Background: The rise of Blockchain

Understanding of NFTs can only arise by considering the series of technological advancements that took place over the recent years. In 2008 Satoshi Nakamato introduced the idea of Bitcoin, a peer to peer network that facilitates transactions in a digital environment. The solution proposed involved the development of a decentralised network of trust between unknown to each other market participants, using cryptographic algorithms.  

Trust between transacting parties allows the flawless exchange of value, limiting the risk for both the sender and the receiver. In a conventional market trust is established between participants through the use of centralised intermediaries which facilitate transactions. Satoshi’s paper however, created a different dimension of trust governed only by mathematical principles, eliminating therefore the middle parties acting as agents and overcoming the inherent risks and limitations faced by centralisation, including time delays, cyber security risks, risk of loss through custodian error or poor performance.  

Back in 2008 little was known of what was about to follow. Although Bitcoin’s growth was shaded by skepticism with regards to the scalability and sustainability of the technology, it dragged the attention of several investors and software developers. Another important milestone was the development of smart contracts enabling blockchains. This allowed the programmability of transactions and it meant that the idea of decentralised trust expanded beyond the exchange of cryptocurrencies or money to more complicated digital trades.

In focus: Non-Fungible Tokens (NFTs)

What are NFTs:

NFTs are unique tokens issued or minted on a blockchain platform. Their non-fungible nature arises from the fact that they represent the ownership of an underlying object, digital or physical. Each token transaction, including minting, is traceable proving the origin and the ownership of tokens, immutable, meaning that data cannot be altered to cause discrepancy and exchangeable in a digital world with improved transaction time.

This creates a world where anything of value can be represented in the form of tokens which can be easily sold to other market participants in exchange of fiat money, goods or other tokens. Hence, upon the broader adoption of blockchain backed NFTs a significant disruption is expected across several industries and markets. Indeed, taking a closer look at the below potential applications of NFTs, one can appreciate the wide spectrum of benefits offered by the technology that are applicable in today’s economy.

Music and digital art

The most apparent application of NFT technology in recent years has been the representation of digital art ownership. Artists, minting creations on blockchain, can directly access a broad market without the need of intermediaries. At the same time the automation of the process ensures that original creators are compensated fairly, by allowing features such as access to gains from future sales.

Representation of physical assets ownership

Ownership of physical assets in the form of land, buildings or equipment, jewellery etc can also be represented using NFTs. Title deeds or ownership certificates can be replaced with a digital token that cannot be forged or destroyed. This allows market participants to exchange legal ownership of assets in an effective and efficient way, while improving the liquidity of the assets.

Education and research

The immutability offered by blockchain technology allows third parties to directly verify the authenticity of educational accreditations or certificates, improving transparency. Literary property can also be protected through NFTs, improving the value of research activity.

Gaming

The introduction of blockchain technology in gaming is expected to face exponential growth in the coming years. Exchange of achievements and collectible gaming items through an in-game marketplace can expand using the interoperable features of blockchain to trade between different gaming platforms and applications.  

Collectibles

Collectors can verify and prove the scarcity of their items through the immutable and transparent blockchain ledger using NFTs. At the same time the value of collectibles is readily available to potential buyers if those are traded within a public blockchain environment.

What does the future hold for NFTs

While the NFT industry has significantly expanded and evolved rapidly over the past months, there is still a large area for exploration and exploitation, especially in industries and sectors that have not yet assessed and evaluated its potential and application. The meteoric rise of the NFT market in 2021 was concentrated in the collectible industry, mostly relating to digital artwork, dominated by sports highlights, GIF-animated artwork and other collectible items, nevertheless new market segments emerged in the second half of the year. With digital collectibles still being the main driver in NFT sales, the range of transactions has spread to other industries such as fashion, gaming assets and music, indicating the new directions of growth.

The embedded characteristics in the nature of the non-fungible tokens can establish value for creators in both the private and public sectors with the future of NFTs starting to develop and shape into a more concrete direction, in parallel with other regulatory and market changes that are expected to have an impact in its evolution.

The future of NFTs is undoubtedly looking bright, taking the center stage, in line with the development of the metaverse which is closely related to the application of NFTs. The expansion and growth of the metaverse concept is also a driving force in the rise of NFTs as there will be an increased number of digital assets as well as online marketplaces for people to transact with.

Following these considerations and as we gradually advance into a multiverse, the virtual world is expected to become a significant part of our daily lives and its products which could either be exclusively digital or virtual representations of physical assets, NFTs represent one of the most revolutionary innovations of the last decades.  

Charalambos Sergiou, Partner, Blockchain & Tax Advisory,

Nikolas Stratis, Senior Associate, Blockchain

Alexandros Vacanas, Senior Associate, Blockchain

PwC Cyprus