Let a tweet sell for millions of dollars, is NFT a bubble or the next outlet of blockchain

Blockchain information is published in the chain circle

Source: The Paper, author: Ye Yinghe

The DeFi (decentralized finance) craze has just passed, and another new term in the cryptocurrency circle, "NFT (non-fungible token)", has emerged and quickly set off a craze in the cryptocurrency circle.

On March 6, according to the BBC, Twitter co-founder and CEO Jack Dorsey put his first tweet ever on the market for sale in the form of an NFT. The content was just five words - "just setting up my twttr", and the bid was as high as US$2.5 million (£1.8 million).

According to data from CryptoSlam, an NFT collectibles data statistics website, in the past 30 days, the transaction volume of NBA TOP Shot (a blockchain-based NBA digital collectible card launched by DapperLabs and the NBA) exceeded US$260 million, an increase of 390%, and the number of buyers exceeded 110,000.

NFT collections statistics website CryptoSlam statistics

"Anything can be made into an NFT, and what others see is the ownership of the NFT that you have certified," Justin Sun, founder of TRON, told The Paper.

William, chief researcher of OKEx Research Institute, pointed out that although NFT is an emerging niche encryption field, the industry is becoming more and more active. Its main application areas include games, digital art, music, domain names, event tickets, sports, etc. In the future, it is expected to be combined with more objects in the real world and serve as a bridge between the physical world and the blockchain world.

So, what exactly is NFT?

NFT: A new and unique way to carry the value of digital assets on the chain

NFT stands for Non-Fungible Token, which is also called non-fungible token in Chinese. It is a unique and non-interchangeable digital asset, and its ownership is transferred on the chain (such as Ethereum). Currently, NFT uses the distributed database technology of blockchain to create a unique ownership certificate for any type of digital commodity.

"Unlike tokenized tokens such as Bitcoin, which can be divided into 0.1, the smallest unit of assets such as NFT is 1, which cannot be divided. Just like artworks in the blockchain world, each NFT corresponds to a piece of art, and a complete artwork cannot be divided into two parts." said Yu Jianing, rotating chairman of the Blockchain Committee of the China Communications Industry Association and president of Huobi University.

In Yu Jianing's view, blockchain has now become a fully digital, globally circulated market, and the emergence of NFT has opened up another new and unique way of carrying value for on-chain digital assets.

William pointed out that NFTs generally have three characteristics: uniqueness, each NFT has different attributes, which are usually stored in the metadata of the token; provable scarcity, generally only a small number of NFTs have only one copy, and the number of tokens can be verified on the blockchain, which is provable; indivisibility, most NFTs cannot be split, so part of the NFT cannot be purchased or transferred.

He believes that compared with traditional intellectual property and copyright, the advantages of NFT are mainly realized through blockchain technology. Based on blockchain technology, NFT has the advantages of ownership, transferability and authenticity. Blockchain technology ensures that the ownership of NFT is not destroyed, so that NFT can be transferred on special platforms. In addition, blockchain technology makes the records of each transaction transparent and traceable, which can effectively prevent counterfeiting and ensure its authenticity.

Lu Jun, a senior researcher at Huobi Research Institute, also pointed out that NFT is supported by blockchain technology. Artworks are confirmed or stored on a decentralized blockchain and are truly owned by the holder. Creators can issue them without being restricted by third parties or middlemen, which can bring more benefits to creators. Anyone can trade, transfer, or even destroy them. NFT is more extensive and is not limited to a static traditional work. It can even be a destroyed physical painting or a famous Twitter post.

He believes that there are many reasons why NFT has been sought after recently. With the explosion of applications such as DeFi and the development of blockchain infrastructure, more and more users are participating in on-chain transactions, which brings people's attention. This will be the basis for the NFT market to become hot. NFT can be compared to mature industries in the real world, such as intellectual property, art collections, game props, etc. People can understand and accept this new thing quickly. At the same time, NFT, as a virtual asset, brings greater imagination and creative space. Users in the crypto world are happy to support creative and forward-looking things. We can see that many seemingly "weird" NFTs are sold at high prices.

"Of course, with the development of the NFT market, there is no shortage of speculators creating and chasing irrational hot spots," said Lu Jun.

Combining NFT with financial assets: confirmation of ownership, tracking, and enhanced liquidity

Yu Jianing said that NFT will carry richer asset value, and NFT assets will play an irreplaceable role in the blockchain ecosystem. Against the backdrop of global digital transformation, the use of NFT to realize asset chain and on-chain property rights confirmation may become the key driving force for many industries to achieve digital economic transformation, and asset chain will also become a key cornerstone for the development of the digital economy.

William also believes that although NFT is still in its early stages, it has already released huge development potential and is likely to be applied to the mainstream market in the future, because the real value of NFT is to provide a channel for real-world items to be put on the chain, acting as a bridge between the physical world and the blockchain world. In addition to existing applications such as game props and art collections, more real-world assets (such as real estate, cars, etc.) are expected to be put on the chain on a large scale in the future, and exist and circulate in the form of NFTs, "which will profoundly change our daily lives."

"The same is true for the financial market," William said. For example, various financial bills carry a lot of information during circulation and trading. If combined with NFT, it can not only confirm ownership but also facilitate tracking. In addition, the future trading of various NFT assets can itself form a segmented financial market.

Gu Yanxi, founder of Liyan Consulting and a researcher in the blockchain and encrypted digital asset industry, is even more certain: "The value of NFT lies not in the various artworks of today, but in the various financial assets of the future."

Yu Jianing believes that in the financial field, traditional assets such as stocks and private equity may be put on the chain in the form of NFTs in the future, which can greatly improve the liquidity of financial assets; at the same time, the cost of asset confirmation, mortgage, liquidation and transaction on the chain will be lower. NFT can separate ownership and usage rights, and has stronger scalability.

"The core idea of ​​blockchain is the linkage between industry and finance. In the era when assets are fully chained, everything in the physical world in the future will have a corresponding digital twin in the digital world under the mapping of technologies such as 5G. Correspondingly, these digital twins will also have corresponding NFTs as identifiers of property rights," he said.

Gu Yanxi further pointed out that the financial products currently traded on the exchange are all large in size and can be divided into many small standard units. This is conducive to centralized trading markets for centralized matching transactions. The most typical example is stocks and various index products. However, for those assets with small individual size and a limited number of standard small units that can be divided, they cannot be traded in the existing securities market. For example, single real estate, such as commercial office buildings or even personal housing. If such asset types are traded in the existing securities market, they must be packaged and then made into standard small units for trading and circulation. In the real estate industry, it is REITS products.

"If NFT starts to circulate, then such small-scale assets can be traded and circulated on the trading market. For example, a family home can be made into an NFT for trading and circulation. Such a market will be much larger than the existing NFT-based collectibles." Gu Yanxi said.

Current problem: Unable to establish a connection between physical assets and digital NFTs, poor liquidity

Yu Jianing pointed out that the current NFT is mainly issued, traded and circulated based on the Ethereum network, but the Ethereum network is congested and the handling fee is high, which restricts the further development of NFT. At present, the application field of NFT is still relatively single, concentrated in the niche circles such as games, encrypted artworks, and card collections, and has not yet achieved large-scale application.

"When putting assets on the chain through NFT, how do we establish the connection between physical assets and digital NFTs? How can we make the digital circulation and title confirmation of these physical objects legally recognized under a regulatory system? These issues are all directions worth thinking about in the industry in the future," he said.

Gu Yanxi also mentioned that if it needs to be associated with physical assets, there must be a corresponding asset registration agency to ensure that the physical assets correspond one-to-one with the NFT.

William said that the NFT track is still in its early stages and inevitably has some flaws, such as an imperfect ecological environment, serious project differentiation, poor liquidity, and high security risks. For novice players, participating in NFT involves concepts such as private keys, wallets, and mnemonics, which have a considerable entry threshold.

Lu Jun also mentioned that a significant problem with NFT is its poor liquidity. Because it cannot be split, a complete NFT must be traded when trading. At the same time, there is often only one NFT on the market, which will have a great impact on liquidity. On the other hand, the pricing mechanism of the NFT market is weak, new NFTs emerge in an endless stream, and the market has not yet formed a relatively stable consensus on the value range of a certain NFT.

He also said that NFTs have typical problems of early products in the crypto world, such as being prone to bubbles.

However, Lu Jun believes that time is the biggest enemy of bubbles. As the market develops and people become more aware of NFTs, it will become difficult to generate large bubbles. The problem of liquidity is similar. When people's expectations of the value of NFTs gradually become stable and the risk of holding NFTs decreases, more people will join the market to contribute liquidity.

William also said frankly: "We should look at the development of NFT with a tolerant and open attitude. With the influx of more talents and funds in the future, NFT will not only overcome its current shortcomings, but also continue to shine in the crypto world."

"The current NFT craze can indeed make the market more aware of the value of NFT. In the future, more NFT-based applications will be easier to promote." said Gu Yanxi