Exploring Non-Fungible Tokens (NFTs): Unlocking the Digital Revolution
Yuming He, Old Dominion University
Wenzhuo Li, Old Dominion University
Lixin Liu, Yangzhou University
Wu He, National Science Foundation
Have you ever wondered how digital assets can be bought, sold, and owned just like physical objects? Well, that’s where Non-Fungible Tokens (NFTs) come into play. NFTs are a groundbreaking application of blockchain technology that allows for the ownership and trading of unique digital assets. From artwork and collectibles to virtual real estate and gaming items, NFTs have taken the world by storm, capturing the attention of enthusiasts and investors alike.
The Rise of NFTs
In recent years, NFTs have transformed from a niche concept known only to blockchain enthusiasts into a vibrant market with a dedicated following. The applications of NFTs span various industries, including gaming, arts, collectibles, and even the metaverse. For example, CryptoPunks, one of the pioneers of NFTs, made headlines when it sold a digital artwork for a staggering $24 million. Similarly, CryptoKitties, a game that allows users to breed and trade virtual cats, generated $40 million in transactions. NFTs have also found their way into ticketing events, fashion, news, and supply chain management.
With the rapid growth and adoption of NFTs, it’s natural to wonder about their future trajectory. Will the NFT market continue flourishing, or are we headed for a bubble burst? To better understand NFTs, let’s delve into their technical and business aspects. NFTs rely on blockchain technology, which combines cryptography and distributed ledger technology. Blockchain ensures decentralization, transparency, immutability, and fault tolerance, which are crucial for NFTs. Smart contracts play a vital role in facilitating NFT exchanges. These digital contracts, introduced with Ethereum, enable the verification and enforcement of contracts between parties without relying on intermediaries. Smart contracts ensure the tamper-proof execution of NFT transactions, enforce agreements anonymously and autonomously, and allow order-sensitive execution based on predefined conditions.
—While NFTs have gained significant attention, they remain uncharted territory.—
While Non-Fungible Tokens (NFTs) offer a low-cost means to realize value from creative works, their distributed and anonymous nature also creates potential issues such as abuse and crimes, posing significant risks for consumers, investors, and businesses.
1. Intellectual Property Issues
A leading concern with NFTs is the difficulty in evaluating and determining individual ownership rights to an NFT before purchase. There have been cases of pre-existing digital art being stolen, minted as an NFT, and sold without the permission of the actual owner. This raises challenges in establishing authenticity and ownership of digital assets, as well as disputes regarding the actual ownership of the asset across multiple NFT platforms.
2. Security and Privacy Issues
NFT platforms have become targets for hackers aiming to steal digital assets or obtain sensitive information from users. Attacks on NFT markets and systems have been reported, and there are vulnerabilities in the storage of off-chain data and potential privacy leaks involving user identity. Ensuring the security and privacy of NFT transactions and systems is a crucial area for research.
3. Scam and Fraud
The rise of NFTs has also increased scams and fraudulent activities. Sellers may provide misleading or false information, leading consumers to purchase fraudulent or plagiarized digital assets. Due to the irreversible nature of blockchain-based transactions, victims of fraud may have little recourse to recover their losses.
4. Concerns about NFTs Representing Physical Assets
NFTs representing physical assets such as real estate or precious metals raise legal risks and implications. The implementation and legal frameworks for coupling physical assets and their digital representation require further research. Questions arise regarding ownership, legal implications, and determining market value for such NFTs.
5. Pricing Stability/Volatility Risks
NFTs are traded globally and exhibit high volatility, posing stability risks for the financial market. Understanding the factors contributing to the relatively high volatility of NFT pricing, such as market manipulation, fraud, sentiments, and uncertainty, is essential to address risks for consumers, investors, and businesses.
6. Taxes or Money Laundering Concerns
NFTs could potentially be used to evade taxes or launder money. The prevalence and impact of these issues in the NFT market require further research, as exchanging, trading, selling, or buying NFTs involves legal and tax liabilities.
7. NFT Data Inaccessibility
Some NFT systems rely on external file storage systems to store data related to digital assets. Concerns arise regarding the longevity of referenced URLs and the potential consequences if NFT marketplaces or underlying systems cease to operate.
8. NFT Interoperability (Cross-Chain) Issue
Enabling cross-chain communication and interoperability of different NFT systems is crucial for facilitating the exchange and trade of NFTs. However, achieving interoperability presents technological and governance challenges that require further research and development.
9. User Complaints with NFT Transactions
Some users have expressed dissatisfaction with NFT transactions, citing slow performance, including slow confirmation of NFT exchanges, high transaction fees (gas fees), and related mental stress and anxiety. Addressing these concerns and improving user experience is an area of research.
10. Environmental Impact Issues
The widespread adoption of NFTs raises concerns about their environmental impact and sustainability. The energy consumption associated with NFT-related transactions, including smart contract processing, requires attention to mitigate the environmental footprint.
While NFTs have gained significant attention, they remain uncharted territory. It is uncertain whether they will be a bubble or achieve widespread acceptance. To ensure sustainable and responsible development, regulation of the NFT marketplace by national governments and international organizations is crucial to combat misconduct and fraud. Education and outreach efforts are needed to increase public awareness of the risks associated with NFTs. Technology researchers must address cybersecurity and privacy risks related to blockchain and NFTs, ensuring these technologies bring more benefits than harm. Furthermore, IT/IS researchers can contribute to studying the societal implications, acceptance, adoption, value-creation, governance, and the development of a healthy and sustainable blockchain-based NFT ecosystem.
This Information Matters article is a translation of “He, Y., Li, W., Liu, L., & He, W. (2023). NFTs–A Game Changer or a Bubble in the Digital Market?. Journal of Global Information Technology Management, 26(1), 1-8.”
Cite this article in APA as: He, Y., Li, W., Liu, L., & He, W. (2023, May 31). Exploring non-fungible tokens (NFTs): Unlocking the digital revolution. Information Matters, Vol. 3, Issue 5. https://informationmatters.org/2023/05/exploring-non-fungible-tokens-nfts-unlocking-the-digital-revolution/