Seemingly out of nowhere, NFTs (non-fungible token) are driving huge prices and capturing executives’ attention, with mentions of “NFT” or “non-fungible token” on earnings calls soaring over the past months. For brands and retailers, they could represent a huge opportunity to tap into the growth of virtual worlds and connect with consumers, according to CBInsights research. But while NFTs might be the next big thing, do they represent a long term trend or are they merely yet another passing fad? Does this new asset class have real value? <h4><b>PROJECTED MARKET GROWTH</b></h4> The global Non-Fungible Token (NFT) market size reached US$340.0 million in 2020 and is expected to register a CAGR of 39.6% taking it to a value of US$3.57 trillion by 2030, according to an analysis by Emergen Research. Increasing use of NFTs in gaming is one of the major factors expected to continue to drive global market revenue growth. <b><i>Note:</i></b> Because NFTs are new, the growth trajectory is very steep (going from one sale is a 100% increase). <h4><b>TREND</b></h4> The hype surrounding NFTs focuses on brand collaborations and merchandise launches - especially from international luxury brands. <b><i>Practical Applications: </i></b> The actual growth is being driven by the rising use of NFT in supply chain and logistics. NFTs prevent counterfeiting, assist in tracing the movement of products across the supply chain, and ensure originality. <ul> <li aria-level="1">NFTs could also provide information about each material and component in a specific product for industries and is particularly useful for product supply chains that include a complex range of input across a global footprint.</li> <li aria-level="1">NFTs could also be beneficial to enterprises concerned about tracking the usage of reusable and sustainable materials.</li> <li aria-level="1">Increasing demand for a decentralized marketplace is boosting market revenue growth.</li> </ul> <h4><b>FAD</b></h4> Many individuals in the online gaming community engage in various online metaverses platforms in order to increase social engagement and gain exposure for NFTs. <b><i>Definition:</i></b> In this case NFTs are defined as “unique, digital items with blockchain-managed ownership.” That ownership can include anything from digital art - currently the rage - to virtual land, conveniently for sale on Decentraland. <b><i>Why The Hype?</i></b> Part of the hype has been the sky high prices people have been willing to pay for something that is intangible - in the case of art, people are paying millions of dollars for what is essentially an online image. <ul> <li aria-level="1">Prices like $69 million for Beeple’s digital image of a unicorn or $91.8 million for Pak’s The Merge, have caught media attention. OpenSea, a leading NFT marketplace, reported sales of $8 million in January 2021, which surged to $86.3 million the following month. </li> <li>NFTs can represent many things ranging from trading cards to sneakers, giving brands an opportunity to participate in the current craze. </li> <li>Not surprisingly, the rush to NFTs has drawn a wide range of brands - from luxury to consumer products - to try to hitch a ride on the bandwagon.</li> </ul> <h4><b>CORE CONSUMER MARKET</b></h4> <em>Gaming</em> is currently one of the most popular applications for NFTs. Decentraland, Sorare, Gods Unchained, and My Crypto Heroes are among the most popular NFT-based games. Outside of gamers, NFTs have taken the art world by storm, and now play a key role in <em>limited edition merchandise</em>. <ul> <li aria-level="1">The high prices and limited access give NFTs a <em>status and exclusivity</em> that implies (to some) that you are a high networth individual (or a fool, depending upon how you look at it).</li> <li aria-level="1"><em>Small transactions</em> of under $10,000 account for <em>more than 75 percent of the market</em>, according to Chainanalysis.</li> <li aria-level="1">Between March and November 2021, there were 360,000 NFT owners holding a total of 2.7 million worth of NFTs. However <em>80 percent of the value of the market was held by just 9 percent of the 'wallets'</em>, according to Chainalysis.</li> <li aria-level="1">So far, most new NFT collectors on the <em>secondary market have yet to recoup the costs of their purchases</em>, according to a study by Nansen on behalf of the Financial Times.</li> </ul> <h4><b>RISKS</b></h4> The lack of regulation is a <em>breeding ground for fraud, scams and market manipulation</em>, especially because the real-world identities of buyers and sellers is difficult, if not impossible, to discover. <ul> <li aria-level="1">A major problem in the NFT market is <em>unpredictability in determining NFT pricing</em>. As there are no formed standards for any particular type of NFT, the prices of NFTs fluctuate significantly, according to EmergenResearch.</li> <li aria-level="1">In many cases, NFT’s <em>require a ‘community’ of potential owners to create value</em>, according to Harvard Business Review. The upside is that the community can be relatively small.</li> </ul> <h4><b>USE CASE DEVELOPMENT</b></h4> Because blockchains are programable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, according to the Harvard Business Review. In simple terms, this could be the difference between ownership and membership. <b><i>Most Likely Uses: </i></b> NFT ownership could be used to grant <em>access to events, early access to product drops</em>, and other limited or exclusive offers. <ul> <li aria-level="1">For many luxury or high demand brands, it's as much about <em>combating counterfeiting</em> and <em>curtailing parallel and gray market activities</em>, as it is about creating membership benefits.</li> <li aria-level="1">Another application focuses on <em>digital rights management</em> - particularly surrounding intellectual property, according to Harvard Business Review. HBR envisions that NFTs have enabled a new type of royalty contract, whereby each time a work is resold, a share of the transaction goes back to the original creator.</li> </ul> <h4><b>OUTLOOK</b></h4> The long term growth for NFTs will be as part of the overall movement towards greater supply chain transparency. <b><i>Retail Use: </i></b> At the retail level, NFTs are more likely to be more about driving excitement and publicity, then about the actual sales of the NFTs themselves. Beyond publicity there is the concept of decentralizing commerce (allowing consumers to bypass retailers and platforms when purchasing products). <b><i>Consensus:</i></b> While NFTs are worth keeping in sight, they are not likely to be mission critical right now. Great for brand publicity and promotions, but more likely to be applied to supply chain management - at least for now. <ul> <li aria-level="1">As Harvard Business Review points out, NFTs make less sense when there isn’t a purpose to digital ownership, such as for managing physical collectibles, where people presumably want to receive the objects themselves.</li> <li aria-level="1">Despite attention-grabbing sales of multi-million dollar NFTs, they are the exception (which is exactly why they command so much attention). NFTs will be all the rage, until one day they are not - and the mainstream market shifts its sights on the newest next big thing.</li> </ul>