Trend Analysis by Blockchain Scientist: Are NFTs a Digital Bubble in the Making?

Mar 28, 2022
NFTs are blockchain-based tokens, and they verify the authenticity and ownership of a digital asset, making the use of NFTs particularly appealing to digital creators who want to ensure the scarcity of their creations.
Professor Jianliang Xu, Head of the Department, says that currently there is no other platform besides the blockchain which can better support NFTs as well as produce the same trusted means of conducting business transactions.


Non-fungible tokens, or NFTs, have exploded in popularity in the past few years, and they now dominate the digital art market. A minute and a half long scene from Wong Kar-wai's iconic film In the Mood for Love fetched HK$4.28 million at auction last year, making it the first Asian film NFT to be offered for sale by an international auction house. The rising popularity of using NFTs to sell digital work has illustrated the potential of different applications of the technology, and it has also sparked discussions on whether digital assets are worth the value assigned to them, as they can be easily copied or shared online.

A Digital Certificate of Authenticity

NFTs are blockchain-based tokens which are built using the same kind of programming that underpins prominent cryptocurrencies. But unlike fungible assets such as physical money and Bitcoin, one of the most well-known cryptocurrencies, NFTs are unique and therefore they cannot be exchanged or substituted with similar assets.

NFTs live on the blockchain, which serves as a ledger of transactions, and they record encrypted information that can verify the ownership of a digital asset. This allows NFTs to act as a digital certificate of authenticity and ownership of the asset, making the use of NFTs particularly appealing to digital creators who want to ensure the scarcity of their creations.

"One of the benefits of selling digital art as an NFT is that it operates as a different business model," says Professor Jianliang Xu, Head of the Department, who has been leading cutting-edge research projects on blockchain technology. "In the common business models found in the art market, artists rarely profit from the resale of their artworks. With the blockchain underlying NFTs, you can set smart contract terms within it, for example, the artist will get a royalty upon each resale of the artwork. This provides artists with opportunities to benefit from the increase in value of their artworks over time."

Creating Higher Demand For Digital Work

According to Professor Xu, the introduction of NFTs and blockchain technology has increased the demand for digital work. "Blockchain platforms are open to users, which enables digital artists and creators to reach a large community of interested buyers and potential customers. This, in turn, leads to a bigger demand and therefore higher value for their work," he says.

As the market for NFTs balloons, the technology has also been applied to video games, concert tickets and sports memorabilia, with the prices of some digital assets rising to stunning levels. On 1 January, pop singer Jay Chou launched an NFT project called "Phanta Bears", and 10,000 virtual avatars sold out in less than 40 minutes, fetching a striking sum of US$10 million. Some buyers resold the avatars at a higher price on the NFT trading platform OpenSea, and the value of each NFT has more than tripled.

"Some users may buy NFTs as speculative assets and hope that the value of the work goes up so they can flip it for a higher price one day," says Professor Xu. "There are also fans who want to financially support the artists they like, and this demand can drive the price to even greater heights."

Great Potential As Well As Risk

While NFTs are seen as the way digital work will be collected and traded going forward, there is some pushback against the hype. One issue is that an art piece can be stolen and sold as an authentic NFT. In addition, since NFTs rely on blockchain technology, they use a lot of electricity, which leads to the emission of greenhouse gases.

Professor Xu further points out that there are concerns about the lack of regulations in the NFT world. "A lot of NFT sales are cross-border transactions, and this leads to the questions of who should regulate the transaction process and how the sales should be taxed," he says. "People can also use NFT transactions for money laundering, while some users may manipulate the sales to generate higher demand for the work, so that the assets may appear more valuable."

Despite the uncertainty surrounding the future of NFTs, Professor Xu believes that the technology has a lot of potential. "There are numerous virtual assets represented by NFTs, and people are already using them in the metaverse," he says, adding that currently there is no other platform besides the blockchain which can better support NFTs as well as produce the same trusted means of conducting business transactions. However, if the NTF platform no longer exists one day, then the information about the ownership of the work could be lost.

"NFTs are one of the major applications on the blockchain. Right now, the most common use of the blockchain is to enable cryptocurrencies to operate, but the technology has not yet been widely adopted in many other areas. The existence of NFTs has pushed the use of the blockchain," he says.

Source: HKBU News