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Non-Fungi-What? A No Nonsense NFT Primer

What can we say about NFTs that hasn’t already been said? Well, our clients have been asking us for our take on probably the hottest craze of 2021-2022. So, what exactly are NFTs, why does the whole world seem to have gone all-in on them? And what do we at Panda think about the future of this intriguing technology? Read on to find out.

A Brief Intro

To keep things simple, NFTs are a type of crypto asset that’s unique. In other words, unlike regular cryptocurrencies where every unit is of the same value and considered completely interchangeable with every other unit (think of the bank notes in your wallet), NFTs are used for objects that are either one of a kind, or that come in limited numbers (think digital art, collectibles, community tokens). 

Bitcoin, ether, and other cryptocurrenciesNFTs (Non-fungible tokens)
US dollars, euros, and other currenciesPaintings, sculptures, and other works of art
Apple, Tesla, Microsoft, and other stocksFurniture, classic cars and other antiques
1 troy ounce of gold, 1 barrel of Texas light sweet crude, and other commodities.Diamonds, watches, and other kinds of jewellery
Futures, CFDs, and other financial derivativesLimited edition toys, baseball cards, and other collectables 

You see, NFTs live in the crypto ecosystem, they possess the same characteristics as crypto in general, which means they are instantly transferable, verifiable on the blockchain, and cryptographically secure. However, they possess some unique characteristics of their own that allow for some pretty interesting use cases.

Is it Just About Digital Art?

You’ve probably mostly heard about NFTs as digital art because it has been a major use case in this particular market cycle. But NFTs aren’t just about pixelated images of questionable artistic merit, that’s just what people have jumped on first. Remember, crypto allows you to build whatever you want with it in a totally permissionless way. It just so happens that turning gifs into unique crypto tokens and attempting to monetise them has been the “killer app” this time round because it was the most accessible use case and the easiest to achieve. 

But think about it. NFTs are crypto, so they offer all the benefits of crypto, plus the ability to attach uniqueness to these specialised units and track their movement. They are actually perfect for bringing the physical world into the digital world. Traditional financial assets like the ones on the left side of the table above are easy to trade digitally because they are totally interchangeable. Assets like the ones on the right side of the table above are much harder to trade on financial markets because of their uniqueness. This means that the tremendous value locked up in these unconventional assets is illiquid, price discovery is slow, and there is usually a considerable markup associated with their purchase. 

NFTs can be used to digitise the rights to all the kinds of items on the right side of the table above. This allows for the value that’s locked up in them to flow freely just as it does on the world’s commodity markets. It also means that more people can access them. A priceless work of art that would usually hang in a billionaire’s hallway can now be divided into a number of NFT tokens and purchased by an entire community of investors, each with provable partial ownership of the work. 

It’s about more than just financial assets

NFTs also provide the kind of assurance and verifiability that’s priceless in many other areas of human life. The coffee you drink every morning is advertised as fair trade, the bag is stamped with a logo that says as much, but can you yourself verify that it is? In the future, you may be able to track the coffee in your morning cup, all the way back to the individual who farmed it for you using a version of this same technology. How about the meat on your plate? Wouldn’t you like to know just how old it is and how long it took to come to your local butcher? Was it really grass-fed? NFTs could be crucial to supply chain management in the future.

Remember the ICO craze of 2017? ICOs (Initial Coin Offerings) were the “killer app” of crypto in the previous market cycle, again because it was the easiest and most accessible use of this new technology. NFTs allow for a much more sophisticated and inclusive form of fundraising. An athlete or musician could sell NFTs to their fans that entitle them to privileged access to games, concerts, events, afterparties and much more. Your NFT would be your ticket to enter and your ID as a member. They could even agree to give back a share of their profits to their earliest fans who believed in them first. The possibilities are truly unlimited. 

In our industry, NFTs could be used to identify VIP accounts and offer them privileged access to much more than the very basic list of benefits they are now provided with. When you start to think about these things as community-building tokens you gain an entirely different perspective on their possibilities

Back down to earth

The problem with all this is the newness of the tech. It’s still in its infancy and so standards and best practises have yet to emerge across the industry. Going all-in now could be the equivalent of spending tens of thousands of dollars on LaserDisc technology in the 1990s, expecting it to be the future of high definition video. 

Being too soon is often functionally the same as being wrong, never forget that. We have yet to see a clear leader in the smart contract platforms that all this stuff is supposedly going to be built on. Ethereum is definitely ahead, but have any of you actually tried to use the Ethereum blockchain for anything in the past year or so? The same problems that plagued it in 2017 and prevented many of these innovations from gaining mainstream adoption back then still persist today (scalability issues and extortionate fees). So, for those of you asking for our take. The technology is fascinating, but it’s not yet ready for prime time, regardless of what anyone tells you. Now is the time to dabble, to experiment, to play, not to sell the farm and go all in. Just our two pennies.

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