How NFTs could influence the rail market

Non-fungible tokens have been the talk of the town for a long time: German Youtuber Fynn Kliemann, Twitter CEO Jack Dorsey and even the trading house Christie’s held auctions with non-fungible tokens (NFTs). So far, their use is mainly a topic in the art market, but NFTs have potential in other areas as well: the NFT blockchain is not limited to its use as a cryptocurrency platform alone. For all the hype, however, there is also justified criticism – the carbon footprint of NFT transactions is enormous, prices for art objects skyrocketed and have long since reached disproportionality before recently plummeting again.

How do you get from digital art to application areas in the rail market? We outline this in the following Insight.

Digression Blockchain: How data storage in the blockchain works

A blockchain is a kind of database composed of blocks. These blocks are strung together like pearls on a necklace and are lined up one after the other. Each block contains the data to be stored in it and a unique hash value.

Hashing is the conversion of a character string into a numerical value. This is often shorter than the original string and is called a hash value. The hash value is a kind of checksum and ensures that the data content has not been changed. In addition to their own hash values, the individual blocks of the chain also know the value of the preceding block. Through this, the blockchain continuously authenticates itself in a chain reaction – if a hash is changed, this chain breaks. This ensures the security of the databases against manipulation. A circumstance that NFTs take advantage of.

Non-fungible tokens – what is that?

A distinction is made between fungible and non-fungible tokens. Fungible tokens are mainly known from cryptocurrencies. Tokens are exchangeable here. The same principle applies to analogue currency. Every 20-euro note has exactly the same value. It doesn’t matter which note you own or use as a means of payment. Non-fungible tokens do not correspond to this principle. They represent a concrete object and depict ownership digitally. The only thing the two types of tokens have in common is that they are stored in the blockchain. NFTs are therefore unique tokens in a blockchain with which ownership can be represented beyond doubt. Moreover, they cannot be multiplied as often as desired and are therefore particularly suitable for representing possessions in a limited and unique way in the digital space. Thus, they can function as the basis for a blockchain-based digital economy.

Crypto Collectibles and NFT Art

Currently, the most relevant and widespread use cases of NFTs are crypto-art and digital collectibles. Musicians and other artists make their work available for purchase in digital form. For example, the singer Grimes, the band Kings of Leon or the German Youtuber Fynn Kliemann. Twitter CEO Jack Dorsey sold the digital copy of the first tweet, the traditional auction house Christie’s auctioned an NFT artwork by the artist Beeple. For the first time in the auction house’s history, it was also possible to pay with cryptocurrency.

Digital art has not had the status of analogue artwork – it could be copied, duplicated and easily shared. Unlike the brushstrokes of an analogue art copy, for example, it was previously impossible to tell in the digital space which file was the original work. NFTs have changed that.

Besides the art industry, one of the biggest beneficiaries is the gaming industry. Using NFTs, individual objects such as clothing, weapons or even equipment can be created and purchased; in the blockchain game Axie Infinity, a virtual stretch of land was sold for 1.5 million US dollars.

Not only digital art objects or content from digital games can be tokenised: For example, the fashion sector and the food industry are using blockchain technology to make supply chains more transparent. Dolce & Gabbana announced that they would launch an exclusive NFT collection. Furthermore, copyrights to digital content such as texts, videos or music could be managed, identity cards, vaccination cards or other important documents could be secured via the blockchain. Falsification of documents would thus be practically impossible. Almost every previously analogue document can be transferred to the digital domain. In the future, universities could create graduate certificates as NFTs, real estate sales could be processed via the blockchain as NFTs. The use cases for NFTs seem almost endless and herald a digitised world.

Why the hype is far from over

With all the hype, however, one thing seems to be forgotten: In order to be written down, the blockchain consumes an enormous amount of energy. The process of writing down, also known as mining, is carried out by countless computers at the same time – so the mining of Bitcoins alone consumes more energy annually than the Netherlands, for example. According to a calculation model from Cambridge University, mining energy consumption will increase continuously in the coming years. NFTs are not yet taken into account here. According to Digiconomist, each Bitcoin transaction currently consumes as much electricity as over 1.8 million Visa credit card transactions. Nevertheless, the benefits of the technology cannot be dismissed out of hand, nor can the hype surrounding NFTs. And the hype is far from over. Apart from the theoretical benefits, another indicator for the success of NFTs is the willingness of established institutions and companies to invest in new structures. For example, Deutsche Börse together with Commerzbank recently invested a double-digit million amount in the Fintech 360X. The start-up aims to create NFT marketplaces for art and real estate. Market developments clearly show that such an investment can pay off: Opensea, the largest marketplace in NFTs, is worth 1.5 billion US dollars. After the hype around NFTs seemed to die down somewhat in mid-June 2021 with monthly sales below 130 million US dollars, sales shot up to over 3 billion US dollars in September 2021, according to Nonfungible.com.

And what’s in it for the rail market?

Stability, long-term plannability and support in digitalisation. What initially sounds like a potentially groundbreaking change in the industry is quickly met with disillusionment:

Rail transport companies could sell tickets far in advance to intermediaries. This guarantees a fixed price per ticket. The company can calculate with a full load, even if this then fails to materialise. The risk is borne by the intermediary. In addition to the ability to plan with certainty, the transport companies benefit from other advantages: Instead of a B2C sales strategy with high costs for customer support and individual sales processing, NFTs can be used to switch to a B2B model due to the clear allocation and forgery protection of tickets. NFTs can also be useful in logistics and freight transport, precisely because of their immutability and transparency. Thus, information about origin, transport route and storage location can be stored and retrieved together with the product. With each new scan, new metadata is also added. The transport of goods could thus be made more efficient and cost-saving.

There is therefore a concrete benefit for the railway market that goes beyond use cases in the area of cybersecurity. But one thing should be considered: Hardly any means of transport is so closely linked with green, low-emission mobility as rail. In all climate policy goals, the railways are repeatedly placed at the centre of attention. So, can it of all transport modes afford to rely on such a high-emission technology as blockchain? The answer to this must be “no”. All the more reason to question why Deutsche Bahn has had an entire department researching various use cases for blockchain technology since 2018.