NFTs can revolutionize SMEs

Nida Khan is the CEO of Nash fintechX, a technology solutions provider, based in Luxembourg. Nida holds a doctorate in computer science and has done pioneering work in the blockchain space, related to social finance, governance, micropayments, and profit-sharing investment accounts. Her PhD research proposal was the recipient of a prestigious grant given by the government of Luxembourg for innovative industrial projects. She was ranked as the 12th most influential woman in Islamic business and finance in 2019 and 2020.

NFTs provide the requisite information technology tools through the blockchain framework that will provide a digital marketplace for the SME to scale and grow

  

NFTs or non-fungible tokens are a breakthrough technological innovation with the potential to disrupt the digital marketplace by blurring the boundary between the physical and virtual world. NFTs have garnered significant public attention by the sale of Jack Dorsey’s tweet for $2.9 million, Beeple’s sale of digital art NFT for $69 million and Tim Berners-Lee sale of World Wide Web source code NFT for $5.4 million. The sale price might overwhelm but is indicative of community interest and support of the novel offering based on blockchain. They are expected to go more mainstream with eBay offering NFT listings and Shopify permitting NFT merchants to use its platform like other businesses to sell directly to collectors.

NFTs are tokens issued using a blockchain-based infrastructure that validate ownership of unique assets like art, real estate or any item of interest that necessitates an ownership entitlement like a music file, software or even selfies. Its use is targeted towards the digital marketplace. In the upsurge towards a digital transformation of economies, triggered by the pandemic, the physical marketplace requires a digital representation and this necessitates the recognition of physical attributes relevant to an asset to exist in the virtual world like ownership or scarcity. Non-fungible assets are those that are not interchangeable whereas fungible assets are those that can be interchanged like money. Non-fungible assets would be a car or home and blockchain-based tokens that can be an apt representation of these non-fungible assets are NFTs, which can indicate ownership and facilitate resale of the underlying asset accompanied by a transfer of ownership. A secondary application in DeFi or decentralized finance would be the usage of NFT as a collateral for a loan as in the case of financial dealings in the real world to ensure replication in the digital world.

According to the World Bank, SMEs comprise majority of the businesses globally, accounting for approximately 50% of the global business and over 90% of the employment. Yet, they are plagued by several shortcomings with the pertinent ones with respect to the discussion on hand being limited access to finance, lack of comprehensive databases, restricted R&D, poorly developed sales channels, inadequate financial inclusion and third parties deriving major benefits from product sales as opposed to the goods originator. Inadequate use of information technology tools is also a major impediment to progress.

When we look at the DeFi landscape and couple it with NFTs, we would be able to mitigate quite a many of these challenges exploiting the blockchain-based infrastructure backing DeFi and NFTs as seen by a few examples below:

Lack of funds: Lack of access to finance can be mitigated by launching utility tokens through ICO’s, which, as an example, can be used to buy NFTs of the future products sold at promotional prices, from the initiating business. The SME can also get loans by creating a NFT of the collateral, for example real estate. The transparency associated with the SME will attract more investors when they have authentic information on the SME through the blockchain.

Inadequate R&D: SMEs are unable to provide a sufficient allocation of funds to R&D, which is crucial to gain a competitive edge with the rival businesses. The availability of authentic data regarding the business through the blockchain, capital redirection from sales and distribution to other business channels and increase in revenue from acquiring an enhanced profit from the NFT product sale would help the SME to dive into the requisite R&D activities to further their business activities.

Inadequate use of information technology: NFTs provide the requisite information technology tools through the blockchain framework that will provide a digital marketplace for the SME to scale and grow.

Financial inclusion: Many local merchants despite producing unique products remain hidden in the confines of their local community on account of lack of proper outreach and inability to scale, lacking access to financial services like bank accounts.

Crypto wallets can give the needed support to these merchants to transact with business partners in different geographical regions, while helping them to save their money in blockchain-based wallets.

There can be many other advantages derived by using NFTs, which all come through the employment of blockchain like transparency, a global consumer base, enhanced investor base, employment of predictive analytic approaches and real-time transactions. At the same time, there are many bottlenecks to be overcome like security of funds in blockchain-based wallets, complexity of usage, lack of skilled professionals in the domain, a technology that is still in its infancy with regards to scalability and still under scrutiny for contributing negatively to the environment. The risk vs benefit needs to be weighed whenever we consider the use of a decentralized database since the energy requirement of blockchain would always be higher than a centralized database. In the case of using NFTs for SMEs, the benefits far outweigh the negative outcomes and alternatives should be sought in terms of choice of blockchain platform to ensure that green NFTs are being created.

Lack of recognition of the SME: Each product from the SME will have a unique identifier through the NFT. There can be many advantages of this, apart from validating the ownership of the product/ asset. Any ticketing event can have even the seat numbers associated with each NFT sold for the event. Artists creating NFTs of their artwork can be recognized and the original artwork can be differentiated from duplications. Consider software, music and real estate where ownership would ensure the owner gaining access to the adequate rights associated with the asset backing the created NFTs. In times of pandemic, this kind of digital validation would ensure a seamless resale of the asset, if needed, after the first purchase. The parallel digital marketplace would ensure that the economy is not affected despite the upheavals caused by unforeseen lockdowns.

Poorly developed sales channels: Consider cottage industries in India where local manufacturers build exquisite pieces of handicraft and sell them for a nominal price. The same artwork travels to the major cities and fetches more than a 100% profit for the merchants, leaving the original artist deprived of any subsequent revenue post their original sale. NFTs can help to grant a certain percentage of the profit to the artist through any resale of his handicraft item. The metadata associated with NFT will have information related to the creator of the product and each time the product is sold, the original artist can earn a certain percentage from the sale price.

Lack of databases: SMEs that create NFTs of their products would by default record all transactions relating to the sale and purchase of their products on the blockchain. This comprehensive dataset, comprising of all transactions emanating from a SME per product category, considering a different set of NFT for each category, would be recorded immutably in the distributed database of the blockchain. This record of transactions would help the SME to utilize artificial intelligence to predict demand of a certain product and offer customized services gauging its client base. The plethora of opportunities is unlimited.

© Opinion 2021

Any opinions expressed in this article are the author’s own

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