Abstract
This paper explores the new world of non-fungible tokens (NFT), which are unique digital assets providing proof of ownership and verification of authenticity held in the blockchain. After describing what a NFT is, we shed light on the main reasons it has value both as a financial instrument and as a new product. Second, we discuss the various types of existing NFTs, including digital artworks, play-to-earn video games, and (digital) real estate. Third, we explain how NFTs and smart contracts are created. In doing so, we discuss some technical aspects such as blockchain, non-fungible versus semi-fungible, and minting. Finally, we give an overview of existing marketplaces followed by a more general discussion of how NFTs could help improve some of market inefficiencies and could contribute to the social welfare and banking industry.
We thank Kirill Kazakov, Luc-Vincent Lauper, and Esteban Rivera for their comments and research assistance.
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Notes
- 1.
How to create NFT is explained in detail in Sect. 4.6.
- 2.
In addition to bespoke private sales, Christie’s is a world-leading company running live and online art auctions.
- 3.
- 4.
From an academic perspective and in an Arrow-Debreu sense, a market is complete when it satisfies two conditions: there is a price for every asset in every possible state of the world; the market is frictionless in terms of negligible transaction costs and perfect information.
- 5.
Dowling (2022b) analyze Decentraland LAND and finds no empirical evidence for price efficiency.
- 6.
Solidity is an object-oriented programming, devised specifically for smart contracts. Created by former Ethereum core developers, it is used for smart contracts on the Ethereum blockchain, but also for different blockchain platforms, for instance, the Binance Smart Chain.
- 7.
NFT gas is the fee that one needs to pay to execute any transactions on the blockchain. It compensates miners for the computing energy and resources used to validate transactions and to include them in the blockchain. The gas fee varies depending on the activity and level of congestion. It is calculated by multiplying the Gas Limit and the Gas Price.
- 8.
A detailed explanation of the minting process will be provided in Sect. 4.5.
- 9.
A definition and discussion of IPFS-based hosting services will be given in Sect. 4.7.
- 10.
A brief description of the concept of the attributes of NFTs are provided in Sect. 4.4.
- 11.
More information about this linkage is provided in Sect. 4.4.
- 12.
Famous collections like Cryptopunks or Bored Apes Yatch Club have supply of 10,000 NFTs and, obviously, were created using custom smart contracts.
- 13.
For instance, DeviantArt introduced Protect, an image recognition tool, to notify users of copyright infringement on NFT marketplaces, leading to a flood of matches. Rarible struggles with plagiarism by implementing a human-moderated verification system.
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Barbon, A., Ranaldo, A. (2023). Non-Fungible Tokens. In: Walker, T., Nikbakht, E., Kooli, M. (eds) The Fintech Disruption. Palgrave Studies in Financial Services Technology. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-23069-1_6
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