The future of applications is decentralized. In the Blockchain world, DeFi or decentralized finance applications are already alive and well in thriving DeFi marketplaces. NFT marketplaces are perfect examples of new types of decentralized apps. Also referred as DeCo (Decentralized Commerce) since NFTs do not represent financial applications (i.e. DeFi) involving fungible tokens (FTs) and assets. Instead, they represent NEW FORMS of decentralized commerce and value exchange.
An NFT is a non-fungible token, an authentic digital artifact. One might relate an NFT to a digital twin that has no twin in the physical world. NFTs are like Bitcoin in the sense they have technology that demonstrates the uniqueness and primacy of the artifact over digital copies. Jack Dorsey recently turned his first ever tweet into an NFT and sold it for $2.9m.
The growth in interest of NFTs is astonishing but pleasing. It demonstrates that intangible assets can and will be valued, increasingly, as a store as value. As they can also be readily exchanged for cash, they can also increase their use as a medium of exchange, though the number of uses remains very low. The recognition of NFTs and their value in the consumer art market will help increase this opportunity.
In most cases, the object and its metadata are stored separately from the NFT that you buy. It is impractical and too costly to store the entire digital object on a blockchain. Sometimes the only link between the NFT Smart Contract and the Object is a URL, meaning that the content stored at the URL can change without the owner knowing about it until after the fact.
When you buy an NFT, you own the right to digitally flex it — i.e. show it off to friends — online, but you don’t own the object itself unless it is so stipulated in your end user license agreement (EULA).
Fine Print to Read When Buying NFTs
Most buyers rarely see — let along sign — an end user license agreement. But if one exists and they read it, they may be surprised to know that they normally can only ‘flex’ the object online and cannot typically make a copy of it for their physical T-Shirt or Coffee Cup, since the object is protected under copyright law.
An NFT buyer can be left owning a string of meaningless bits if the object linked to the NFT e.g. a digital baseball card, is stored on a central server, and that server becomes inaccessible and/or the file is corrupted.
NFT buyers are bound to learn more about this – probably the hard way – in the coming year. For example, it could happen if a budding artist who sells NFT art goes out of business and can no longer afford to keep the server where the art is stored up and running.
NFT Markets will become More Transparent and Trustworthy
The good news is that the market will become more transparent and trustworthy. NFT buyers will demand to know where and how their NFT objects are stored so that they can make an informed decision about whether they can trust the NFT seller to provide persistent secure storage as long as they so choose.
How to Be Prepared and Stay Aware
Next time you buy a cool digital shoe for your favorite avatar (see Nike NFT Patent), make sure the shoe will last as long as your avatar wants to wear it. That assurance will take more than good sneaker treads. It will also take reliable and persistent shoe storage. Not something you would normally think about when buying shoes today, but something that will become commonplace in the years to come.
NFT sellers will eventually have many more easily accessible persistent storage options and over time will likely start shifting ownership for storage over to the buyers. Buyers who want to keep their objects around will have to sign up for low-fee storage subscription services, much like Apple’s iCloud storage service.
The author is Avivah Litan, Distinguished VP Analyst, Gartner.