NFTs create new digital business opportunities, but beware the potential pitfalls

This post was written by Christophe Uzureau, research vice-president at Gartner.

From the first tweet selling for $2.9 million to the famed “Disaster Girl” meme selling for more than $500K, non-fungible tokens (NFTs) are not only making headlines, but they’re making some of their creators lots of money. And as with any new, potentially lucrative technology, NFTs are leading executives to wonder: Can this create value for my business?

An NFT is a blockchain-based, monetized record of unique, noninterchangeable information that represents a digital asset. NFTs can link to any form of digital asset, such as art, text, videos, photos, songs or lines of code. NFTs can also represent, in a tokenized form, any digitally represented artifact (a physical asset that has been digitized).

While there has been much excitement around NFTs, the technology has also faced significant hype and skepticism. Critics of NFTs cite factors including:

• The value manifested in the NFTs is often intangible, highly volatile and based on sometimes inflated social media concepts of reputation.
• The NFT market has different layers of decentralization so it’s not economically friction-less.
• The underlying asset can be altered, even deleted or moved after the NFT sale.
• The party purchasing the NFT doesn’t necessarily get automatic ownership or control over the underlying asset.

The nascent version of NFTs and their ecosystem certainly has these potential flaws, and it’s clear that the digital infrastructure, business processes and governance supporting NFT exchanges still needs to evolve. However, NFTs are not just another speculative asset.

NFTs present an opportunity for digital business leaders, as they enable organizations to create new business models, extend the value of existing products and services and enter new markets. They also provide an alternative way to invest in and finance projects, as well as opportunities for trading and investing in a new digital asset class.

Here are four things executive leaders need to know about the opportunities presented by NFTs and how the technology can impact digital business.

NFTs demonstrate the value of programmability

NFTs are programmable instruments. They can be programmed using blockchain-enabled technologies to reflect and execute predetermined conditions or rules set out by the issuer.

For example, the music group Kings of Leon recently issued NFTs representing access to digital files containing a new album release. Some of these NFTs included software code that guaranteed purchasers of the NFT rights to front-row seats at future Kings of Leon concerts.

This kind of programmability affords an opportunity to target specific conditions or rights that can be executed as an embedded part of a transaction. These economics create a different kind of commercial landscape, customer experience and engagement model and reinforce brand resonance with targeted audiences.

NFTs support the decentralization of finance

NFTs operate on the principle of decentralized finance, in which assets and participants in a market operate on a person-to-person basis. Cryptocurrencies tend to be the preferred medium of exchange, and the intention is that there will be no centralized intermediaries involved in the market. However, it’s important to note that there is currently intense competition to become the dominant NFT marketplace, so there’s a risk of centralization of market power as the market matures.

A benefit of decentralization is that it provides the capability for value to be captured directly by the asset creators, initially at sale and potentially as a form of annuity. For example, artists can now be directly compensated by patrons through NFT purchases; artists can also define the royalty rates and decide whether to transfer copyrights.

Consequently, NFTs provide another building block in the decentralized finance infrastructure to accommodate nonhuman actors, such as smart machines. The rollout of 5G and IoT infrastructure and blockchain-enabled smart cities provide core mechanisms that autonomous agents can use to conduct transactions. NFTs could be one type of digital asset that monetizes those transactions. As potentially billions of autonomous agents go online and become “ machine customers ,” this presents a significant economic opportunity for enterprises to monetize previously illiquid assets.

NFTs generate new digital products

The centuries-old economic structure of relying on government-issued currency imposes limitations on how commercial transactions are conducted and how assets are valued and exchanged. These nondigital financial systems inhibit the creation and fair distribution of economic value.

The ability to make all assets interchangeable, whether physical or digital, and to enable new forms of assets to be valued — such as social media reputation or social behaviors — accelerates digital business. This opens the door to bring a huge array of new digital product development to a vast new audience.

For example, the National Basketball Assn. rolled out a Top Shot Moments initiative this spring that creates digital tokens of video clips of memorable dunks or other scores. In this instance, the data exchanges within the community of fans and the NBA could themselves become data assets. Using NFTs would enable the valuation of data assets generated by an enterprise, such as sales or customer behavior.

In this way, NFTs provide an opportunity to explore the digital fractionalization of commerce. Any type of asset can be digitized, and that digital representation is monetized and shared on a peer-to-peer basis. Terms and conditions of doing business are set by the commercial participants, not by a centralized intermediary. This means previously disenfranchised actors can now access and use assets that were unattainable. Instead of global commerce being limited to a largely known quantity of asset stock, with NFT and decentralized finance the sum of the parts is many times greater than the whole.

How to create digital value using NFTs

To take advantage of these opportunities and guard against threats, executive leaders building a digital business need to take steps to prepare for the future of NFTs.

First, since the introduction of NFTs signals the restructuring of industries, products and processes, it’s important to map the business’ ecosystem to acquire a better understanding of how value flows through customers and business partners.

Then, track and monitor NFT early adopters. The obvious disruptive shifts in the music, media, art, gaming and sports industries will be felt first. There will also likely be pressure facing the financial services industry as it introduces financial products in the form of NFTs as collateral. Organizations in all industries can consider adopting new funding and payment mechanisms that account for a decentralized financial approach.

Finally, consider participating in data market creation. Any of the many industries involved with the creation of data assets should consider the opportunity provided by NFT protocols to monetize that data by creating new markets.

Although the current versions of NFTs are predominantly limited to a small set of digital assets, the groundwork is being laid for broader applicability moving forward. Executive leaders should pay close attention to these developments and consider experimenting with the creation of NFTs to assess the opportunity and risk implications for their businesses.

David Furlonger, distinguished research VP at Gartner, contributed to this article.