NFTs are increasingly being viewed as financial products and evolving in complexity and interactions, according to a new report by Reflexivity Research. While the popularity of NFTs has taken off, with artists looking for ways to monetize assets, there are also significant problems associated with them, including reputational and environmental issues.
NFTs currently account for 30% of all Ethereum gas usage, and this is likely to grow. Despite this, NFTs can introduce financial market dynamics to traditionally non-financial or illiquid assets by digitizing unique items and facilitating their trade on a blockchain.
The report highlights a number of market factors driving financialization, including the launch of BLEND, an NFT loan platform, and the meteoric rise of the NFT marketplace Blur. The report notes that misunderstandings about NFTs persist, with many people viewing them as expensive JPEGs used for profile pictures, rather than a means to revolutionize the financial sector, such as within loan collateralization, insurance, and debt management.
Anthony Georgiades, co-founder of Pastel Network, said that NFTs will vastly improve existing processes in the financial sector and that fractional NFTs will also see greater financial inclusion across a variety of investments, given that they lower the financial barrier to entry. However, others are more skeptical about the role that NFTs can play in revolutionizing the art market.
Mark Lurie, CEO of Shipyard Software and a director of The Foundation for Art & Blockchain (FAB), said that “a new form of patronage is needed, one that alters the method of artist selection, the provision of financial support, and the commissioning and creation of art. Even these three necessary shifts may be insufficient.”
The financialization of NFTs is likely to have implications for the crypto sector, including the potential for increased regulation. The report suggests that NFTs may be subject to the same regulatory oversight as other financial products, depending on their complexity and use. While NFTs can provide greater access and inclusion to financial markets, they also pose significant risks, including the potential for market manipulation and fraud.
The report concludes that while NFTs offer exciting possibilities, significant challenges remain, from environmental concerns to the reputational risk associated with the financialization of traditionally non-financial assets.
While NFTs offer exciting possibilities and the potential for greater financial inclusion, there are also significant challenges associated with them. As with any new technology, it is important to strike a balance between innovation and caution, and to carefully consider the potential risks and benefits before diving in.