Unique digital files are associated with units of data known as non-fungible tokens (NFTs), commonly found on a blockchain as cryptographic assets. The digital files can contain anything from the recordings of a live concert to simple graphic art.
NFTs are exchanged on online digital art markets and stored on the blockchain, a digital ledger technology supporting cryptocurrencies, smart contracts, and other advanced applications.
The high values of some early NFTs have been noteworthy, with a Tom Brady digital trading card selling for over $1.3 million in Ethereum in March, and a digital painting sold for over $69.3 million by auction house Christie’s.
In contrast to fungible tokens and coins, NFTs are unique and have their values and code, making them non-exchangeable to one another. Additionally, NFTs are becoming an integral part of cryptocurrency and are also creating some huge tides in the financial sector. Although NFTs do have a few security concerns, it consists of a potential that one can argue is revolutionary.
NFTs May Drive DeFi Innovations
NFTs could potentially have a significant impact on the future of decentralized finance (DeFi), which involves using blockchain or cryptocurrency to disrupt traditional financial intermediaries.
One instance is Teller Finance, which has incorporated collectible NFTs into its algorithmic credit risk protocol to generate initial liquidity. Holders of these NFTs can also access some “immediate APY benefits” as well as longer-term benefits that will be announced in the future.
NFTs could also offer an alternative fundraising option for fintech firms that want to invest in the crypto space or launch their own DeFi services instead of relying on traditional crypto fundraising methods such as coin IPOs. Moreover, many new DeFi projects that are in development work with NFTs. And the growth of crypto has provided room for blockchain stocks and funds to grow.
The Drawbacks and Risks of NFTs
It’s true that NFTs are non-fungible, unique, and can be easily stored on the blockchain, but they are very hard to edit. Of course, you can make new entries but to change the old ones? That’s a tough cookie to crack. This says that although crypto assets such as NFTs are safer than traditional assets, their ownership is easy to track.
In the case of NFTs, there isn’t any type of ID to measure ownership. It is done with the help of two pieces of code, i.e. your public and private keys. The downside here is that both these keys are associated with a wallet called Ethereum wallet. So if your Ethereum wallet got hacked or by any chance you lose control over it, then you will lose the ownership of your NFTs.
Many users from the NFT marketplace called Nifty Gateway have experienced this after their accounts were hacked. One user even reported losing around $10,000 as hackers used his account to buy and sell NFTs. These security risks are related to how blockchain works. And it is the reason why many crypto investors prefer to save their assets in digital wallets or hardware wallets that are protected by a more secure method of multiple authentications.
Energy consumption is another major concern of using blockchain. Because it has a significantly negative environmental impact.
For every piece of information added to the technology, many calculations are needed to be done beforehand. This as a result consumes more energy. The impact of NFTs can be different, but it is claimed that the overall cryptocurrency ecosystem consumes more energy than that of the entire Argentina when blockchain is mined and verified.
To decrease the negative impact of NFTs on the environment, many NFT traders choose to invest in carbon offsets. It aims to reduce carbon emissions which is achieved by either planting new trees or by protecting the vulnerable parts of the Amazon rainforest. However, it remains to be seen whether these projects are being measured to decrease the carbon produced by NFT trading.
How NFTs Are Likely to Change FinTech
With cryptos gaining momentum, NFTs are in trend too. People are already investing a large sum of money in such tokens and the market will likely keep continuing to grow. It is also claimed that the true innovation of fintech lies in the combination of DeFi and NFTs.
NFTs are used in DeFi services to create liquidity. And many DeFi startups have already started providing NFT trading as a part of their services. Shortly, digital assets like NFTs can grow as a new asset class that could revolutionize the traditional way of investments.
Of course, there are still many risks and limitations regarding NFTs but the impact these crypto assets are having on the fintech market is gradually increasing without a doubt.
Guest article written by: Rishi Jain is a fintech developer at TatvaSoft.com. He is passionate about writing on various topics in his free time.