April 10, 2023
NFTs saw irrational, explosive growth in recent years akin to ‘Tulip Mania’ of the 17th century. Much like tulips, the exotic luxury of digital images labeled as NFTs were the ticket to unspeakable riches. And then they weren't.
I've talked about NFT royalties in the past. I've talked about how the technology around NFTs is not actually all that awesome. (link to S2) I even made fun of email (link to S1).
NFTs saw irrational, explosive growth in recent years akin to ‘Tulip Mania’ of the 17th century. Much like tulips, the exotic luxury of digital images labeled as NFTs were the ticket to unspeakable riches.
Or not. We kind of knew that history repeats itself and there was no way this wasn’t going to pan out differently.
Despite this early traction, the NFT market has experienced challenges related to royalties and enforcement. The landscape is currently dominated by wash trades and individuals seeking the lowest fees rather than genuine collectors. Nevertheless, new specifications and enforcement through smart contracts offer promising solutions to these issues.
By implementing enforceable rules and understanding the predictable market mechanics, we can build a protocol that enables fascinating new business opportunities, such as lending, insurance, and fractionalization of utility. Addressing the royalty enforcement challenges allows for the compelling possibility of tying physical assets to NFTs, creating a seamless link between the digital and real worlds.
This new approach will enable the construction of marketplaces that incentivize owners of physical assets to share in the consumptive utility around these assets with a broader audience. These incentives could be in the form of liquidity and royalties for participating in the larger network with their physical assets. Such a system would also significantly increase the value of these items by allowing for provenance tracking and proof-of-ownership over time.
Take, for example, a famous individual who owns a dress or piece of artwork. Their ownership alone can dramatically increase the value of the item. By tying the physical asset to an NFT, the provenance of the item can be tracked, and its value can be further enhanced as it changes hands. Not only does this provide a clear record of ownership, but it also opens up the potential for new forms of investment and appreciation.
Building something like this isn’t without its challenges. Authentication of physical assets, escrow houses and constant verification would be required of such a system. Regulatory bodies would struggle with a model like this as it will look similar to what they classify as a security or commodity but in actuality, it is neither.
The integration of smart contracts and new specifications that enforce royalties will be essential in overcoming the limitations of the current NFT market. By ensuring proper enforcement of royalties and enabling the tokenization of physical assets, a more robust and valuable ecosystem can be created. This innovative approach has the potential to revolutionize how we view ownership, investment, and the exchange of valuable goods, both digital and physical.