What's behind NFTs

Non-fungible Token

Digitalisation & Technology, 09.03.2022

They are currently very hyped and give digital possessions a whole new meaning: NFTs. What is behind digital certificates? What are the advantages and disadvantages? And how important will they be in future wealth accumulation? An overview.

Mona Lisa

What are NFTs?

NFT is the abbreviation for "Non-fungible Token" - which loosely translated means "non-replaceable token". What is meant here are digital certificates that clarify the authenticity of a digital file and at the same time are its rights of use. This unique digital certificate of ownership thus clearly proves who the owner of an original digital file is. This file can be a photo, a video or an audio recording.

NFTs are stored on a blockchain, i.e. a database composed of various data blocks. These data blocks contain all transactions that have been made on the respective blockchain. In the blockchain, it is thus clearly stored that the original file belongs to the user who created the NFT or purchased it on a marketplace. "The origin of a digital image is thus identifiable and legally secured via the blockchain," explains Daniel Diemers, NFT expert and co-founder of the start-up SNGLR Group, which specialises in exponential technologies.

"Legally, NFTs are very easy to declare as a thing of value," says Diemers, who adds: "The blockchain laws are now very stable. If need be, you can sue for ownership in court." The NFT of this file only belongs to the person who purchased the NFT and holds the key to it.

"At first glance, buying a digital photo may seem crazy, because after all, anyone can simply copy the image, download it and thus own it," says Victor Thoma of the ERGO Innovation Lab. The example of the Mona Lisa offers a good comparison, he says. "You can also take a photo of the Mona Lisa with your phone, but you wouldn't claim ownership of it," says Thoma. "We all just trust that the Louvre owns the real Mona Lisa." So in the digital world, the blockchain is the Louvre.

What are NFTs suitable for and for whom?

First and foremost, NFTs are useful for digital files of which there is only one or a few. These include crypto artworks and virtual territories in virtual worlds as well as digital trading cards or game characters. But other documents such as identity cards or vaccination cards or electronic prescriptions could also be stored via the blockchain.

"In the meantime, established artists and brands are also in the NFT business," says expert Daniel Diemers. NFTs should also be seen in the context of the metaverse. "They have created a cross-Metaverse standard that is safe from hackers. Without NFTs, the Metaverse would have a hard time," says Diemers. NFTs will be particularly attractive to digital natives, the digital expert believes. "They live digitally and then also want to invest or own things in the digital."

Andreas Aschenbrenner, Managing Director Wonder Consulting, explains further uses of NFTs: "We all have unique characteristics that are important from time to time in proofs or registrations - from our appearance to our educational qualifications and medical histories," says Aschenbrenner. "Using NFTs, it's possible to tokenise that identity individually and share only the data with specific entities that are needed at the time to achieve good privacy." People could thus ensure control over their data, says the blockchain expert. "Legitimisation at an insurance company, university or doctor could be much easier and faster this way."

What are famous NFTs?

Twitter founder Jack Dorsey received around 2.5 million euros for the NFT of his first tweet. The inventor of the internet, Tim Berners-Lee, received around five million euros for the NFT of the original source code of the World Wide Web. The US artist Mike Winkelmann, known as Beeple, created a collage from 5,000 images that he had been posting daily on the Tumblr platform since 2007. He also created an NFT from this collage. The work sold for over 69 million US dollars and is considered the most expensive NFT artwork ever. "NFTs have experienced some hype, but they will become even more important in the future," says Vladan Falcic, NFT expert and co-founder of Squares Capital.

What are the advantages and disadvantages of NFTs?

The advantage of NFTs is that they are very tamper-proof. Because once something is entered in the blockchain, it can no longer be changed or deleted. This also has potential for other documents in the future. For example, certificates or deeds might soon no longer need to be authenticated if there were corresponding NFTs. "NFTs are easily traceable and even if the server fails, an NFT will not simply disappear," explains NFT expert Vladan Falcic and adds: "It can always be clearly said who has a copy of an image and who holds the original." Added to this: NFTs can be very individual and tailor-made.

The disadvantages of NFTs: There are even bigger technical hurdles with NFTs than with Bitcoin. "You can't just order them in a bank, you have to use corresponding online platforms that require prior knowledge of crypto," explains Daniel Diemers.

They also consume a lot of energy because more and more computing power is needed to create them. In a study, the University of Cambridge examined the power requirements of the Bitcoin network. The electricity consumption is about 125 terawatt hours per year. That is about a quarter of the electricity consumption per year in Germany. In the future, however, there should be more environmentally friendly and sustainable methods to generate cryptocurrencies.

What role can NFTs play in wealth creation?

Some companies will create new marketplaces and tailor NFTs to replace physical property rights for houses and cars, for example. Some of this is already happening. The fact that NFTs are not yet regulated makes it easier to build such business models. "Basically, however, NFTs are high-risk investments," says expert Daniel Diemers. "If you want to save money to buy a house one day, you shouldn't necessarily invest in NFTs. Those who have money to spare and like to speculate can certainly give it a try." For Diemers, it is clear that NFTs become particularly relevant when the metaverse becomes relevant. "If you buy digital land and corresponding buildings in the metaverse, you need NFTs."

But not only can the acquisition of NFTs be attractive, they can also be lent out. This way, one could earn money with them on an ongoing basis. "For example, NFTs can be made available to others for travel insurance when you are not using them yourself at the moment," explains Florian Jersch, ERGO sales partner and NFT expert. "This way, I can lend the NFT to someone who needs it at the moment for a fee."

Text: Benjamin Esche

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