Analyst Take: Brands tap into the power of NFTs to explore new markets

The past year has witnessed explosive growth in hype and money pouring into nonfungible tokens (NFTs). NFT sales spiked to $25 billion in 2021 from less than $100 million the previous year, according to DappRadar, driven largely by sales of digital art and collectibles. Brands across the consumer spectrum—from luxury fashion houses like Gucci to fast-food chains such as McDonald’s—have jumped into the fray with their own NFT projects, to varying degrees of success.

In the biggest mainstream push to date, Meta CEO Mark Zuckerberg announced that Instagram will integrate NFTs in the coming months—indicating their central role in Meta’s roadmap for metaverse commerce.

But as some of the dust settles and the market cools, many are wondering about NFTs’ longer-term potential and their place in the nascent metaverse and web3: the anticipated evolution of the internet from a centralized, server-based model to a decentralized, blockchain-based system.

What are NFTs, and how do they work?

An NFT is a record on a blockchain that verifies ownership of a digital asset, like a JPEG image, video, piece of music, text, or even a tweet. While each NFT is unique (nonfungible), the digital asset it points to may be one of many copies (like an “edition of”).

• Some of the most well-known NFT projects to date, such as Bored Ape Yacht Club, use digital collectible images known as PFPs (profile pictures) to create a sense of community among owners.
• Holding a Bored Ape NFT confers benefits beyond the image, like entry to members-only channels on Discord, invitations to parties, and insider access to both virtual and real-world product launches.

NFTs may also serve as gateways for more ambitious virtual projects. Yuga Labs, the startup behind Bored Ape Yacht Club, recently raised $450 million to develop a gaming metaverse powered by a newly launched ApeCoin cryptocurrency, which was first issued to Bored Ape owners.

But the technology involved in NFT operations is inefficient and glitchy. The computing power required to verify transactions on Ethereum, the most commonly used blockchain for NFTs, consumes large amounts of energy and has raised serious environmental concerns.

Ethereum can only process about 15 transactions per second. (Visa’s network, by comparison, can handle up to 65,000.) That means long wait times, higher processing costs (known as “gas fees”), and even failed transactions.