturer Budweiser spent as much as 90,000 euros to purchase the crypto domain “beer.eth”. Unthinkable, right? However, if we compare this amount with the internet domain “beer.com”, which was sold for as much as 7,000,000 euros in 2004, it does not seem so excessive anymore.

"The arrival of celebrities and major companies"

Due to the pandemic and mandatory measures, the world of fashion has, in the last year, tested itself in a digital format, where NFTs played a big role.

The world-renowned brand Louis Vouitton, celebrating the 200th anniversary of its founder, created the game “Louis the Game”. Along with various missions and treasures, the adventure game contained 30 hidden NFTs, of which 10 were released in collaboration with “Beeple”, the creator who became a real celebrity in the world of NFTs, as he became famous after selling his creation “Everydays”, released as an NFT, which sold for a then record breaking $69.3 million.

On the picture: »Everydays« – The first 5000days NFT, Source: Artnet News

Other exclusive brands have also entered this sector, such as Gucci and Dolce & Gabbana, which presented its 9-piece collection at the Venice Fashion Week. The collection was auctioned for $5.56 million, and buyers of each NFT received not only digital ownership of the dress, but also a physical version of the items and exclusive access to D&G events.

On the picture: »D&G Venice fashion week«, Vir: Zipmex

Major investments in digital assets are also officially supported by the payment giant Visa, who spent 49.5 Ethereum or around 150,000 euros for the purchase of one CryptoPunk #7610. They added: “We believe NFTs will play a significant role in the future of retail, social media, entertainment and commerce.” The company says they cannot help their customers and partners collaborate without first-hand understanding of the infrastructure requirements.

On the picture: »Crypto Punk #7610«, Source: Artnet News

Issuing NFTs as a company has recently become a real trend. For now, companies see this move as a marketing tool or brand expansion into the technology and innovation sectors. The purpose of the company is not to speculate and trade coins, but to become part of the community and thus increase the loyalty of its customers.

On the picture: »Famous Argetty«, Source: Argeta

It is also worth mentioning the Slovenian manufacturer of equipment for the production of beer Mithraeium, who also started domestic beer production and decided to create tokens under the name “bottlecap”

Due to lack of capital and promotion of their beer, they decided to issue non-fungible tokens called “bottlecap”. Funds raised from the sale of these tokens will be used to expand the brewery. However, their plan for the future of these tokens is that they will be able to share a portion of their profits with all token owners, meaning that the token will be directly tied to the company’s performance. As the next step towards the integration of blockchain technology into their services, they are already planning a 3D virtual world where customers will be able to walk around pubs and order beer, which will later be delivered to their homes.

As the most expensive NFT sold in Slovenia, we rank the sale of two unreleased songs by Slovenian electronic music creator Gramatik, which were sold as an NFT for 1.3 million euros.

On the picture: »Gramatik’s post a year ago«, Source: Facebook Gramatik

The sale of music in the form of NFT has started a big trend, where many famous musicians have already taken advantage of this “fever” and joined the sale of music on decentralized platforms. They include Grimes, Steve Aoki, Timbaland and Snoop Dogg. Snoop Dogg even shot a music video in his self-built house in the metaverse. In the near future, concerts in the virtual world are planned, where ticket purchase will be possible only in the form of NFT.

On the picture: »Metaverse concert«, Source: Inside the Games

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Legal aspect of digital property

The NFT market is in its early stages of development, which opens the door to many scams. Basically, the crypto world has been the target of many scams since its inception. In recent years, due to the arrival of many new people, this number has only increased. That is why it is absolutely necessary to regulate this area, as well as to legally define the laws of trading and management of digital assets. Existing laws and regulations regarding intellectual and digital property will remain, but here many commercial and legal questions arise as to how the state will implement this for companies and individuals.

Regarding copyrighting when purchasing an NFT, it is important to note that you are not purchasing the entire digital work; the creator or a third party may violate the right to copy, distribute, modify and publicly display.

Certain data protection laws give individuals the right to have their data deleted. The immutable nature of blockchain technology could render this right functionally impossible. As a result, NFTs containing personal data may violate data protection laws.

It is also important to consider which legal system governs your ability to sell or secure NFTs. The location of the asset itself usually determines ownership. This is where things get complicated, as an NFT represents a unique copy of an asset, not the underlying asset.

As with other digital assets, one issue that will become increasingly important over time is how the legal aspect of NFTs deals with the death of the owner. Leaving digitally stored assets to the next generation can cause problems for contractors.

In the case of one of the most famous NFT projects BAYC or Bored Ape Yacht Club, NFT owners recently had to reveal their identity and undergo KYC verification if they wanted to participate in the launch of new projects in collaboration with BAYC. This has sparked a lot of discussion about the actual anonymity in this world and whether it will be necessary to integrate this process into the NFT markets in the future.

On the picture: »Security when using NFTs«, Source: Experience Digital

It is necessary to understand that the law has not yet been able to catch up with this rapid development of NFTs and that it is not yet fully known whether this sector will establish itself as a legitimate form of collecting and trading works of art or whether it is a bubble waiting to burst. As an investor, however, it is necessary to know the complex legal issues and possible risks posed by NFT investments.

The future of NFTs

It can be seen that the world is rapidly digitizing. Each user, on average, spends 6 to 7 hours a day online and, as it seems, this number is not decreasing. The use of AR and VR glasses, the development of smartphones and electric cars will most likely accelerate the process of transition from the physical to a completely virtual world. Although this theory sounds scary, we have to accept that the world is moving in this direction.

It is interesting to see that large companies, such as Facebook or Meta, bet their reputation or huge amounts of money on the success of this sector, and are already preparing to enter the virtual world.

Currently, the largest NFT trading platforms collectively reach around 3 billion trades per month. If you compare this amount to the trading of the Shiba Inu Coin, which was created as a joke and can reach 3 billion in daily trading, this amount seems extremely low. Considering the sudden wave of information about the entry of major banks into the world of NFTs, such as JP Morgan, Visa, and Mastercard, we can conclude that the level of trading will increase exponentially in the following years, and as a result, a lot of “smart money” will be “injected” into this sector.

The true value of the NFT technology lies in its potential to transform the way markets operate and improve the way markets are managed, as well as the control of sensitive information.

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Marti Korošec - strokovnjak za marketing in prodajo
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