Non-Fungible Token (NFT)

By Devanand DV, PGDRM Jan’22-23

Devanand D.V who is currently pursuing the Global Risk Management Institute’s (GRMI) post-graduate diploma in risk management (PGDRM) course, Conducted a research study on “ NON FUNGIBLE TOKEN (NFT) “. Before pursuing a career in risk management in India, Devanand completed his Bachelor of Business Administration from, Kumaraguru College of Liberal Arts and Science, According to him PGDRM is one of India’s best job-oriented courses. 

BLOCKCHAIN

Blockchain has given us the new ability to create scarce digital assets, where ownership is maintained by the decentralized network of miners but most of the assets are “fungible” in that they are able to be interchangeably by another of the same.

Image Source: Forbes

For example, my bitcoin is the same as your bitcoin. They are mutually interchangeable. We are also able to create, Unique Digital Assets, such as digital–native deeds, that are “Non-fungible” and provably unique and without a non-centralized intermediary.

What are NFTs

NFT Definition

• NFT or Non Fungible Tokens are types of digital tokens where every token is different and holds unique characteristics.
• Due to the nature of NFTs, many NFTs have varying rarity and are considered valuable in the digital asset community.
• Anything is defined as NFT, from games to painting to everything else.

KEY CHARACTERISTICS OF NFTs

• Indivisibility
• Ownership
• Uniqueness
• Rarity
• Transparency
• Interoperability

TOKEN STANDARD THAT NFT USES

Ethereum token standard is the most common token standard that NFTs use now. Typically ERC-721and ERC –1155 token standards are widely used to create various NFTs.

Some early-stage NFTs use a hybrid ERC-20token standard to create NFTs unfortunately. To sell them you need to wrap them.

Other than Etheriumalso EOS, Flow, Tezos, etc. Also, offer a specific token standard for developing NFTs

NFT Market place

To buy and sell on NFT marketplaces, users need to create an account and connect their wallets to the account.

Different marketplaces have different supported cryptocurrencies. The most popular currency currently is Etherium. User can use etheriumto buy NFTs.

To buy Ether/Ethereum or any other crypto, users have to get a blockchain wallet and fund it through a flat-to cryptocurrency exchange.

Opensea–NFT Market place

Risks that NFTs bring

Intellectual Property

The NFT risk and challenges related to intellectual property rights suggest that buyers only have the right to display NFTs and that they are the sole owners.

The limitations are also evident in terms of the service that users should follow when using NFT marketplaces.

Theft risk

When you are trying to purchase an NFT, it is important to find out whether the seller actually owns the NFT.

There have been examples of people clicking photos of NFTs or minting NFT replicas.

So, when you buy an NFT, you only get the right to use the NFT rather than intellectual property rights.

The terms and conditions for ownership of an NFT are evident in the metadata of the underlying smart contract.

Cybersecurity Risks

The growth of the digital world and staggering growth in popularity of NFTs has resulted in prominent cybersecurity and fraud risks. NFT replica stores that appear similar to the original NFT store with the same logo and content from authentic stores

Another prominent challenge associated with the risks and challenges related to NFTs in cyber security refers to fake NFT stores

The other prominent non-fungible tokens risks and challenges related to cybersecurity and fraud include copyright theft, replication of popular NFTs or fake airdrops, and NFT giveaways.

Legal risk

There is no legal definition of NFT known in the entire world. Different countries such as the UK, Japan, and the EU are moving ahead with different approaches for classifying NFT. This makes it necessary to come up with an international body of Non-fungible tokens for setting regulations and legalization in the entire world.

There is a considerable rise seen in the NFT market, and this is why it’s essential to have a regulatory body. There is a vast increment visible in the use cases of NFTs. Now, this demands a regulatory body to adapt to the rules and regulations of NFTs.

The current laws related to NFT are still stuck with finding the correct definition for it. As the market and variety of NFT are constantly growing, it is becoming difficult to come to a solid ground for compliance in NFTs.

Money laundering risks

This technology can raise alarm bells from a money laundering and financial crime perspective. This is an NFT known as ‘The Pixel’, produced by an artist who goes by the name Pax and sold for roughly $1.3 million dollars at a Sotheby’s auction in April 2021.

Someone looking to “clean” dirty money could theoretically generate an anonymous NFT; list it for sale on the blockchain; purchase it from himself/herself from an anonymous, unregulated digital wallet with illicit funds; and then recognize the money as legitimate funds from the sale of the artwork.

Indonesian guy’s NFT sold for 328.78 USD. As of Friday, his collection reached a total trade volume of 384 ether, equivalent to more than $1 million.

Evaluation challenge

Among non-fungible tokens risks and challenges refers to the uncertainty in determining the value of NFTs.

The valuation of NFTs depends considerably on scarcity and the perception of owners and buyers alongside the availability of distribution channels

It is extremely difficult to anticipate the identity of the next buyer of an NFT or the possible factors which can drive their purchase.

Therefore, the value of NFTs would basically depend on how the buyer perceives their price, thereby leading to fluctuations.

Advantages of NFTs

1. Decentralized marketplace
2. UniqueoCollectibles
3. Resell able
4. Immutable
5. Copyright
6. Security
7. Identity Management

Industries that leverage NFTs

NFT in art and music

The art & music industry has a long history of gatekeepers such as brokers, galleries, agents, and labels holding the keys to the kingdom of intellectual property ownership. These gatekeepers control the distribution and sale of an artist’s work, and how the revenues are allocated.

NFT in the Gaming industry

The gaming industry would adopt NFTs since most games have created virtual economies by adding in-app purchases, essentially tokenizing assets that you can buy within a game i.e. Shield or skin. The opportunity NFT offers the gaming industry is the ability to let users keep the assets they’ve purchased in their games. Currently, when a user quits their game the money/investment and the assets purchased in-game are gone.

NFT in Metaverse

Metaverse is digital 3D universes that give users and businesses endless opportunities for porting real-world assets and services

Metaverses provide an open and fair economy backed by the blockchain.

In particular, the play-to-earn gaming economy will engage and empower players of blockchain games via NFTs.

NFTs are the bridge to the metaverse and facilitate identity, community and social experiences in the metaverse.

Users can collect in-game NFTs through collections to access gaming metaverses.

NFT in the Sports industry

Collectibles are arguably the industry most impacted by NFTs. This is largely because NFT technology first made waves by catching mainstream attention in 2017 with CryptoKitties collectibles

More recently, marketplaces like NBA TopShotshave gained huge NFT momentum, letting collectors buy a moment in an NBA game as an NFT.

NFT in Internet of things (IoT)

Estimated 50 billion connected devices worldwide, IoT is easily one of the most prevalent technologies in existence today.

NFTs can help secure IoT networks by acting as a device authenticator which prevents a single entity (i.e. a malicious actor) from controlling massive amounts of data generated by digital networks.

An NFT can be physically bound to an IoT device to the use of the physical unclonable function (PUF) that enables the recovery of its private key and then its Blockchain account address (BCA). This link between the tokens and devices is difficult to break and can be traced during their lifetime.

NFT in Land ownership/claims

When the land assets are represented as an NFT, letting the individual or group (for example an indigenous community) prove ownership using a cryptographically secured and signed digital token.

Instead of lawyers, land registries, and escrow accounts, smart contracts will ensure that money and assets change hands and both parties honor their agreements.

Get the full research study here: Case study by Non Fungible Token(NFT)

Disclaimer

This report has been produced by students of Global Risk Management Institute for their own research, classroom discussions and general information purposes only. While care has been taken in gathering the data and preparing the report, the student’s or GRMI does not make any representations or warranties as to its accuracy or completeness and expressly excludes to the maximum extent permitted by law all those that might otherwise be implied. References to the information collected have been given where necessary.

GRMI or it’s students accepts no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind.

Other research studies by our PGDRM students:

Research Study on Complex Security risk to 4G-5G Evolution