Two years ago, Non-fungible tokens (NFTs) captivated the world with skyrocketing prices and mainstream attention, but then the market snapped back and many said that NFTs were “dead.”

They spoke too soon. This technology continues to proliferate on a global scale, reshaping entire industries.

Even with the NFT market reaching sales volumes of nearly 200,000 NFTs worth over $191 million per day it’s easy to dismiss them as Internet culture toys due to headline grabbing projects like CryptoPunks and Bored Apes.

Source: Nval.com 

The NFT industry spent enormous energy and resources to make this possible; building, testing, and shipping some of the most game-changing technologies to date.  

Even though some NFT markets are now down by over 90%, it’s a mistake to write NFTs off so quickly.

NFTs Are a How,Not a What

What does it take to trade assets in a digitally native environment? Ownership rights.

NFTs are merely how we record who holds rights to an asset. They can certify ownership and authenticity, and they come with many features of blockchains such as interoperability, secure transfer and verification.

The NFT industry created a revolutionary property rights system that is available 24/7/365 to anyone, anywhere at a fraction of the cost of traditional systems, and conveys uniqueness to any asset including digital files.

The what being bought, sold, or transferred are the rights to an underlying asset that is linked to the NFT. The assets and the rights that can be conveyed are virtually limitless.

Real World Assets (RWAs)

NFTs are a global ownership system that is changing what’s possible and reshaping existing industries.

Digital Art and Collectibles: NFTs provide artists and IP holders a means to create a verifiably unique or distinct digital item, unlocking new avenues for monetization. The holder of an NFT receives rights that can include ownership, usage, and resale of the digital work.

For example, NBA Top Shot created a wildly successful marketplace where fans can buy, sell, and trade officially licensed NBA video highlights enabled by NFTs that verify ownership and uniqueness.

Stocks and Bonds: The financial world is also embracing tokenization. NFTs offer more efficient and accessible markets for traditional financial instruments with transparent ownership and instant settlement. 

Carbon Credits: NFTs representing a specific amount of carbon dioxide emissions offset can be easily traced from creation through to retirement, ensuring authenticity of carbon credits and helping combat climate change while adhering to regulatory standards.

NFT technology is also revolutionizing music, video, ticketing, gaming, trade finance, luxury goods, identity, private credit, AI, physical goods and even vehicle registries.

NFTs redefine what’s possible through verifiable global ownership and authenticity. In the early days of the Internet, we didn’t know how accessible, affordable communication would transform the world, and it profoundly impacted every industry. 

NFT are reshaping the world with the same transformative power, creating unprecedented innovation and economic possibilities.

- Layne Nadeau, founder and CEO of Nval

The digital assets market is undergoing a significant transformation in 2024, with tokenization emerging as a powerful new force. This momentum is fueled by the market entrance of heavyweights like BlackRock, driving a surge in TVL (Total Value Locked) of these assets. This increase signals growing investor demand, confidence and interest, marking a new phase of adoption following the widespread acceptance of stablecoins in recent years.

Illustration 1: Industry Adoption Curve

Despite this positive trend, the tokenized assets market faces substantial challenges. Traditional financial investors (TradFi) remain cautious about product structuring and encounter liquidity issues in secondary markets. The complexity of trading and monitoring these digital assets post-issuance, along with the implementation of robust risk management processes, deters  potential investors. To gain broader acceptance, tokenized assets must establish a robust infrastructure and provide a transparent product lifecycle.

Illustration 2: Key Stages in Creating High-Quality Tokenized Products

As the market supply advances along the adoption curve, it becomes increasingly clear that the lack of data availability, data analytics and data quality significantly complicates the implementation of structured due diligence and monitoring processes for investors. This leads to different risk exposures throughout the lifecycle of tokenized assets. These risks are evident in the creation of new assets, modifications to asset characteristics, the contractual terms of issuance, trading, custody and the valuation of underlying assets.

Investors must familiarize themselves with the potential risks along the value chain and the intermediaries involved. By understanding the unique product structuring inherent in the origination, manufacturing, and distribution processes is essential, as well as their implications for operational infrastructure, valuation mechanisms, regulatory frameworks, fiscal compliance, and execution, investors can mitigate risks and increase the trust of their respective share- and stakeholders to allocate liquidity into high-quality offerings.

Effective risk management involves continuous evaluation of technical infrastructure, compliance with evolving regulations and stringent security measures for smart contracts. Ensuring clear property rights, secure custody of private keys, and accurate valuation through high-quality oracle services are also essential. Integrating red-flag detection systems that leverage both on-chain and off-chain data, along with constant price discovery mechanisms, further enhances the integrity and trust. In addition, constantly monitoring data flows and changes in information at all three levels – issuer, token and underlying asset – ensures thorough risk assessment and informed decision-making.

The tokenized assets market is advancing rapidly, attracting increased interest from traditional financial investors due to innovative value propositions with new products and customer segments. But, significant challenges remain. 

Due to its complexity, investors need to implement additional risk management processes, while specialized data providers and rating agencies are crucial for providing independent assessments. Through diligent oversight, monitoring and continuous evaluation, these stakeholders can ensure the market develops securely, transparently, and in an investor-friendly manner, ultimately leading to broader adoption and integration into the global financial system.

– Axel Jester, senior vice president at Particula

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