NFTs: A Digital Token of Love

If you have yet to order your mom or other Valentine flowers or a card, you’re not alone. Most of us wait until the last minute, which is why February 13th sees the highest volume of payment processing of the year as millions of people rush to buy a gift. It even surpasses Black Friday.

That’s where non-fungible tokens, or NFTs, hold an advantage. Chances are you’ve heard something about NFTs in the last few months, and while digital ledger technology and NFTs are not new, they have seen a recent surge in popularity due to the recent boom of the crypto economy. It can also be contributed to the Covid-19 pandemic and the resulting dramatic transfer to at-home consumption that continues to out-pace the reliance on global supply chains.

With such massive demand in the payments and shipping industries, what began as a niche new investment market has now grown into a popular trend consistent with the modern digital era. And with Valentine's Day just around the corner, we may very well see people ditching the classic flowers and chocolates in favor of these non-fungible tokens.

What is an NFT?

NFTs are digital assets that can be traded on a blockchain, which is the digital ledger technology (DLT) that has historically fueled cryptocurrencies such as Bitcoin and Ethereum.

"Blockchain, at its core, is an immutable distributed ledger, a database that records and verifies transactions between two entities without the need for a third party, such as a bank or government, to intervene," explained Stephen Harmon, associate dean of research for Georgia Tech Professional Education and the interim director of the Center for 21st Century Universities (C21U). "While its capability makes the technology useful for a wide variety of applications, the most notable is cryptocurrency."

But unlike cryptocurrency, which is designed to be traded or exchanged like physical currencies, each NFT has a unique entity within the blockchain that can’t be exchanged for equal value with other NFTs. In other words, they are more like one-of-a-kind physical collectibles.

How NFTs Work

NFTs can be anything from digital artwork to singular noteworthy Twitter posts. When an NFT is traded, the creator retains copyright and reproduction rights, while the buyer, or investor, assumes ownership of the digital file. So rather than be released into the internet ether to be copied and reposted endlessly, an NFT retains its originality and singleness.

“The underpinnings of the blockchain technology allow for the unique tracking of digital items. After an NFT linked to a digital item has been created, then the blockchain can be used to track who owns that NFT. This allows digital items to be ‘unique,'" noted Eric Overby, professor of Information Technology Management at Scheller College of Business. "For example, a digital song file recorded by Taylor Swift can be perfectly copied many times. But if Ms. Swift creates an NFT for the original file, then that specific file — and none of the copies — can be considered as the authentic, unique original."

The Rise of NFTs

Because NFTs are so diverse, they make surprisingly good gifts. It’s easy to find an NFT that is tied to something meaningful to the recipient, such as a piece of memorabilia from a favorite celebrity or a beloved piece of artwork.

Furthermore, buying an NFT is a shrewd investment since its provenance is stored as a public record in a secure blockchain. If an NFT possesses both scarcity and high levels of interest, its value will soar at resale.

“We have already seen that people are willing to pay for the unique ownership that NFTs represent in areas such as digital art and music,” said Overby. “We are likely to see other creative uses, given that people will value the artificial scarcity that NFTs create for digital items.”

NFTs Impact on FinTech

The underlying technology of NFTs, distributed ledgers, is here to stay and will only get more popular as the use cases get refined and adopted. And the effect of this boom has the potential to fundamentally disrupt the payments and banking industries.

Since NFTs are decentralized and not under the control of financial institutions, they use a consensus mechanism to help verify transactions without a central authority. While many cryptocurrencies use an approach known as proof of work, there are a growing number of tokens that are now using an alternative known as proof of stake, which is quicker and consumes less energy.

“Blockchains using the proof of stake approach have a greater transaction output, processing tens of thousands of transactions per second,” says Sudheer Chava, professor of finance at Scheller College of Business. “By significantly reducing operating costs and the time required for payment processing, these mechanisms are going to be adopted more broadly and have the ability to drastically change how banks operate.”

Despite challenges, several major companies in the FinTech and payments industries have begun to explore how to use NFTs in their favor. Visa, for example, purchased a “CryptoPunk,” an NFT-based digital avatar, in August of 2021. Meanwhile, Mastercard recently launched a sweepstake competition with an NFT prize.

NFT Security Concern

Blockchain, due to its decentralized nature, provides safer and more efficient storage, access, and transfer of customer data for banks. It may also accelerate the payments process and provide a more seamless customer experience.

However, new digital technology and processes will always come with threats of fraud and cybersecurity breaches. Last year, for example, a hacker sold a fake NFT art piece, posing as famous street artist Banksy, for $336,000 after exploiting security loopholes on the artist’s website. As the NFT market grows, NFT backers, creators, and buyers will need to bolster their cybersecurity measures.

“Thanks to advancements in digital technology, more currencies have entered the ecosystem, bringing with them a host of bad actors hoping to use digital scams as a way to steal these assets,” says Milton Mueller, Georgia Tech School of Public Policy and head of the Policy Track for the Online Master of Science in Cybersecurity. Although Mueller doesn’t own NFTs himself, he advises potential buyers to take the time to be vigilant in their self-education. “Read about the scams that exist within the marketplace and be comfortable with their inherent risks.”

The Future of NFTs

As this new market continues to sky-rocket, it may seem like there has never been a better time to jump onto the NFT trend than now. As you consider exploring the world of digital assets, you may ask yourself: are NFTs my next token of love? As with every new investment, they can be, but with thorough research and some rationalization.

“While some NFTs may increase in value, many are unlikely to retain their current value, and some may even end up completely worthless,” Chava reminded. “Ultimately, their long-term value will depend on the supply and demand for the underlying digital or physical product. Consumers should do their homework and be mindful of the significant risk in investing in NFTs.”