NFT 2.0: The comeback digital assets needed

When they were first invented, non-fungible tokens experienced insurmountable hype, with some reaching values of more than $69 million at their absolute peak in 2021. The concept behind NFTs is that they are units of data with proof of ownership that certify a digital asset as unique — essentially an authenticated version of a digital image. Investors trade, buy and sell these digital art pieces much like physical artwork. After a couple years, however, the excitement fizzled out, so their values quickly declined.

Nowadays, NFTs are widely considered a dead trend, unworthy of investment or attention. However, companies like BlackRock and JPMorgan have been experimenting with new uses for the concepts behind NFTs and how they generate revenue, and many businesses and investors are leaning into it. Many recognize this new wave of innovation as NFT 2.0, and it could be the very thing that revives its popularity and everyday financial usages. 

Where the first generation focused almost entirely on trading digital collectibles, the second emphasizes new functionality and integration with real-world systems.

The original NFTs were static, relying on the supply and demand of its type. In the absence of a link to a physical attribution, they were extremely volatile and susceptible to sudden (and deep) troughs and peaks. 

At first, general public participation in trading NFTs was enough to keep it moving and thriving. But eventually, issues began to arise. Oversupply, copycat projects and cryptocurrency downturns deteriorated public confidence. They were also fatally underdeveloped, leading to scams, fraud and market manipulation.

As a result of having no real-world utility beyond speculation, the dip in investment was enough to throw off NFT stability and temporarily curb it as a legitimate asset. In 2023, their average values crashed by 95% and 23 million people were left with worthless investments, leaving a bitter taste in the public’s mouth.

This purely speculative nature is a mistake that NFT 2.0 has patched, with its pinnacle of evolution this year. NFT 2.0 emphasizes the practical and tangible uses of NFTs in everyday life.

For example, developers improved blockchain, the foundational ledger system behind NFT transaction verifications. In recent years, blockchain mechanisms adopted Layer 2 solutions. Layer 2 solutions are secondary frameworks that improve the performance, speed and cost-effectiveness of the transaction-verification system — a principal function of non-fungible tokens. Since blockchain is so heavily integrated into NFT systems, its advancement consequently ameliorates NFTs as well. 

Layer 2 solutions make NFTs secure enough to apply to more practical tasks. In fact, startups like Propy and Roofstock, both NFT real-estate companies, have embraced NFT 2.0 by tokenizing property deeds to accelerate transactions and verify ownership on-chain. By and large, more companies are implementing NFTs to enhance consumer experience, ultimately bolstering consumer confidence and NFTs popularity in the market.

Within the realm of the asset’s original uses, NFT 2.0 also offers more robust investment options than before. Throughout NFT 1.0, the main objective of investors was to “flip” an acquired NFT — purchasing a digital token, waiting for the value to increase and selling it, ultimately making money off of the value fluctuation. But this eventually became very monotonous and, as such, was not economically set to last very long.

Now, NFT consumers can invest based on NFT project fundamentals, smart contract verifications and creator track records. The new multifunctionality of the digital assets presents benefits to everyday consumers as well as direct investors. 

In 2023, the Internal Revenue Service classified the transfer of NFTs as digital assets or property, instead of currency. Because long-term holdings have lower tax rates, it encourages patient investment over speculation. The more complex and legitimate forms of NFT investments suggest a more promising long-term involvement and returns.

There are still valid concerns that, at their core, NFTs are unreliable, and the high volatility still presents risk to investors. However, there has been a paradigm shift in consumer trust of these digital tokens due to improvements made between NFT 1.0 and NFT 2.0, which is a determining factor in the reliability, stability and legitimacy of NFTs. Since the crash in 2023, investors have begun treating NFTs as startups rather than collectibles. This means that they were no longer valued solely based on novelty, but also long-term utility and potential, ultimately preventing overspeculation. NFT integration into well-established corporations also provides the investment with an outbound link to stability. The technology has strong ties to blue-chip companies, like BMW and Yves Saint Laurent, so legitimacy is both preserved and insulated. Investing in NFTs through these companies can reduce the risk of unforeseen value crashes. 

The NFT 2.0 wave of innovation has demonstrated that the sector is prepared for a second life built upon the foundation of real utility and credibility, unlike before. While directly investing may still be risky, embracing the shift in small steps can both acclimate and benefit a consumer. 

Stephanie Bouserhal is an Opinion Columnist who writes about cryptocurrency in her column “Crypto Critiques.” She can be reached at scbous@umich.edu.

Source: https://www.michigandaily.com/opinion/columns/nft-2-0-the-comeback-digital-assets-needed/