Non-fungible tokens – or “NFTs – have been around since at least 2014, but only recently began to really come into their own, and still are nowhere near what we can ultimately expect of the technology. Unique, unalterable entries on a blockchain that can be used as “virtual title deeds” to verifiably identify and track specific objects (virtual or real), NFTs can record and guarantee provenance and value-add along a supply chain, allowing businesses to trust the identity, origin, and other specifications of a commodity. Combined with smart contracts, which can trigger things like automatic payments or other responses on the occurrence of future events, NFTs can, at least in theory, provide some protection against counterfeiting and other types of fraud.
Beyond the recent surge in interest in NFTs among artists and collectors, is there more to NFTs than $70 million Beeple compilations, Gucci fashion films, and iridescent digital dresses? As NFT technology becomes adopted by mainstream industry, it will increasingly be found behind all manner of applications, permitting automatic verification and security to be hardwired into commercial and consumer transactions. And at some point, NFTs could stop being newsworthy and will, instead, become an accepted but vital part of everyday life, much like the historical transition of the internet itself from novelty to utility.
NFTs will enable businesses and individuals to acquire and protect value in real-world and virtual objects. Themes of authentication and “DeFi” (decentralized finance) are common to many blockchain use cases, including those discussed below. So, leaving aside the current hype over digital art, what other use cases are being explored for NFTs?
Assets & commodities
By attaching NFTs to physical goods, an additional level of guarantee can be offered to distributors and consumers to prove that the goods in question are the real deal. Examples might be NFT-enabled eartags for premium beef cattle, allowing each animal to be tracked from “farm to fork” with total accuracy. Likewise, shipments of commodities (e.g. grain, iron ore or water) can be assigned a unique NFT so their progress through the supply chain can be reliably traced.
NFTs can help prevent “leakage” of genuine goods along the supply chain, as well as stopping counterfeit goods being introduced or substituted. They can also be utilized to guarantee specific characteristics of goods, such as methods and circumstances of production. Several fashion industry entities are looking to use NFTs to assure their customers their products have been manufactured sustainably and ethically, and the gemological industry is exploring the use of NFTs to restrict the sale of “blood diamonds.”
As a fundamental aspect of blockchain, this concept is, in principle, scalable down to the level of individual items. Although the state of technology and the relatively high transaction fees for updating NFTs mean that such use cases are currently viable only for high-value assets, we can expect to see diamonds with NFTs linked to unique laser-engraved serial numbers, high-end handbags and fine wines with NFT-enabled QR codes, or sports cars with vehicle identification numbers backed by NFTs.
NFTs can also be used to enable fractionalized or micro-investment in such assets, where an individual acquires a small share in a diamond, an artwork, or a plot of land, for example. This might seem somewhat counterintuitive as it effectively undoes the non-fungibility of an NFT by rendering its fractions fungible. However, there is a growing market for such things. and while it is still at a very early stage, financial authorities around the world are working to extend their regulatory regimes in order to cover the new risks and opportunities presented.
Licenses, certificates & registrations
Many of us are still happy to accept a formal-looking certificate at face value, but the sale and use of fraudulent qualifications is widespread. In an era of hard-copy documents, the question of authenticity and security was traditionally addressed by using special paper, unique seals, holograms, and wet-ink signatures. None of these translate satisfactorily to the digital world, but NFTs are perfectly designed to verify electronic information, increasing efficiency, and reducing the administrative burden of keeping and checking records.
Collectibles & gaming
CryptoKitties, a game run on the Ethereum blockchain, was one of the first commercial use cases for NFTs. It allows players to “breed” virtual cats, selecting sires and queens for specific traits much as in the real world. Animals with proven pedigrees can become extremely valuable – in 2018 one CryptoKitty sold for $140,000. Similarly, ZEDRun is a platform for breeding and racing digital horses where successful breeders can earn significant sums of money in prize money and stud fees.
Several online gaming platforms, including My Crypto Heroes and Aavegotchi, allow the purchase of NFT-backed in-game items to allow players to level up and gain unique advantages over their competitors. While the trade in sporting highlights, such as NBA TopShot’s tokenization of basketball matches, is akin to the market for digital art, NFTs can also be used to verify physical collectibles. Ethernity is a leading marketplace for NFT-backed real-world items such as limited-edition baseball bats and, in 2019, Austrian Post launched Crypto Stamps, which can be used like normal stamps or collected and traded on the blockchain.
Ticketing for sports, music and other events has been plagued by forgeries and fraudulent practice, particularly in a resale. The immutable and “trustless” nature of blockchain technology promises to help address some of these issues. While it may not be practicable (or even desirable) to completely eliminate ticket resellers, it may be possible to reduce sales of fake tickets and the use of automated botnets by scalpers to corner markets for specific events.
With the foregoing in mind, blockchain holds great promises for many aspects of our society. However, it is not all perfect, and there are many issues which need to be addressed and resolved before the technology can achieve its full potential.
Graeme Fearon is special counsel in Moulis Legal, providing strategic insight and expert knowledge to the firm’s cross-border, commercial, and intellectual property teams.