Recently a “Hype Cycle” report was released by Gartner on maturation of new industries and products.
Nonfungible Token (NFT) topped the list to be the “Peak of inflated expectations”. It essentially means, NFTs have reached highest publicity, both negative and positive, either attracting companies towards it or scaring them away.
Balancing this with, the recent recognition of digital assets in many jurisdictions, seems little hard. With recognition of Virtual Digital Asset and in India, proposal to introduce the e-Rupee, the commercial viability of such assets seem at nascent stage. In fact, it seems like a phase where media and entertainment businesses seem keen to build their own digital asset strategies to capitalize on and develop a sustainable competitive edge.
NFTs are digital assets whose ownership are recorded on the blockchain. Transition of digital assets to be adopted in businesses is supported with the rapid usage of native blockchain for commercial deals. Established companies are now adapting and building blockchains to leverage digital assets within their current business models.
Companies like Arizona Iced Tea purchasing Bored Ape NFT or Fox Corporation developing “Krapopolis” memorabilia are examples of companies investing in these assets.
GROWTH OF VDA AND MODELS ADOPTED
The growth of every digital asset in a market backed by company investment has the following elements:
- Low Marginal Cost- The cost of production of digital assets especially NFTs has lower marginal costs over traditional physical assets like artwork or physical trading cards. The upfront costs required is same for designers but distribution of such assets through digital channels is cheaper compared to production of physical prints and asset management in retail stores. Conversion rate of digital asset paid by companies as gas fees to mint token is just 150 USD depending on the monthly subscription cost on the uploaded platform.
- Rise in customer engagement- There has been rise in digital asset adoption rate with the rapid growth of technology adoption, globally increasing customer engagement. Though this has been hindered slightly in India as digital technology and knowledge still remains at a nascent stage. Reports by NITI Aayog has increased awareness among users.
- Usage of blockchain- Increased investment and use of blockchain technology is a major indicator of the corporates. Potential of blockchain has been recognized across major sectors and companies are investing in augmenting this.
- Marketing- Coca Cola auctioned its first ever NFT collectibles for 575,500 USD for charity, including customed designed jackets which can be worn by avatars on virtual platforms built on Ethereum blockchain. This could be considered their marketing tactic to understand key players in the industry including marketplaces, developers, target audience as well as gain strategic insight into emerging technology.
A major hindrance in companies making aggressive investments in this, is the immature and essentially unregulated nature of the market. All digital assets are not equal. Certificate of ownership is stored on the public blockchain which is immutable and cannot be forged.
The issue is the token provided is a link to the actual digital file stored on the servers and not all servers are built equal. The formation of each server depends on the quality and security measures implemented by the platform. “Link Rot” is a major issue where the digital asset gets lost due to lack when a transfer is made from one server to the other without updating the original server.
Lack of legal precedent in the sector has also created major hindrance. Lingering questions surrounding the retention of commercial rights by creators and licensing of digital assets still remain in grey due to lack of requisite regulations.
Environmental impact has also been a major issue. Digital assets are mostly created on Ethereum blockchain, which emits carbon close to what small countries do in a year.
The use case of digital assets is huge and is only limited by an individual’s imagination. The sectors having the highest potential of growth is sports and entertainment and there are numerous early movers in the industry.
The potential of digital assets is very high, jurisdictions have started warming up to it by offering it legal sanctity and framing regulations. It is yet to be seen, how and to the extent it is accepted will depend on the sustenance alongside the regular economy.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: Gartner, TopTal, DigiEconomist