Wealth Allocation in a highly digitalized world
By Paul Joseph
Background Information:
In the popular movie Ready Player One, science fiction meets the realms of imagination as humanity has progressed so far from catastrophic doom that everything occurs through a virtual reality world. This movie might’ve seemed unrealistic after its release, but a virtual reality world where a person doesn’t have to move a muscle is closer than we think. Mark Zuckerberg has been the pioneer of doing things from connecting the world through the social media platform Facebook and other entrepreneurial aims. However, his most ambitious venture is something similar to the movie, Ready Player One, where he aims to create a virtual world known as the Metaverse.
However, the main focus is the connection in this article is between a digital asset called a non-fungible token (NFT) and how it can be integrated into the Metaverse. An NFT is known as a tool where digital ownership is given to the owner of the NFT for specific items such as artwork, real estate, and real assets. An NFT runs on the same algorithm as cryptocurrency, known as the blockchain. A blockchain is a distributed ledger where transactions can be made, making it impossible to cheat or even harder to reconfigure. While the true value of an NFT is speculative, the development of the Metaverse will allow for crypto wallets where NFTs can be linked to virtual items leading to a more coherent digital community. A crypto wallet is a medium through which transactions regarding different crypto coins ranging from Cardano to Bitcoin can be purchased. Visionaries such as Mark Zuckenberg see cryptocurrency as a method through which NFTs can be independently purchased.
The overall value of an NFT is linked to a specific cryptocurrency. This indicates that there can be rapid price fluctuations if different cryptocurrencies are trading at a low volume. For instance, Ethereum has implemented a direct NFT wallet known as MetaMask, where each NFT is interconnected with the price of Ethereum at any given moment in time. Promising headlines regarding NFTs being their own independent entity fail to showcase the entire story. While crypto wallets seem to be fool-proof, various cyber threats can allow any individual with an understanding of the blockchain to get the key to an NFT wallet. Obtaining the key to any NFT wallet in development allows hackers to completely disrupt these tokens from the blockchain and have the opportunity to sell these tokens to other vendors. Individuals that believe in the technology surrounding NFTs think that the massive potential of owning an NFT outweighs the possible risks. This is far from the truth as NFTs are codependent on other technology and have not shown relative strength in the financial markets.
Obstacles:
Interest within both NTFS and the Metaverse has been declining due to no major headlines from these two terms. The overall interest in both of these terms peaked when Facebook officially changed its IPO name to Meta. Without an established concept for the metaverse, many blockchain competitors to Meta are starting to lose credibility. A few notable competitors include Oracle, Etherum, and Ripply, who have placed some equity into the Metaverse allowing cryptocurrencies to be used as payment. NFTs are based upon a speculative market indicating that interest is dependent on the number of digital assets that are circulating around the blockchain.
Another problem with NFTs is how rare of a commodity each NFT is, leading to problems in exchanges with other users on the blockchain. The owner of a specific NFT doesn’t own the physical object that the NFT grants ownership over. For example, the most expensive NFT sold was related to the artwork sold on a prominent marketplace called the Nifty Gateway for nearly 91.8 million dollars. The piece of art was created
using digital software so the owner never owned the artwork.
Figure 1: Google Search Trends between the words of NFT and Metaverse
As seen by the graph, interest levels have declined at an alarming rate between the two terms as a lot of people are still hesitant to give such a risky venture a chance. The blockchain has only been firmly established for cryptocurrency for various coins such as Bitcoin and Ethereum. The overall efficiency in being able to hold millions of potential NFTs that grant ownership is still up to chance. With the Federal Reserve tightening its policies on how Bitcoin can function, the lack of autonomy that NFTs often hold are compromised.
In addition to this, NFTs are not forever going to be tax havens like art either. The art community is robust and has a pre-founded institution supporting the auctioning of reputable pieces. Those that argue that value is in the eye of the beholder in support of NFTs simply do not have the backing of Sotheby’s or Christie’s. This often leads many people to steer clear of NFTs and the metaverse alike. Different companies that specialize within NFTs tend to have lower market caps as the level of interest tends to fluctuate, whereas the demand for hard assets such as art and wine continually grows as wealth prospers, perhaps as a function of the human condition. Historically, we have valued real goods over “promises,” meaning those who gain wealth eventually stop parking their money in assets bearing any risk. It’s well-known for quite some time now that hedge funds rarely beat the S&P 500 index, but affluent individuals still park their money in them for the perception of lower risk. When someone does strike it rich, most of them don’t become venture capitalists or crypto backers but instead buy real estate, save up, and perhaps give these savings to a wealth manager while buying real art, watches, or wine.
For example, the daily trading volume for OpenSea, which is the largest (NFT) market space, had fallen from the $323 million peaks to $52 million in overall trading volume. This indicates that the NFT marketplace is a type of bubble where the fundamental value of the financial asset exceeds its intrinsic value. However, this may not forever remain the case with younger individuals who have grown up on the screen finding everything they see on their screens to be real. If this generation does grow up to be affluent and wealthy, it is well within the next few years that NFTs will be legitimized in the metaverse.
To alleviate this speculative bubble, a lot of NFT creators have decided to fractionalize the true ownership of the NFT that a person buys. One potential pro of fractionalizing NFTs is that the overall trust in the system increases when the number of users is maximized. This is actually what many government-issued fiat currencies rely on for their liquidity. However, since the NFT is an entirely different class of asset and entirely “non-fungible,” there are technical and practical issues with this idea. When NFTs are fractionalized, the liquidity of the NFT itself is a big issue. Another key factor comes into play, and that is security. There are a lot of “pump and dump” schemes where individuals buy fractional ownership of an NFT, which is usually tied to Ethereum in value. This indicates that the NFT purchased was worthless before the NFTs were sent off to another potential buyer for less value. Overall, NFTs have to look towards new innovative solutions to truly be more than an afterthought for numerous consumers. With the Metaverse still being at least a decade away from being implemented, NFTs have to think of innovative strategies to truly be a game-changer.
Potential:
NFTs go further than digital artwork, which is usually portrayed as their sole use on social media. NFTs have the ability to rapidly modernize the digital world as the market space for online shopping has skyrocketed in the past few years. From industry giants such as Amazon and Walmart dominating the supply chain, various smaller businesses have been driven out by the selective prices of different products. Within the world of NFTs, numerous marketplaces have risen where digital ownership can be granted to individuals willing to pay hefty fees. In the Metaverse alone, virtual real estate in a digital space known as the Sandbox has nearly jumped 700% in overall value, with 65,000 transactions being made by individuals who want a stake within Meta. The direct correlation between the Metaverse and NFTs becomes evident as NFTs have been granted out to these owners verifying that their purchase was valid.
Figure 2: Collage of various NFTs that have been sold on marketplaces
This flexibility of an NFT means that the true potential of this digital asset is still unrealized in the hands of many blockchain users. However, the true uses of an NFT are dependent upon individuals of higher status who can create a seamless digital world where these tokens can function for artists and other individuals. Through proper implementation of digital space, NFTs can be used in direct usage with other streaming services such as Spotify for premium music ownership and granting special access to limited-edition items such as funko-pops. All in all, an NFT is something that should be kept on the lookout by many avid individuals to prevent a mistake such as the Dotcom bubble burst of 2000 from never occurring again.
Final Thoughts:
In conclusion, NFTs are a financial tool that can have massive upside if utilized correctly. With organizations such as the NBA utilizing this technology to capture iconic basketball moments along with sneaker brands like Adidas creating virtual shoe collections, the future is looking extremely bright for this technology. NFTs can truly branch their identity from becoming media assets where captured visual data can become invaluable to transforming into financial tokens, which allow for contracts to acquire physical property and decentralized home services.
The NFT as an asset fundamentally is not going anywhere, it’s most likely not a toy fad like beanie babies or Tamagotchis, but rather it’s the most widespread manifestation of the collector’s phenomenon. From basketball cards to video game characters, NFTs will inextricably be a part of any industry that can be commodified. In essence, if people feel like their cash can be more secure in an idea or a moment or even something as simple as a digital image, that could be demonstrative of the fact that cash simply is not worth holding on its own (only a rational actor would replace the fungible token that currency is with something that isn’t fungible), or that humans are flawed buyers in a flawed market. Regardless, NFTs look like they are here to stay.
However, the carbon footprint of creating new NFTs to put on a blockchain is something that must be resolved. A single NFT can generate nearly more carbon dioxide than driving for 500 miles showcasing the inefficient energy consumption. Fortunately, various corporations have been able to purchase renewable energy certifications (RECs) from various energy sources that don’t lead to carbon emissions, indicating that the creation of new NFTs won’t be as demanding on the environment. Through proper implementation of sustainability policies, NFTs can flourish for a diverse set of individuals and can be the future of digitization.
Disclosure: This article is for information purposes only and does not constitute financial advice.
