What is an NFT?  - Finance for all

What is an NFT? – Finance for all


Having become essential in 2021, NFTs are assets allowing the exchange of digital content. If the media coverage of NFTs was concomitant with record sales on the art market, companies are now using the growing popularity of this medium to associate all types of goods and services with it.

One can consider the NFT like a new type of assets. Deployed on the blockchain, they allowexchange ownership rights of digital objects. In 2021according to a report by Nonfungible.com and BNP Paribas’ L’Atelier, NFT sales reached $17 billion, a 21,000% increase compared to 2020. However, this data should be viewed with caution. Indeed, according to the media The Block, between May and June 2022, the trading volume was divided by four. Everything suggests that the price of NFTs fell victim to a speculative bubble in 2021.

Definition

NFTs – for non fungible token (literally, “non-fungible tokens”) – are certificates of ownership associated with a digital object (image, text, sound, etc.). It is tokens that are not substitutable for any other. Indeed, NFTs are uniquely identified on the blockchain. They thus differ from crypto-currencies whose tokens are fungible, that is to say interchangeable (one Bitcoin is always equivalent to one Bitcoin).

  • 1 – The MergePack, sold at $91.8 million (December 2021), initially composed of several hundred thousand juxtaposed NFTs, this work is represented by white spheres of equal size, but which merge and grow when an individual holds several NFTs of the work.
  • 2 – Everydays: the First 5000 daysBeeple sold at $69.3 million (March 2021), since 1er May 2007, the artist Beeple has in mind to progress in digital art and draws a digital work per day. Everydays brings together the first 5,000 days of his work.
  • 3-ClockPack, sold at $52.7 million (February 2022), clock is an NFT that counts the number of days Julian Assange, the founder of WikiLeaks, has spent in detention.
  • 4 – HumanOneBeeple sold at $28.9 million (November 2021), described by the artist as a “portrait of a human born in the metaverse”, the work is a 3D representation of a human that the artist modifies over time.
  • 5 – CryptoPunk #7523Larva Labs, sold $23.7 million (February 2022), œPart of the CryptoPunks pixel character collection created in 2017, CryptoPunk #7523 is the only one with a surgical mask.

Unfortunately, the difference between an NFT and its underlying is not always understood. Without having purchased the NFT Quantum, anyone can download the artwork file and view it at home. The NFT does not offer ownership of the digital object. Thus, what the acquisition of the NFT offers is the link between the digital object and the blockchain. The purchaser has the guarantee of an unalterable signature of the exchange between the creator (or a previous holder) and himself.

In January 2018, the creation of a standard NFTthe ERC-721, enablesstandardize the creation and exchanges of NFT on the Ethereum blockchain. The standard, widely adopted by the creators of NFT, allows the development of trading platforms, and the use of NFT by the uninitiated.

Multiple uses

Often cited as an example, art is only one of the many possible uses NFTs. Possession of certain NFTs guarantees the right to services or goods. This type of token is known as an NFT utility, i.e. a utility token.

the Bored Ape Yacht Club is a collection of NFTs that includes 10,000 tokens. Each token is represented by a monkey generated by an algorithm from 172 distinct traits. Token holders can access privileges, such as private events or group chat access. This network, based on the possession of NFT, has attracted many celebrities like Eminem, Neymar, Serena Williams or Justin Bieber.

In sum, a utility NFT can integrate more or less any service. An NFT can be used as a certificate for the purchase of real estate, as a profile photo on a Tweeter account, as support for the purchase of specific elements in a video game or even for the purchase of concert tickets. In fact, since the hype of NFTs, businesses are rife with ways to incorporate these digital assets into their transactions.

Finance a film via NFT?

On May 20, 2022, 50,000 NFTs were auctioned at €1,250 each to finance the animated film Plush. In return, the animation studio promised 80% of the film’s receipts to NFT holders, as well as a right to vote on the direction of the script. In the midst of a fall in the price of crypto-assets, the operation turned out to be a failure. Only 1,247 NFTs found buyers that day.

Problem, if the film is not made, the investment is not reimbursed since the purchase concerns the NFT (represented by a plush image with unique characteristics for each NFT sold). The contract is therefore very risky since if the project is not carried out, the intrinsic value of this NFT collection can be questioned. Investors are likely to lose the entire stake, in fact, they replace the producers and therefore bear the risk of the project.

Before investing in a financing project via NFTs, it is important to pay attention to the risks involved. One can also wonder why the company uses NFTs rather than “classic” crowdfunding.

Nevertheless, assuming that this film (or another that also uses NFTs to finance itself) is released in theaters one day, from an economic point of view, the buyer will have two options:

keep his token and wait to receive his share of the film’s receipts;

resell his NFT on the market if he estimates his profit higher than that made by keeping his token.

The question of the value of the NFTs of the film after the distribution of the receipts is interesting. If these NFTs keep a monetary value, this implies that the utility tokens can transform into collection tokens once the service is rendered, such as those associated with works of art.

Moreover, for the creators of NFTone of the major advantages consists in being able to insert conditions concerning all future exchanges of their NFTs. For example, an artist who sells an NFT may demand to get a percentage of the profits in case of any appreciation in future resales. Since the contract is immutable on the blockchain, the transfer of the percentage is done automatically and does not have to be renegotiated at each exchange.

For now, NFTs are, with some exceptions, excluded from the scope of the European regulation – says MICA – which regulates the public offering of crypto-assets. The European Commission will assess over the next 18 months whether or not it is necessary to regulate the NFT market. It is therefore necessary to be particularly careful with these products, which do not currently benefit from any regulation..



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