Future use cases of NFTs – Industry verticals to be disrupted next

Everydays: the first 5000 Days by Beeple (Mike Winkelmann) – sold for 69.3 million dollars at Christie’s

Non-fungible tokens, commonly referred to as NFTs, gained a lot of public attention throughout the past year. Artists began selling virtual art and investors were generating increasingly large ROIs (return on investment). The Artist Beeple (Mike Winkelmann) sold his piece “Everydays: the First 5000 Days” for 69.3 million dollars at Christie’s, while the auction started with an initial bid of 100 dollars. Despite gaining public attention only in 2021, NFTs have been around since summer 2015. Currently, the only popular use case of NFTs is the minting of virtual art. However, the technology offers a variety of use cases and will disrupt many industries in a comparably short period of time.

What are NFTs and what can they do?

NFTs originated from the continuous development of the Blockchain technology, affiliated business models and concepts. To fully grasp the bandwidth of possible applications offered by NFTs, one should acquire basic knowledge in Blockchain technology, the different existing tokens and their respective use case and limitations.

Before the first NFT was launched and started an international hype, there were three Blockchain-based tokens with different uses, concepts, and backgrounds. These three different types included payment tokens, utility tokens and security tokens. Relevant definitions and explanations will be provided in the following paragraphs.

While an in-depth explanation of the Blockchain technology can easily fill textbooks with far over 100 pages, rudimentary knowledge can be acquired through a less voluminous definition of the matter. Nathaniel Popper, a journalist for the New York Times, found a comparably simple but yet effective and correct explanation for what the Blockchain actually is. In its essence, the blockchain is a highly technical database, which has become the go to solution for storing digital information bundles in a secure way, more secure than previously possible. The name Blockchain can be taken literal, as all information integrated into the “database” is grouped into individual blocks and then chained together in to one so-called ledger. The Blockchain ledgers are public and consequentially known as the public ledger. Transactions stored on the public ledger are transparent to the public, which constitutes the main difference between the Blockchain and other digital databases. Transactions are saved on the Blockchain for eternity, they cannot be modified or deleted and can be reviewed from anywhere at any time by any user. Summarizing, the Blockchain is a database constituted by the public ledger, on which all transactions within the ecosystem will be saved as blocks, once it has been verified by the designated users or network participants.

The first token to be discussed in this section is the so-called payment token. A payment token is self-explanatory as it can be used as a simple means of payment and is interchangeable with any traditional fiat currency such as the USD or the Euro. The Payment Token does not fall into the category of a security as it is not an investment. The most famous examples of payment tokens are Bitcoin or Ethereum, the two most relevant cryptocurrencies established to this day.

The second token is the so-called utility token. Basically, a utility token gives the holder the right to receive a product or service from the issuing company. Utility tokens are a way of transferring participation rights (Genussrechte under German law). A classic example of a Utility Token offering is cloud storage space upon token redemption. There is no maximum amount of Utility Tokens that can be issued by a company. Therefore, the price of the tokens is regulated by the supply-demand curve (Mitra, 2019).

The third traditional token is the security token, also known as asset-backed token. This Token can be identified by carrying out the so-called Howey test. The Howey test provides the framework for deciding whether a particular asset qualifies as a security under the law, thus leading to a distinction between the different token types. According to the Howey test, a security exists if the asset represents an investment in a venture that is implemented by another person. It is important to note at this point that a token that is classified as a Security Token is legally treated as a security and therefore subject to the relevant regulations. Security tokens aim to generate profits from the work of others. Popular examples of this type of token are the real estate investments or investments in private equity and venture capital funds mentioned in other FOSTEC & Company blog posts (Mitra, 2019).

NFTs where originally developed in 2014 with the first non-fungible token being launched in summer 2015. Nonetheless, the general public began to grasp the full potential of NFTs during 2021. On a macro level, NFTs are part of the Ethereum blockchain (Bitcoin based NFTs existed in the past). NFTs are classified as non-fungible, as they are unique (a unique token on the Ethereum blockchain) and cannot be interchanged with one another. Even though the virtual file including the art incorporated within the NFT can be copied as many times as one likes, the NFT provides one aspect that cannot be copied: proof of ownership of the work (despite the creator still retaining copyrights and reproduction rights). Afterall, it is worth noting at this stage, that NFTs are not limited to art, but can be used to tokenize (or mint) any existing digital asset and record the ownership rights on the Blockchain. Further use cases lie in the connection of NFTs to objects in the real world. Nike is working on a campaign, and has already registered a patent, for a method to verify the authenticity of their sneakers using an NFT system. The project has been named “CryptoKicks”. The main potential for disruption lies within the connection of NFTs and real-world objects, events, and services – intertwining the real and the digital world seamlessly.

Most of the industries offering large digital transformation potentials for and through NFTs are part of a group of industries lacking behind in terms of digitalization. These industries include the real estate industry, the medical sector the event and ticketing industry and the food sector.

Digitalization of the real estate industry

The bureaucratic efforts arising in combination with real estate transactions generally impose time consuming manual work on the buyer, the seller, and a variety of governmental agencies. The digitalization of the real estate industry will reduce working times and transaction costs.

Non-fungible tokens can be expected to facilitate several manual processes in the coming years. NFTs will enable proof of ownership to be provided digitally. NFTs fall-back on smart contracts to facilitate the transfer of properties from one legal individual to another. Properties could be transferred without requiring a notary using smart contracts. Additionally, NFTs generally incorporate automatic payments which would allow the seller to stay in control of the property until the fully automatic reception of the whole payment amount. The public ledger of the Ethereum blockchain would also facilitate the work of the governmental officials introducing the change of ownership in the land registry (Grundbuch).

The public ledger would also allow for historical information on the property to be stored safely. This information would then be publicly available and impossible to modify. Consequentially, buyers as well as tenants would be able to gather the largest possible amount of information before deciding to move in or purchase the real estate.

Figure 1: NFT ecosystem and current market environment

Tokenization of medical records

Doctors and medical clinics are by law required to store personal information as well as medical records for ten years, records on certain treatments and information on x-rays must be stored for thirty years. The transfer of medical records from one treatment facility to another often leads to manual efforts for administrative clinic personnel as well as time delays.

NFTs could be used to safely store personal information of patients as well as their medical records well beyond the required ten-year holding period without compromising the confidentiality of the patients. Additionally, birth certificates could be stored as NFTs, which would ensure the preservation of the document (also enables government officials to identify homeless people more easily). Similar use cases would be applicable to store academic credentials as well as intellectual property and patents in a secure manner without the risk of fraud or modification of the documents and certificates.

Tracing of goods in the supply chain and post-sales

Many other industries, require high levels of transparency, in their supply chains, this goes especially for luxury goods. NFTs possess the required capabilities to provide producers with the possibility to track their sent goods across all levels of the supply chain.

Essentially, the NFT will work similar to an eternal tracking number. The company will create a digital representation of the asset on the Blockchain, which will then be used to safely store all information related to the product including its origin, transport information as well as previous owner and sales (the NFT can also include information on sales prices for transactions).

The programmer can also incorporate an automatic kickback or royalty to the producer or initial seller of the goods, which can lead to ongoing revenues of physical goods. Additionally, the NFT will serve as product authentication method and can store information on repairs, refurbishment, and restorations. The tracking of goods along the supply chain will also enable companies in the food sector to know the exact position of their goods.

Revolutionizing the event and ticketing industry

Real tickets could be tokenized and minted to be represented on the Ethereum Blockchain. This would have a variety of easily recognizable advantages such as the preservation of authenticity of tickets and the reduction of the tickets sold and traded on the black market. Nowadays, tickets are mostly non-transferable which requires re-sellers to distribute their tickets on the black market. Hence, the host or organizer will be unaware of the personal information of certain individuals which poses a significant security issue.

Additionally, the organizer can benefit from the reselling activities of ticket owners, as the code can include a kickback and royalty function for all additional transfers. Additionally, the tokenized tickets can be used to track the purchasing behaviour of guests during the event. This will enable the organizer to tailor digital marketing and retargeting activities to the individual ticket owners and ultimately generate additional perpetual revenues and generate further growth. Event tickets are often collected by individuals, either because they are particularly rare (Michael Jordan’s last professional game) or because of the design (artworks on tickets) or as memorabilia. NFTs as ticket replacement allow the storing and the re-selling of old tickets for an indefinite period.

While many of these industries have E-Commerce verticals, NFTs will add additional opportunities for E-Commerce activities in these industries. Part two of this blog series will investigate detailed E-Commerce opportunities and activities in more detail.