Category: Knowledge

NFTs – Simple Guide to the World of NFTs and Its Potential Beyond Art and Gaming Industries

Posted on by admin_beacon_2024

This year’s hottest emerging use case of digital assets, particularly in the art and gaming industries, is the use of non-fungible tokens, or NFTs. NFTs as a concept are not something new, but recent explosive popularity in 2021 put the market in awe, from the sale of Jack Dorsey’s first tweet at $2.9M to Beeple’s digital artwork at $69M. In this article, we will take you through the world of NFTs, including current use cases beyond the art and gaming industries, and opportunities and potential to transform the financial sector.

 

What Exactly is an NFT?

 

An NFT is a unique digital asset token that represents ownership of digital or physical assets. You can think of NFTs as digital certificates of authenticity and ownership.

Generally, tokens traded on any blockchain fall into two categories, fungible and non-fungible. Fungible tokens, like Bitcoin, are those that can be traded interchangeably. This is similar to trading a one-dollar bill in which all one-dollar bills contain the same nominal value. On the other hand, NFTs fall into the latter category, as each NFT is distinct and therefore not interchangeable – no two NFTs are the same.

Despite the growing hype, NFTs are encountering three key challenges:

  • expensive transaction fees stemming from the nature of the blockchain layer used by the NFT project;
  • ongoing questions on the legal enforceability of the NFT, such as what the buyer actually owns when they buy an NFT; and
  • environmental impact due to high energy consumption in proof-of-work blockchains.

 

A Quick Overview of NFT Landscape

 

Sales Volume

NFT sales volume experienced tremendous growth to $2.5B in H1 2021 from $94M in 2020 as more participants such as celebrities, artists, and companies are joining the space. It appears to have potential for future mainstream adoption.

 

Fundraising Activities

 

In terms of funding, according to CB Insights, in the past year roughly 15% or 18 deals of blockchain funding deals by top blockchain investors are digital collectibles and NFTs compared to only 2 deals in the previous year. The top blockchain investors include but are not limited to Digital Currency Group, Pantera Capital, and Andressen Horowitz (a16z).

Diving into the top-funded companies in this space, many NFT marketplaces have emerged to serve the rising demand. Dapper Labs, an NFT development platform, raised a total of $635.6M and was recently valued at $7.35B in September 2021. Additionally, one of the most well-known marketplaces, Opeasea, recently closed a $100M Series B round led by a16z in July 2021. Other marketplace players include  Sorare, SuperRare, Rarible.

 

Thai NFT Landscape

 

We also see growing adoption in the Thai NFT market. Several NFT projects have emerged, ranging from local celebrities to pageant fans. Bitkub Group partnered with Miss Universe Thailand to bring NFTs to pageants to stimulate fans’ engagement both before and after the competition. In addition, Jay Mart plans to launch JNFT marketplace and collaborate with celebrities to introduce its NFT collection in order to boost the use case of JFin tokens.

However, mass adoption of NFTs may face challenges on the regulatory side. In June 2021, the Thai Securities and Exchange Commission prohibited digital asset exchanges from offering trading of fan-based tokens and NFTs. The regulator aims to stop the trading of digital assets which have no clear objective and whose price could be manipulated by social media trends.

 

NFT Ecosystem Stakeholders

 

The main stakeholders of the NFT ecosystem are the creator/artists, the collectors, and the platform providers. Benefits that these stakeholders could receive from NFTs include:

Creator/Artist: The creator/artist could be anyone who owns a digital asset, e.g. artwork, music, or tweets, and wants to monetize it securely. Tokenizing the digital asset into NFTs can help keep the artwork safe, differentiate the original from the copies, and create value from scarcity, resulting in a higher asset value. Retail businesses can expand their product range to include NFTs, creating new revenue streams.

Collectors: Those who are looking to own a valuable digital asset. They could benefit from NFTs in several ways, such as supporting their favorite creators, holding a piece of history, capital gains from market fluctuations, or keeping money protected from inflation.

Platform providers: Providers can generate revenue from transaction fees; for example, OpenSea, the largest peer-to-peer online marketplace for NFTs, makes money by collecting fees from successful transactions. OpenSea is free for NFT buyers, but it charges sellers of NFTs a 2.5% commission on any transaction made through the platform. Different platforms have different models for how they charge fees.

 

NFT Use Cases Across Industries

 

NFT applications serve well in any industry where authentication and proof of ownership are crucial. We can observe many real-world use cases of NFTs across different sectors including art, gaming, retail, supply chain management and logistics, and real estate.

 

 

Opportunities of NFTs for Financial Institutions (FIs)

  1. How FIs can get involved or provide support in the NFT ecosystem

Payments

Some marketplaces, like Mintable, allow their users to pay for NFTs using a credit card. These users can purchase NFTs on the marketplace without needing any digital assets in their wallets (they still need to have a wallet to store purchased NFTs). Financial institutions could enter the NFT space by partnering with NFT marketplaces to allow their users to use credit cards on the platform. For example, Visa has taken steps in this NFT universe by making it convenient for users to convert and spend digital assets with a Visa card.

AML/KYC

NFTs transactions can involve large amounts of money, posing risks of money laundering, malicious transactions, illegal activity, or scams. Financial institutions can take part in the space by conducting due diligence on customers involved in NFT and digital asset transactions.

NFT Market Operator

FIs can take part in the NFT market by participating as an NFT marketplace to capture the growing demand and explore new space while leveraging their trusted brand. FIs can support the creators to help launch new NFTs on the platform and earn a fee or percentage cut from each peer-to-peer transaction.

NFT Fund

FIs can also launch NFT funds for investors to have exposure in digital art, digital collectibles, and metaverse, and to own a part of several NFTs without direct exposure to the NFT market. FIs can leverage their existing large customer bases, as well as drawing in new clients to invest in their NFT funds.

  1. Application of NFTs in the Financial Sector

Application of NFTs is still in a very early stage for the financial services sector but it has the potential to be integrated deeper into the space to improve operational efficiencies as well as create new revenue models.

To improve efficiencies for FIs, NFTs can be used to record ownership and transfer of assets. They can be utilized to ensure the provenance of goods (point of origin), for fraud protection, and for debt management, including tracking and managing debts. On the potential revenue-generating side, it is possible for FIs to explore the convergence of decentralized finance and NFTs by allowing the holder of the NFTs to earn yield (staking) or use their NFTs as loan collateral.

 

How to Get Involved in the NFT Market

 

This section will guide you through the general process of how to create NFT collections and store and sell NFTs to have a better understanding of how the process works.

 

Step 1: Determining an appropriate blockchain

 

Every creator will start their NFT journey by deciding which blockchain they should adopt. Most NFT activities we observe today are built on Ethereum, due to its capability to attract a broad set of users and developers. In the future, we can expect to see more blockchains entering the market. Users should consider tradeoffs and pick one that suits well with their objectives.

 

Step 2: Minting NFTs

 

After picking which blockchain to use, the next step is to transform the digital assets into NFTs. This process is called minting. Several platforms can help with minting, such as OpenSea, Rarible, or Bitski. One important thing to keep in mind when deciding on what platform to use is controllability. We should pick one that gives us as much control over NFT features, such as provenance, attributes of the NFT, or storage of the underlying asset. Once NFTs are minted, they will be stored on the blockchain, unchangeable and tamper-proof.

 

Step 3: Storing digital content file

 

During the minting process, users will have options to store their digital content file either on the blockchain itself, or in other places. While storing files directly on blockchain (e.g. on Ethereum) may limit storage space, some users might find it more convenient to use third-party storage as it is more reasonable in terms of price and storage space. Currently, both centralized and decentralized storage options exist. Centralized storage makes NFTs more dependent on storage providers, and if such a provider is out of the business, the NFT will link to nothing. Decentralized storage has evolved to mitigate this issue because the architecture of this method completes the full circle of blockchain principles and operates without the intervention of any intermediary.

 

Step 4: Storing NFTs

 

Once the creators successfully mint NFTs, they have to keep them in a digital asset wallet like other digital assets. There are two models of wallets, custodial and non-custodial. For the custodial solution, third-party providers will store private keys of wallets on behalf of customers. Creators should only use a custodial service from a trusted brand with strong security. In contrast, the non-custodial solution is that customers are responsible for storing their own private key to access their wallets.

 

Step 5: Distributing NFTs across the marketplace

 

Nowadays, we have many NFT marketplaces in the space. Well-known players in this space include OpenSea, SuperRare, Rarible, Nifty Gateway, Foundation, Enjin, and many more.

 

Conclusion

 

By considering its underlying technology and current use cases, mainstream adoption of NFTs may be in the foreseeable future. Big brands and public figures in the traditional world are joining the NFT ecosystem which then stimulates and increases awareness among the general public. Nevertheless, regulations related to NFT, including the classification and anti-money laundering need to be monitored, as this type of digital asset is still in the early-stage, and regulators may attempt to closely monitor and control it as it grows. Looking into the future with proven technology, NFT has the potential to go beyond what we see today in the digital art and gaming industries. It could potentially transform existing sectors from retail to financial services, which may present an even greater opportunity for NFTs in forthcoming years.

 

 

Author: Warittha Chalanonniwat (Paeng), Wanwares Boonkong (Pippin)

Editors: Panuchanad Phunkitjakran (Pook), Woraphot Kingkawkantong (Ping), Krongkamol Deleon (Joy)

References:

https://app.cbinsights.com/research/what-are-nfts/

https://app.cbinsights.com/research/blockchain-tech-funding/

https://app.cbinsights.com/research/nfts-brands-retailers-decentralized-commerce/

https://www.bangkokpost.com/business/2131883/jay-mart-plans-non-fungible-tokens-for-stars

https://www.bangkokpost.com/business/2131299/sec-bans-trade-in-gimmick-tokens-and-nfts

https://www.prnewswire.com/news-releases/wave-financial-expands-investment-offerings-with-worlds-first-traditional-nft-fund-301357615.html

https://usa.visa.com/content/dam/VCOM/regional/na/us/Solutions/documents/visa-nft-whitepaper.pdf

https://blog.liquid.com/nft-use-cases

https://blog.portion.io/the-history-of-nfts-how-they-got-started/

From Internet Banking to Blockchain Finance, What’s Next for Financial Institutions?

Posted on by admin_beacon_2024

The concept of banking first emerged sometime around 2,000 BC in Mesopotamia, where merchants felt the need to give out loans to farmers and traders who roamed the different cities. From then on, as trade and the economy grew, modern financial institutions were built to consolidate the scattering of economic activities and provide trust.

 

For centuries, the financial system has been heavily centralized. Along with other government entities, financial institutions joined hands to govern almost all transactions, from money issuance to lending and investing. They have this power to centralize because they alone can keep track of all financial transactions. The invention of blockchain will change the fundamental mechanics of how this new era of the financial system operates with its decentralized record-keeping feature. Once this technology fully matures, traditional financial institutions as we know them will have a lesser role in the financial system.

 

Blockchain and Its Promise to the Financial System

 

Blockchain is a decentralized record-keeping system that documents all transactions that happened on it. In other words, it is a bank book that everyone can possess and whose content is self-updating with all new transactions and the change in ownership of any assets. It defies financial institutions’ fundamental role as the centralized record keepers who prevent the same money from being spent twice or the same asset being transferred repeatedly.

Fully mature blockchain technology promises to provide greater efficiency, lower transaction costs, better transparency, a speedier rate of financial innovation, and a much lower carbon footprint (still heavily debated) compared to the traditional financial system.

 

The Inception of Blockchain Finance

 

In the early days of blockchain finance, Satoshi Nakamoto (pseudo name – actual identity remains unknown) invented Bitcoin (whose underlying technology later became known as blockchain), a digital currency to aid in the decentralized transfer of money. The transfer data stored in Bitcoin’s blockchain is static – meaning that the blockchain can only record that Entity A transfers B amount of money to Entity C.

Ethereum then came along and introduced smart contract technology, which allows blockchain to be programmable. Ethereum blockchain can instruct that only when Event D happens, Entity A can transfer B amount of money to Entity C. Any transactions can become fully automated upon a defined set of rules.

Both technologies were the foundation of the concept of what is now known as Blockchain Finance.

 

The Blockchain Finance Dilemma

 

While groundbreaking, current blockchain finance is not without limitations. The challenge lies in the Blockchain Dilemma – that blockchains may only choose up to two qualities to achieve: Security, Scalability, and Decentralization. The limitation is the mechanism to how each party in blockchain finance agrees that a transaction is legitimate and therefore should get updated in everybody’s copy of the bank book (referred to as the “Consensus Mechanism”).

 

 

Source: Original framework by Certik, adapted by Beacon VC

 

Since both Bitcoin and Ethereum prioritizes Security and Decentralization, scalability is a challenge for both blockchains. In order for a new transaction to be recorded in everyone’s copy of the bank book, someone who holds a copy of the bank book must confirm that the transaction is legitimate through the computation of a complex mathematical equation. That person is referred to as a miner, and the first miner who gets the equation right wins a monetary reward. This process of solving a mathematical equation to confirm a transaction is called the proof-of-work consensus mechanism (PoW).

 

Other blockchains prioritize Decentralization and Scalability, giving birth to the proof-of-stake consensus mechanism (PoS). Blockchains that adopt PoS include Polkadot and Vechain. Under the PoS concept, a miner can be eligible to confirm a transaction by putting down a ‘ stake’ in the form of coins belonging to that blockchain (think of it as a refundable deposit). The more coins put down by a specific miner, the more eligibility that miner has to validate a transaction. This consensus mechanism works because the miners who are not validating any specific transactions are obliged to check the work of the validating miners. Faulty confirmation of a transaction is penalized by confiscation of stake.

 

Finally, other blockchains prioritize Security and Scalability. While many blockchains use the PoS to validate transactions, we have seen a rise in the proof-of-authority consensus mechanism (PoA). In this case, new transactions are confirmed by a few authorized players in that blockchain. These players are incentivized to keep transaction data legitimate and enjoy the monetary benefit for that blockchain growth. Examples of blockchains that prioritize security and scalability include blockchain consortiums formed by financial institutions (JPM coin), and the Bitkub chain. In reality, there are many other ways that a blockchain can achieve scalability and security, as we also see cases using a hybrid model between PoS and PoA – the delegated proof-of-stake mechanism (dPOS), which we will leave for another discussion.

 

The Two School of Thought of Blockchain Finance (CeDeFi/ DeFi)

 

There are big debates in the blockchain finance space whether blockchain finance should be centralized (CeDeFi or CeFi) or decentralized (DeFi).

 

 

CeDeFi is an evolution of the current financial system where an intermediary helps manage the transaction and regulate the users’ activities in that ecosystem. Under this scenario, if a user wants to make a transaction, the user needs to create an account with the company, deposit cash or any assets into the company’s custodian, and use that company to execute the transaction. In this case, the customer would need to reveal their personal information to participate in the ecosystem. Great examples of CeDeFi platforms include Binance and Coinbase.

 

Conversely, with the growing need to protect own data and distrust in institutions comes the demand for DeFi. Users are required to manage their own funds and financial activities. They must have a personal wallet where they store their assets and use that wallet to carry out transactions by connecting it with decentralized service providers. Since these decentralized service providers execute trades based on smart contracts, the transactions automatically occur when conditions are met. There is zero need for human intervention. This gives flexibility for DeFi users to select service providers whose set of rules they like the most.

 

Which School of Thought Will Prevail?

 

Although there is no guarantee which school of thought will prevail, or that there will be any clear winner, we anticipate that CeDeFi will gain mass acceptance and adoption for real commercial purposes first, despite the current boom in DeFi which has been driven by speculative forces.

It is all about the evolution of public trust. CeDeFi is, by design, a bridge for general customers to start exploring the blockchain finance ecosystem and shifting their trust away from financial institutions/centralized governing entities to service providers (think of Binance, Bitkub, Zipmex, Satang Pro, etc.). These companies excel in replicating the same user experience a customer would have if they were to interact with general fintech that people know and have grown accustomed to. Once more people start adopting CeDeFi, and the infrastructure and interface for DeFi are in place, the public will soon learn to shift trust from said service providers to algorithms (code and rules of how transactions are made), leading to the potential mass adoption of DeFi. It is impossible to say when mass DeFi adoption will happen, but we can definitely see both CeDeFi and DeFi co-existing in the foreseeable future.

 

Such co-existence can take place in a number of manners:

  • Gateway: Since value creation in the economy is still largely driven and transacted in the physical world, CeDeFi can exist as a gateway for users to convert traditional assets (such as fiat money) into decentralized blockchain finance. We are already starting to see this symbiotic relationship between CeDeFi and DeFi, in which users convert their money into digital assets using CeDeFi and then transfer it to their personal DeFi wallet. (think of Fiat -> Binance -> Metamask wallet)
  • Market Segmentation: It is possible that CeDeFi and DeFi can co-exist by serving different markets in the economy. Segmentation can be based on the need for governance. For instance, CeDeFi can serve segments where visibility and governance are critical, such as corporate clients, while DeFi can serve the retail market. Segmentation can also be based on the type of trust users require. Conventional users can use CeDeFi because their trust system is based on having a single entity to point to when things go wrong, while DeFi users can be more comfortable with the algorithm.
  • Business Extension: CeDeFi organizations can use DeFi as a place to experiment with financial innovations and later acquire the know-how to build or integrate similar services to their platform. This is the same model that we already see in the financial industry, in which big financial institutions leverage the capability of startups to enhance the robustness of their offerings.

 

While this migration unfolds, regulators and financial intermediaries incumbents will likely try to slow the migration rate to a minimum. This is because they will first need to find a satisfactory framework to thrive in an entirely DeFi environment. After all, there are certain benefits to centralization, such as the ability for the government and banks to control fund flow, regulate the market, and effectively pull monetary levers to protect the economy or national interests.

 

What’s Next for Financial Institutions?

 

There is no telling when mass CeDeFi or DeFi adoption will happen, but it is paramount that financial institutions start finding their role in this emerging ecosystem. To start from an inside-out perspective, financial institutions were built upon trust and efficiency through consolidation. The critical area of exploration is where financial institutions can continue to deliver benefits both in the CeDeFi or DeFi context. From an outside-in approach, financial institutions can navigate through different blockchain layers and access points in the ecosystem to identify a natural fit for their current products, capabilities, or future strategy and monetization models.

 

While we are racing towards what may be the most significant overhaul of the financial system in modern history, we must strive to remember that different populations adopt technology at different rates and that meaningful innovation must not further marginalize anyone.

 

 

Author: Woraphot Kingkawkantong (Ping)
Editor: Krongkamol Deleon (Joy)
Special shout-out: Wanwares Boonkong (Pin), Phanthila Saengthong (Mook), Panuchanad Phunkitjakran (Pook), Napat Nantavechsanti (Jum+), Phongsuphat Kanchanakom (Monn)