NFTs And Blockchain Technology In The Collectibles Industry

Many people have been confused by the meteoric rise in some NFT prices and skeptics have claimed that NFTs have “no value.” While value is subjective, one thing that’s for certain is that the use case for NFTs goes far beyond digital art.

NFTs have many uses aside from an image on a screen. For example, they can be used for real estate transactions, creators monetizing their work over the long term, or managing tickets and membership in a smarter way. One interesting and recent use case involves using NFTs to bring physical collectibles onto the blockchain, or on-chain.

Authentication And Lowering Trading Friction

Assets can be put on-chain by creating a digital record on the blockchain associated with the asset. For physical assets, that record can take shape in an NFT linked to the asset, which ensures authenticity and tracks the item as it moves through the supply chain. Companies such as Everledger are working with various industries, like the wine industry, to have producers add items on the blockchain and use tamper-proof packaging that allows for consistent tracing of the wine’s source, making it increasingly difficult to produce fakes.

While having every asset on-chain at source may be the holy grail, it will take years to get every producer and manufacturer onboard. Therefore, many other initiatives have emerged, putting existing assets on-chain after an expert has authenticated them. A notable recent example is StockX, which announced that it would issue NFTs linked to sneakers it has in its vault, with the NFT acting as a proof of authenticity and ownership.

A major benefit is a reduction in trading costs because as long as the asset is held in a trusted location, such as the StockX vault, the NFT can trade without the shoe having to be reauthenticated each time it changes hands. For this reason, sneakers aren’t the only collectibles going on-chain. There are similar initiatives that pop up in different collectibles categories: Take for example companies like Courtyard, which is tokenizing trading cards to lower trading fees and frictions.

Transparency Of The Blockchain

Aside from issues with fake goods, there have been various scams in the collectibles industry, such as an $86 million fraud by convicted art dealer Inigo Philbrick, who sold the same works of art to multiple people. Blockchain can be a solution, as trades are visible on-chain. For this to work at its highest efficiency, a majority of collectibles need to be on-chain and dealers would need to show a link to the on-chain asset for consumers to verify. If this becomes the norm, consumers will come to expect it and no longer trust dealers who don’t participate in the system.

I expect this reality is still a few years away, but examples in other industries have proven such shifts are possible and anyone unwilling to adapt will struggle. Take for instance the domain name industry where everyone has now come to expect the use of third-party escrow service to avoid scams; or in crypto when third-party apps require you buy any coins, users expect to buy these tokens via trusted decentralized exchanges like Uniswap and not directly on the third-party app who could, in theory, take your funds and not fulfill your order.

Capitalizing On The NFT Ecosystem

Using NFTs isn’t essential to make use of blockchain’s ability to provide an unchangeable public ledger. However, with the surging popularity of NFTs, the ecosystem and infrastructure around them have developed rapidly. NFTs are simple to issue and holders can easily buy and sell them. Moreover, NFTs can unlock liquidity and have multiple additional functionalities.

One exciting element of NFTs and the marketplaces around them includes the ability for creators to automatically receive royalties whenever the item gets traded, even on the secondary market. Today producers can’t usually reap the rewards from an increase in value and trades on the secondary market, but there is clearly an appetite for producers to capture value here, with companies like Richemont having acquired marketplaces like Watchfinder. Royalties via smart contracts can be game-changing for brands as well as artists, especially as their works increase in value and get traded more.

Moreover, NFTs can be used to enable fractionalization of collectibles, which is something I’m working on with Koia, a platform to buy, trade and collect fractions of iconic assets. Fractionalization can benefit end consumers as they can get access to collectibles they could never afford on their own. It also opens up new possibilities for asset owners as they now have a broader consumer base to tap into, and they could also decide to tokenize their assets and release only some tokens while retaining partial ownership.

Lastly, there’s a huge opportunity when it comes to using asset-backed NFTs to get access to liquidity. Platforms and protocols like DropsDAO and NFTfi are creating solutions to enable users to use their NFTs as collateral to get loans. Lending on the back of assets such as art does also exist in traditional finance, but NFTs may provide an easier way to manage the process.

Think, for example, of when a borrower defaults on a loan and the lender wants to take possession of the asset, with an NFT this can be enabled automatically via the smart contract. The increased price transparency from managing transactions on-chain will further open up access to liquidity as more lenders will be comfortable issuing loans on the back of these assets.

In conclusion, blockchain technology can potentially add transparency to the traditionally opaque collectibles market. Adding NFTs on top of this technology allows for easier trading of the underlying assets, and with the NFT market developing rapidly, possibilities are ever-increasing: ranging from fractionalization to lending and royalties. Building on these developments, I expect the collectibles market to become more efficient: Increased price transparency, lower trading fees and fewer intermediaries will ultimately lead to a liquid market where assets can trade as freely and easily as in the financial markets.

 

Original post: https://www.forbes.com/sites/forbesfinancecouncil/2022/03/22/nfts-and-blockchain-technology-in-the-collectibles-industry/

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