NFTs are a joke.
That is probably the first thought that comes to mind when most of us come across the phenomenon that has swept crypto marketplaces in the last year, often in the form of crudely drawn, pixelated digital pictures (think: CryptoPunks) that look like they were quickly scribbled together on MS Paint, or some variant of digital cute animals in different poses.
What makes it even more unfathomable for the average person is that prices of these so called digital collectibles can be astronomical, particularly when one can simply “right click, save as” to download the exact same picture onto your phone.
CryptoPunks - often considered the original NFT collection that started back in 2017, has a price floor of around US$400,000 each. Bored Ape Yacht Club, another NFT collection that has generated tremendous enthusiasm amongst its collectors, trade at around US$200,000. Then of course there’s Ether Rocks, which is literally a drawing of a rock in different shades - recently transacting hands at $1.7 million in August earlier this year.
Let’s be clear, a lot of the NFT projects out there will trend towards zero. 99% of these digital collections will be worthless in a couple years when the fad dies down and a bear market in the broader crypto market ensues.
However, that does not mean that the technology that underpins these digital creations is meaningless.
In fact, just as bitcoin was the proof-of-concept for a decentralized exchange of value that functions digitally without a central authority, NFT is a new framework to ascribe ownership of digital assets that facilitates the birth of a new digital economy.
Overview
At the most basic level, non-fungible tokens, or NFTs, are simply recorded ownership of digital assets. Digital art such as those that we can “right-click and save as” are just one manifestation of the technology.
NFTs can be digital collectibles such as NBA Top Shots, they can be unique goods sold within the digital universe, and they can also be the gateway to gaming on the blockchain.
Digital Scarcity and Authenticated Provenance
One myth we have to debunk at the outset is the “right-click, save as” mentality that dismisses all NFTs as worthless.
While we often can’t get over how digital pieces can have value, we often forget that participants within a community can value scarce and authenticated goods that may not make sense to someone in another community.
For example, a simple baseball that retails for five to seven dollars at the mall is worth much more if it can be proved that it was used at an important game or part of a particular moment.
If that same baseball is signed by a famous player - say, Babe Ruth - somebody will probably pay a higher price to own that ball with some ink scribbled on it.
For someone with no appreciation of American sports and zero interest in baseball, I probably won’t pay $100,000 for a signed Babe Ruth baseball, but I would wager that some wealthy baseball fans might.
Another great example is with physical art.
In 2017, Christie’s auctioned what it calls the Last da Vinci, a painting that is purported to be the only known work from the grand master of the Renaissance still in private collection. Only 15 other works by Leonardo exists today and all of them are owned by museums around the world.
This, was the last chance to own a da Vinci.
Now, one can argue that technologies exist today that can easily and accurately replicate the painting, and many have done so. However, none of them will fetch the eye-popping sum of $450 million for a print of the Salvado Mundi, which was the price it fetched that fateful day at Rockerfeller Center.
Scarcity has value.
Authenticated, scarce items can be worth even more.
In a world where more of our lives are lived online, authenticated scarce digital assets can have outsized value - even if it has limited value to you.
Royalty Contracts and the Disintermediation of the Middleman
NFTs also provide a new platform for the creation or evolution of new business models.
Historically, when a piece of physical art is transacted between buyers and sellers, the artist almost never benefits from the subsequent sales of his work. In fact, when an artist sells through an art gallery, the dealer typically takes a 50 percent cut in the first transaction, simply by being the middleman that introduces the artist to the paying public.
Spotify, Youtube and the broader streaming industry are great examples where artists and creatives are at the mercy of the streaming giants.
Being the dominant platforms that they are, Spotify and Youtube can dictate the terms in which artists get paid for each stream, or in Youtube’s case - demonetize a content creator’s channel if the algorithm detects something they deem not to fit their requirements.
The introduction of NFTs have the potential to disrupt the business models of these platforms and bring control back to the artists.
For example, an artist can insert a clause into an NFT a royalty mechanism whereby every time her artwork changes hand, she receives a percent of the sale price. Not only does the artist get to go direct to her customers, she will finally benefit from any subsequent appreciation in the value of the work.
In music, artists are beginning to test the selling of their music directly to their fan base through NFTs.
Electronic DJ artist 3LAU has taken it a step further and will look to reward his most ardent fans who hold his NFTs a portion of any further earnings from the streaming of his songs through the creation of an NFT powered marketplace called Royal.
Not only can the artist now benefit from the direct sale of her work to her fans without paying the middleman, she can now also reward her NFT holders, thus creating a virtuous cycle where her community will be even more incentivized to spread her work to others.
Last Thoughts
There are many other applications that NFTs can bring about.
For example, gaming is another area where the introduction of the technology could theoretically allow a player to bring one digital item from one game into another game entirely.
A player possessing a certain item in World of Warcraft that is imbued with certain properties recorded on an NFT, for example, could bring that same item along into an entirely different game such as The Sims - since that NFT is entirely recorded on the blockchain.
As pointless as that is to someone who isn’t interested in gaming, it also highlights that we may not have the imagination to dream up the possibilities that this technology can bring.
NFTs are defined today by the headline market prices. But if the technology continues to develop, it is probably worth following the space as it continues to quietly disrupt existing business models and unleash new and exciting possibilities.
Further readings
Harvard Business Review, “How NFTs Create Value”, 10 Nov 2021
Harvard Business Review, “Making Sense of the NFT Marketplace”, 18 Nov 2021
3LAU, “$55M series A round led by a16z to build the future of music ownership”, 22 Nov 2021
a16z Future, “Why Web3 Matters”, 7 Oct 2021
a16z Future, “Play to Earn Gaming and How Work is Evolving in Web3” 11 Nov 2021
Real Vision Youtube Channel, "Non-Fungible Tokens (NFTs), Yield Curve Control, & Wobbling Equity Market (w/Raoul Pal)”, minute 24:40 onwards, 12 March 2021
Real Vision, “Rally: The Tokenization of Creator and Fan Economies”, 29 March 2021
Bankless Youtube Channel, “5 Mental Models for Web3”, minute 35 on, 1 Nov 2021