In our October 2021 webinar, Martha Bennett and I delved into cryptocurrency fundamentals, issues with blockchain, and practical blockchain applications in the retail industry. As a follow-up, we released a second webinar in January 2022 that focused mainly on nonfungible tokens (NFTs). We covered some of the basics, examined consumer demand for NFTs, and shared our take on pros and cons. Here are some highlights from our webinar:
What Are NFTs?
There are two types of blockchain-based tokens: fungible and nonfungible. Nonfungible tokens are unique and cannot be exchanged for each other. NFTs can represent any physical or digital asset; anybody can mint, sell, trade, or gift NFTs.
What Are Some Common Misconceptions About NFTs?
Most people (erroneously) assume that if you own the NFT (it’s in your wallet; you have control over it), you also own the asset that it represents. Many also believe that digital assets are on the blockchain along with the NFT. In reality, all you “own” when you’ve purchased an NFT is the token itself. Unless there are specific terms and conditions or an actual legal contract associated with the NFT, the buyer doesn’t know what rights they have.
When it comes to the asset itself, the NFT (with one or two minor exceptions) just contains a pointer to the location where the file resides. It’s also worth noting that sellers have no obligation to maintain the asset or the asset’s location. And unless the token has a hash or other cryptographic proof of the off-chain digital asset, the buyer won’t be able to tell or prove whether the asset has been altered or replaced.
What Should Buyers Be Wary Of?
NFTs clearly are a hot area, and the motivations for engagement differ. For some people, it’s mainly about engagement and collectibles, while for others, it’s more about speculation; there are also a lot of scams. Buyers need to be aware that:
- Depending on how the minting and purchase processes are implemented, they need to be technically savvy and may also require an in-depth understanding of cryptocurrencies, wallets, and how the minting and NFT buy-and-sell processes work.
- Code running on public blockchains is open to code exploits. This situation can lead (and has led) to buyers losing out, which could happen at the minting stage or at a later point. Wallets and exchanges can also be vulnerable to attack, both technical and via social engineering or phishing. In this way, many NFTs have been lost to their original owners.
- Exchanges aren’t regulated, and there’s no consumer protection. There’s also no clarity on the legal position on “stolen” NFTs.
- Wash trading (whereby the same entity sells to itself to artificially inflate the price) is rife.
- There is likely to be a tax liability associated with buying and selling NFTs.
What Should Brands Know?
Brands thinking about embarking on an NFT initiative should bear in mind that:
- NFT ownership today is concentrated in a comparatively narrow demographic, as we outlined in our blog post, NFTs Are Having A Bromance With US Males.
- Brands need to provide clear terms and conditions which state what the customer has actually purchased and what rights they do and don’t have.
- An unsatisfactory user experience and difficulties or losses arising from badly written software can lead to brand damage.
- Brands with a strong environmental message should be mindful of the environmental impact of NFTs, due to the excessive resource consumption of blockchains (like Ethereum) that use the so-called proof-of-work mechanism.
Watch our recent webinar — NFTs: Fun Stocking Stuffers Or A Lump Of Coal? — for a more in-depth overview on the current state of NFTs, pros and cons, and careful considerations for the future buyer or brand.
Research Associate Taylor Hansen contributed to this post.