Non-fungible tokens, or NFTs, have recently become the latest blockchain-based innovation to enter the lexicon, and are fast outstripping bitcoin in both hype and popularity.
An NFT is a unique unit of data, or token, stored on the blockchain. Unlike cryptocurrency, such as bitcoin, or even traditional money, such as a one pound coin, one NFT can’t be traded or exchanged for another – that is, they are not fungible.
This uniqueness means that NFTs can be used to represent assets, with data on their provenance, originality and ownership all being recorded on the blockchain – a characteristic that has been used to sell a wide range of virtual collectibles, most notably a work by digital artist Beeple, whose Everyday: The First 5000 Days recently netted US$69mn at auction house Christie’s.
While transforming digital works of art into assets that have been bought for eye-watering sums of money is their most famous use case to date, a more practical implementation of NFTs lies in trade and supply chain finance, according to some proponents.
In a recent blog post, Jean-Baptiste Gaudemet, senior vice-president of data and analytics at treasury software provider Kyriba, outlines how the tokens could be leveraged to solve the problem of financing long supply chains.
“Sponsoring a supplier’s credit line and using the invoice as collateral is a well-established way for big companies to help their immediate suppliers,” he says. “But it is not enough for a long supply chain, working just-in-time, when all that chain is interdependent. What’s needed there is for the end buyer to put in place a financing platform right along the supply chain, including all the SMEs. This is currently possible but it’s a legal nightmare that would involve a mass of separate contracts.”
The solution, he posits, is to tokenise the payment guarantee of the ultimate buyer in the form of an NFT, and create a financial mechanism – potentially via a spread coded into the NFT smart contract – to incentivise suppliers to pass the NFT on to their own suppliers right along the supply chain.
“The successful introduction of NFTs throughout the supply chain would give us, and companies like us, the opportunity to extend that support from the biggest companies down to SMEs where the benefits are most needed and would be most apparent,” he says.
Richard Crook, director of financial services software company LAB577 and former head of emerging technology at RBS, agrees. “Everything from the provenance of goods, fraud prevention and even debt management can be streamlined and verified using blockchain-based NFTs,” he says, adding that NFTs can act as digital receipts which are tied to bills of lading, certificates of origin or any other type of trade documentation.
“At its heart, you have goods and services, and payments, which are two legs of the same transaction, and which are currently discrete,” he tells GTR. “As we roll out the internet of value, you can have purchase orders and invoices one way, and send payments along the same fabric. That removes a phenomenal amount of reconciliation in the trade finance and supply chain space.”
Some moves are already underway to leverage NFTs in financial services. Tinlake, for example, an open, smart contract-based marketplace of asset pools developed by blockchain startup Centrifuge, enables asset originators to tokenise assets such as invoices into NFTs which can then be financed. Meanwhile, at a recent NFT conference held in China, Guangzhou-based Oumi Blockchain Technology outlined its plans to apply NFTs to the digitisation of invoices for functions such as factoring.
However, as concerns about outsized energy consumption lead initial adopters in the art world to cancel NFT sales, the extent to which the tokens might be of practical use is under question.
NFTs are typically held on the Ethereum blockchain, which is secured using a similar proof-of-work system to bitcoin, involving an energy-intensive computer function called mining. Estimates vary as to how much electricity an NFT transaction uses, but Joanie Lemercier, a French artist who sold six pieces of so-called cryptoart in 2019, worked out that in just 10 seconds, his sale used 8,754 KWh – or more than that used by his entire studio over two years.
“During unprecedented temperature increases, sea level rise, the total loss of permanent sea ice, widespread species extinction, countless severe weather events, and all the other hallmarks of total climate collapse, this kind of gleeful wastefulness is, and I am not being hyperbolic, a crime against humanity,” says Everest Pipkin, another digital artist, in a recent blog post.
The carbon footprint of NFTs in their current form, therefore, would make scaling them up beyond a handful of digital art sales to tokenise trade assets unfeasible at best.
However, solutions are at hand. “There are many better ways [than proof of work] of ordering transactions,” says Crook. “One of the ways we do that is by creating trusted nodes on a network to validate them. A good example of that is Corda. There are already technology choices out there that you could use to do NFTs that will not result in this huge electricity footprint. I don’t doubt that if you issue an NFT on Ethereum that there is an outsized environmental impact, however that is not where we are going to end up over five or 10 years.”
Speaking to GTR in 2019, Amy Fisher, then head of business development at R3, the blockchain firm behind Corda, explained that Corda’s peer-to-peer architecture means it only involves parties to the transaction, as opposed to the entire network, as is the case with public blockchains like Ethereum. “This avoids the high time and computing resources that public blockchain consensus requires, which serves as a serious impediment to scalability, not to mention wasted resources,” she said.
“The environmental impact of any technology is dependent on the facts and circumstances of that specific technology,” adds David Sutter, chief product officer at TradeIX, which runs the technology platform for the Marco Polo Network. “So, a digital token or a tokenised payment obligation on Corda would have a vastly different environmental impact than a tokenised payment obligation on bitcoin or on Ethereum. The network on which the token is issued and managed is really what would define the environmental impact.”
New name for an old concept
As long as the energy consumption problem is solved, the idea of using NFTs to create immutable digital documents that can act as a linchpin for trade finance networks seems like a feasible one – albeit one that is somewhat familiar.
“Most blockchain companies are already doing some level of tokenisation,” says TradeIX’s Sutter. “At Marco Polo Network, we have tokenised payment obligations, invoices, purchase orders, logistics information, identity, and have plans to tokenise many more trade and supply chain assets.” He adds that the term NFT is being used primarily as a “marketing buzzword” – which isn’t necessarily a negative.
“What you’re seeing here is a dynamic that is not new in the blockchain space, which is that people often find different ways of describing the same thing,” he tells GTR. “This is ultimately a good thing as it raises awareness. If someone talks about an NFT, given the publicity around them, the general public may now understand what is happening and the benefits of the technology more than if someone talks about tokenisation.”
Whether or not NFTs are indeed a new development that could be leveraged in trade, or simply a new name for a technique that is already in use, the benefits of them are clear, and are the same as those that blockchain technology providers have been extolling for years. Tokenising trade documents brings to the table a single source of truth, multiparty automation, fraud reduction, greater transparency and trust – as well as removing cumbersome paper-based processes from the equation.