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The Top 3 Things People Get Wrong About NFTs

What are the top three things people get wrong about NFTs? With the mania that is the NFT market right now, there are bound to be misconceptions. That being said, are we seeing the same hype for non-art NFTs? And how will the NFT market adapt when the shoe drops on the high liquidity we have seen in the markets? What we have seen is an expansion in the NFT market, and a growing conviction that NFTs are here to stay.

We are going to peer at the dominance behind digital art NFTs, and address the on-going discussion of how NFTs derive their value. We will also touch on the utility of NFTs, and the subtleties behind who owns the underlying asset when you purchase an NFT.

Opensea remains the most popular marketplace for NFTs

Misconception #1: NFTs Only Apply to Art

This is perhaps the most common misconception given the amount of hype and money behind digital art NFTs right now. Luckily, it takes little research to move past this farce. This is especially evident given the growth we see in other sectors of NFTs like gaming and music.

It’s safe to assume that most of the money in NFTs now is in digital art. It’s comparable to DeFi’s share of the crypto market (~60% not including Bitcoin). I haven’t seen anyone pay $69 million for a video game skin quite yet. This could change, of course. We are in the midst of high inflation and interest rate hikes that can dramatically shift investors’ sentiments. Digital art NFTs have benefitted from a very liquid market. Of course, the market will inevitably shift. How will the NFT market adapt?

Digital art NFTs have the most to lose because they have gained the most (with a high degree of speculation). However, NFTs in other areas are gaining momentum. Games like Axie Infinity have demonstrated that massive wealth can be funneled into NFT-enabled play-to-earn gaming micro economies. Musicians like Steve Aoki are making millions by embracing NFTs to build their own platforms. We are also seeing NFTs emerge in DeFi. Heck, crypto desktop (and mobile) video games are meshing with DeFi to birth GameFi.

Misconception #2: NFTs Have No Value or Utility

Do NFTs have value? The answer is yes and no. Fundamentally, NFTs act as proof of ownership (of an underlying asset) that is stored on a blockchain. As long as the underlying asset has true value, then the associated NFT correlates with that value.

Fiat currency works similarly. A bill you hold in your hand is assumed to convey the value of its underlying asset, which, roughly speaking, is a function of the government issuer’s economy and political stability. The bill itself has no value, because it is only a piece of paper or plastic. So yes, NFTs can have value as de facto digital representations of an asset with true value. And no, an NFT itself is just a piece of code. Without the underlying asset, it has no value.

Meanwhile for utility it stands to reason that being a means for digital proof of ownership is the fundamental utility behind NFTs. Given that the underlying asset of an NFT can also be physical, we could leverage NFTs to keep a digital record of the ownership of any good sold. It could simplify global trade logistics and accounting as goods change hands with intermediaries across borders. In finance, we are seeing fractionalized ownership of assets made possible by the fractionalization of NFTs. We are also seeing NFTs pre-programmed to collect commissions on transfers of ownership transactions that route to the original and/or subsequent owners.

In gaming, we saw resiliency in the prices of game coins while Bitcoin and the broader crypto market moved to the downside. Though it is not clear why, it seems the micro economies of these games can decrease the impact of moves in the broader market. Theoretically, it makes sense. NFTs are used repeatedly during active gameplay, and people will likely continue to play games during a bear market. If people keep playing the games, then demand for the NFTs being used can be sustained.

Misconception #3: NFTs Imply Ownership of the Underlying Asset

Metadata. Metadata is a common term that refers to data that provides information about other data. An NFT’s metadata specifies details about the underlying asset – the asset’s name, history, or anything else deemed necessary for, say, a collection.

However, there is a bit of “fine print” missing from the metadata of most NFTs I’ve seen. What’s missing are the details to who will carry forward ownership of the underlying asset after a transaction. Buying an NFT does not mean you automatically assume ownership of the underlying asset. Unless otherwise specified, all you have purchased is a permanent link to the underlying asset. Typically, the copyright and intellectual property rights (IPR) will remain with the original artist, too. If you are interested in the ownership of the underlying asset, copyright and/or IPR, then you’ll need to include these in the terms of the sale before making a purchase.

Funny enough, NFTs are a form of metadata if viewed as code (data) that represents (describes) information (data) about an asset. Therefore, one might exercise trying to frame NFTs as blockchain-enabled metadata.

Correcting our Conceptions of NFTs

There are misconceptions now, and there will be more down the road. NFTs continue to grow and reveal new use cases for people to wrap their heads around.

NFTs are young like the rest of the crypto market, and only now are regulations starting to creep in. Regulations are important, but will introduce volatility and confusion in the short-term. We are seeing such shocks in the broader crypto market now. Like crypto, NFTs represent a technology with the potential to disrupt many industries.

As their relevance grows, so will the importance in correcting our conceptions of what they are. For now, we are ready for the next wave of development after debunking the top three things people get wrong about NFTs.

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Gerrit van Sittert

About the Author

Gerrit van Sittert

Gerrit van Sittert is a cryptocurrency investor keenly interested in the ramifications of blockchain technology. Since graduating from a commerce and entrepreneurship degree, he has specialized his knowledge of how cryptocurrencies are set to impact the global supply chain and emerging markets. He started his crypto journey in 2017 while hosting an entrepreneurial focussed meetup group in Victoria, BC.

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