Nonfungible tokens: Hype or the future of finance? | Business | Economy and finance news from a German perspective | DW | 17.11.2021

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Nonfungible tokens: Hype or the future of finance?

With its recent auction of a so-called nonfungible token (NFT), DW has ventured into what some believe could be the future world of finance. What has piqued our interest in trying out the much-vaunted technology?

That's what it's like in the world of cryptofinance: Wallets are no longer made of leather, instead, they are made of digits. In the case of DW's NFT auction, the corresponding wallet hides behind this: 0x277C535dF402837F89074D51761BBd8594475995.

This truly "cryptical" code contains — you guessed it — a cryptocurrency. We use Ether, or Ethereum, the second-largest cryptocurrency after Bitcoin.

Bitcoin, Ether, and many thousands of fellow cryptocoins all run on so-called blockchain technology. There's an endless ledger into which all cryptocurrency transactions are written — all payments, all transfers, and for everyone to see for eternity.

You no longer have high-profile intermediaries like central banks or governments overseeing, or possibly tinkering with currencies, because blockchain is essentially a public digital ledger of transactions that is duplicated and distributed across the entire network of computing systems on the blockchain.

Every block in the chain has its own unique nonce and hash which aren't easy to find especially on large chains. So-called miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. There are roughly four billion possible nonce/hash combinations that must be mined before the right one is found and can be added to the ledger.

The principle that digital blocks are distributed instead of copied or transferred creates a tamper-proof record of an asset, allowing full real-time access and public transparency.

Hunger for energy

Unfortunately, the computational power needed for mining or validating block transactions is so huge that the technology has drawn the ire of environmental activists who are criticizing its energy consumption.

A picture of mining machines at a bitcoin farm in Mabian Yi in southern China's Sichuan province

China's cryptomining community used to be the world's largest until the government banned their activities

However, the process behind it — called Proof of Work (POW) — could soon be replaced by the Proof of Stake (POS) alternative concept, which gives mining power mainly to those miners holding the biggest amounts of cryptoassets. This process is said to be less power-hungry.

Ethereum blockchain has announced it will make the switch to POS as soon as next year. Meanwhile, Ethereum as well as several other blockchain operators, have grown their business well beyond the mere payment services offered on the Bitcoin blockchain.

Bitcoin the power guzzler

Brave new blockchain world

For DW's auction, two distinct technological features are important: the nonfungible token (NFT) and a digital smart contract.

The NFT is a certificate of authenticity attached to a piece of digital data and entered into the blockchain ledger. In our auction, the NFT is called PressFreedomX30 and marks the data as an original work, distinguishing it from copies. It also identifies its owner at any specific moment in time.

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. Typically, they are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary's involvement or delay.

DW's smart contract makes sure that when the auction is over, the NFT is automatically transferred to the wallet of the highest bidder immediately after he or she has paid the price. It also includes a 15% fee for the platform operator. Moreover, our smart contract ensures that the auction's proceeds are then transferred to the wallet of Reporters Without Borders (RWB) — our beneficiaries. 

NFT-Versteigerung

To show our respect for Reporters Without Borders, DW has produced a video displaying "freedom of the press" written in 30 languages our organization works in

A network of computers executes the actions when conditions have been met and verified. This could even include contractual obligations, for instance provisions for previous owners, when the NFT is sold on to someone else.

Blockchain enthusiasts are full of praise for the multiple opportunities that open up with smart contracts, and are dreaming of a decentralized finance (DeFi) world in which even complex derivatives can be traded via smartphone wallets and without commercial banks as intermediaries.  

DeFi making finance better?

Decentralized finance has the potential to fundamentally disrupt existing structures and methods in the world of finance. The industry is facing change comparable only to the upheavals in the entertainment sector following the rise of Spotify, Netflix and the likes, who have grown bigger than traditional music and film studios ever were.

What dangers are hidden within the crypto art craze?

Especially high hopes are attached to the technology in countries where good old Main Street banking never really took hold as there was no legal framework and no stable national currencies.

This, however, doesn't automatically mean that the financial world of the future is intrinsically better, let alone cheaper for those using it. DW, for instance, has had to pay a so-called gas fee, or pricing value, required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform. When using credit card payment, the gas fee can be as high as 11%.

Comparing that with what traditional money services such as Western Union and Moneygram charge for transactions, the DeFi world has a problem that may seem even bigger than overcoming mistrust of a brand-new technology.

This article has been adapted from German.