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Remember the NFT boom of 2021? The surge in trading of non-fungible tokens (NFTs), which are unique, blockchain-recorded digital assets, was one of the stranger economic offshoots of the COVID-19 pandemic.
What started as a marginal curiosity became a highly lucrative sector worth close to $40 billion (€36 billion) globally by the end of 2021, almost as valuable as the global art market itself.
In the highly publicized bust that followed, many NFTs lost practically all their value. The wider cryptocurrency crash was particularly punishing for digital collectibles and largely, they have not recovered.
The sector is worth up to 97% less than it was at its height in January 2022, and sales continue to plummet. So far this year, total global sales of NFTs are less than $2 billion, according to FindWeb3, a cryptocurrency and blockchain jobs platform. That’s more than 90% down from the peaks of 2021 and 2022.
Saying ‘non’ to non-fungibles
Does that mean that NFTs will ultimately fade away to nothing, proving right those who dismissed them as a worthless fad? Or is there still some kind of future for them?
“NFTs will still exist, but it will be a niche collectible market,” Ben Charoenwong, associate professor of finance at the business school INSEAD, said. “This doesn’t mean there cannot be booms here and there, but certainly not take off as people had imagined in the past.”
He thinks whatever future it can have will be “narrow” and says doubt is growing over the value of “non-fungible” as a concept. Non-fungible means an asset is unique and cannot be traded like for like, whereas fungible means it can be traded like for like, for example, with money.
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The tokenization boom
He notes that the recent trend of financial institutions converting real-world financial assets, such as bonds and stocks, into digital tokens recorded on a blockchain — the so-called tokenization boom — mostly relates to fungible assets.
However, Andrea Barbon, a finance professor at the University of St Gallen in Switzerland, thinks part of NFTs’ future lies in this tokenization boom, as there are some examples of people trading unique real-world assets as NFTs.
“NFT technology is really about ownership,” he says. “They describe the ownership of a specific asset that could be a digital asset or real-world asset.” He says things like real-estate contracts, expensive watches, artworks or luxury sports cars can now be tokenized, with NFTs created to represent these physical objects.
That immediately begs the question: Why would anyone want to have a digital, NFT version of their watch or sports car?
“Some people want to just speculate on the value of the physical asset and for them, it’s great that you don’t need to move the physical object around,” Barbon said.
“If the object is a nice painting and you buy it from the US, you want to ship it to the UK, that’s very costly, it’s hassle and it’s potentially not safe if the value of this painting is very high,” he explained.
He says some companies, such as Courtyard.io, keep physical vaults to hold physical assets which are traded online as NFTs. He says very often, the owner has no interest in having physical possession of the asset.
NFT as a way to make AI safer
Another area where he sees some promise for the future of NFTs is connected to artificial intelligence. He says NFTs could help with AI safety, as they could be used to provide unique, verifiable, non-fungible identities for AI agents.
Ethereum and other blockchain providers are in the process of trying to build NFT systems that would represent and verify AI agents, something Barbon says could be very successful.
He envisages a scenario where AI agents are recorded on an NFT blockchain and can then be identified and rated for safety and reliability.
“Everybody else can then see that the AI agent is actually doing well, you can trust it, it’s safe,” he says. “In order to do that, you need something which is uniquely attached to each AI agent and that can be an NFT.”
Another possible use he sees for NFTs in the AI era is that writers and artists could tokenize their work as NFTs so that if an AI agent ends up using it for training, the original work can be more easily identified as unique to the creator.
“Maybe you could then claim that the AI company has to pay you because they have used your content,” Barbon says.
The Bored Ape example
While the NFT craze of 2021 can now be seen as a classic bubble, many of those who invested in it have moved on to memecoins and other forms of fungible cryptocurrency, according to Ben Charoenwong.
“Overall, I think the market did not reject blockchains; it rejected non-fungibility,” he says.
At the time of the craze, Microsoft co-founder Bill Gates said NFT popularity was “100% based on the greater fool theory,” the idea being that one can make money through the purchase of overvalued, fundamentally worthless assets as long as there is a”greater fool” willing to pay even more.
One of the most famous NFT collections was the Bored Ape Yacht Club, a series of drawings of apes in various locations in various states of boredom. “Obviously, expensive digital images of monkeys are going to improve the world immensely,” Gates joked.
In many ways, that collection’s current status epitomizes NFTs’ fall from grace better than anything else. Although it remains one of the biggest NFT marketplaces, its value has plunged.
The singer Justin Bieber bought one image for 500 ETH (Ethereum), or around $1.3 million dollars. The value fell by around 99% to around $14,000. He still owns it.
Yet the fact that these images still command such prices shows they are not entirely worthless. That offers some hope to those who still believe in the technology. Alongside other possible applications linked to AI and tokenization, NFTs may still have a future, albeit a more modest one than when they first came to public attention.
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