Monkey Business or Going Ape? The Evolution of NFTS
“People don’t understand NFTs, Metaverse, and crypto today the same way they didn’t understand online shopping in 1995.” ― Anuj Jasani, CEO — JustBrandable & BudgetOK
Is there anything better guaranteed to send traditional investors running screaming for the hills and away from the promised land of Crypto than tales of absurdly priced monkey jpegs? Some of the excesses of the early days of the Non Fungible Token (NFT) market may remind those of us with longer memories of the heady days of the tech bubble, when companies traded on non-existent profits and P/E ratios heady enough to induce nosebleeds. Those burnt in the subsequent collapse might prudently mutter “once bitten, twice shy”. Yet, looking back, it is clear that the promise of many of those tech offerings were,in the event, more than fulfilled. If ‘Bluetooth’ then sounded like a quirky take on a long dead Viking to soften up investors for the then incomprehensible notion of technology talking without wires, we can now chuckle indulgently at those who failed to see that it would, in the not too distant future, control their music, alarm and heating systems, allow them to use their phone in the car, and even turn the lights on and off.
While it is, perhaps, understandable that people would laugh over the absurdity of selling a Jack Dorsey Tweet for $2.9 million that you can read anytime for free (indeed, by April of this year, it had fallen by 99%), they may be overlooking the more serious — and sensible — applications of NFTs.
FROM THE SLOUGH OF DESPOND TO THE SUNLIT UPLANDS?
It’s uncanny how every technological advance I have seen in my lifetime has followed a very similar pattern — from dismissal and derision to mass adoption. Shiv Sakhuja of Majik Labs says that the trajectory to date of NFTs is a classic example of the Gartner Hype Cycle which argues that disruptive technologies go through five stages. NFTs have now passed the stage of inflated expectations and are sunk in the trough of disillusionment. For a canny investor, this is where the real, long term, opportunities start to emerge.
So, what are NFTs and what earthly application do they have beyond proving you own a digital artwork of limited artistic merit that the world and its mother can download anyway?
NOT JUST SUPREMELY DISENGAGED PRIMATES
At its most basic, an NFT is proof of ownership of an asset which is recorded on the blockchain. “Non fungible” simply means that something is unique and, while it might be bought or sold, it cannot be replaced by something directly equivalent (unlike money, which is ‘fungible’, meaning for example two notes of identical value are identical and equivalent).
Art is an obvious point of comparison, and perhaps that is why it was the first stop on the NFT train. The Mona Lisa may smile down from a million prints, posters and websites, but only the Louvre owns her. Of course, this is where this particular comparison starts to go awry. Leonado’s masterpiece cannot, as yet, be cloned, even with the best digital reproductions. That is emphatically not true of a Beeple video which can be downloaded from the same file as the one accessible to the person who paid $6.6m for the NFT and what, apparently, amounts to bragging rights. The token may be non fungible, jpegs and gifs, less so.
Then there are the copyright complications which can render this form of “ownership” all but meaningless. No wonder that many are clueless that NFTs can in fact have functionality when news stories focus on vanity art products which seem to have so little intrinsic value. Yet as the market matures, we are likely to see more, and better, applications. This is because an NFT is a record of something unique that is associated with one person, and, more crucially, the dissemination of that information is owned and controlled by that person. It is here, then, in ticketing, or real estate, rather than the millionaires’ playground of the virtual yacht club that the enduring value of NFTs is most likely to be found. So what are some examples of applications that are likely to become more common?
A NON-EXHAUSTIVE LIST
Identification
We have plenty of pieces of documentation in the physical world which also provide a record of unique ownership or attainment — for example, the deeds to your house which state that you are the owner of the property; a passport which declares that His Majesty’s Government has given you permission to travel to Ibiza and — even more importantly — get home again; or degree and exam certificates which prove to your employer that you, Harry Potter, are the proud recipient of an OWL in Potions. While you could, in theory, swap your house for another, it would be an entirely different property, and no reputable University would let you swap your degree certificate in Modern Languages for one in Medicine. Currently, information is held in many places, your degree certificate will — you hope — be backed up by records held at the University, while the Land Registry will have Title Deeds. If you are on holiday and lose your passport, you might have a nightmarish few days — especially if you leave it in the taxi en-route to the airport — while you find the local embassy or consulate. Done right, the blockchain could be a far more secure and accessible place to store this information.
It could also allow you to control who sees what and when. In the physical world, it is hard to compartmentalise our identity documentation. The Customs Official may need to see your passport number and biometric data and the DVLA your address and date of birth, but others do not. For those youthful enough to be challenged trying to get into a club or buy a bottle in an off licence they are forced, potentially, to reveal far more information about themselves than they may be comfortable with. Most of us would not, willingly, hand over our address to a burly stranger late at night.
Personal information is also scattered across the internet like confetti: it’s the trade-off for buying online, as companies greedily seek to know more about the customer. However, it also makes us vulnerable: identity theft is expensive, a cause of real upset and frustration, and all too common. It is one of the biggest headaches for both consumers and businesses. Meanwhile old-fashioned forgers can, and do, replicate passports while fraudsters create different identities using the birth certificates of dead children. Of course, the blockchain has weaknesses too: encryption keys can be stolen, for example, but the main nettle society will have to grapple with is the fraught question of surveillance and online anonymity. This is rather beyond the scope of this post, but, in the final analysis, this may come down to choosing between a system that allows greater personal control of who can access our details — and for what purpose — and the current situation, where your data may be being collected without your knowledge and consent, something examined here by a data privacy specialist.
Tickets
An NFT ticket is a straight swap for a paper version or the one on your phone, and works in the same way. Beyond the ease of storage, however, an NFT ticket to a match or a concert has many advantages:
- Peace of mind — no more panicking about which drawer you left that ticket for the big match!
- The secondary (black) market — in a traditional system this is hard to tackle and works out badly for buyers and sellers alike. Meanwhile, highly organised touts buy in bulk and make tidy profits.
- Fraud — forged tickets hit the pockets of fans and the reputation of the club or venue.
These benefits may explain why football clubs like Lazio have begun to issue NFT season tickets. These also unlock added benefits and special offers, like discounts on merchandise or access to other experiences and products.
NFT tickets can also be a boon for the traveller wary about purchasing illiquid airline tickets. Making the process of purchase, changes or refunds smoother is not just good news for the consumer, however, they reduce distribution costs for the airline. No wonder that airlines such as Emirates have begun to investigate the potential.
Property
It isn’t just the deeds to your home that could be stored on the blockchain, it could open the way for more adventurous investing. Suppose you wanted to invest in property but also to divest while still maintaining a level of control over the asset allocation? Property ownership could be fractionalised with token holders splitting the rental payments which are, in turn, secured by a smart contract. “Tokenisation” will mean that you could, for example, buy a small part of a gorgeous multi-million pound villa in San Tropez, which seems a far more glamorous version of the Time Shares of the past! De-fi may enable people more straightforward access to mortgages as identity and ownership will be recorded on the blockchain, and property tokens can be used as collateral.
Provenance and supply chain
Where do your clothes or your expensive leather goods really come from? You might think you are only buying ethically produced goods, but sometimes even the biggest corporations are caught unawares. When the Rana Plaza building collapsed, killing over a thousand people, it was revealed that luxury goods as well as major household names were being produced there. NFTs could allow for greater transparency and traceability and perhaps play a part in eliminating bad practice.
They also have the capacity to iron out supply chain issues and streamline operations. For industries that require multiple components, like the car industry, this ability to track parts will help manage delays. Faults in a product line may be identified and resolved (or recalled) more speedily.
Art and Music
“The internet is not bad for creative people. Web2 is bad for creative people.” — @cdixon
If NFTs are currently causing artists a copyright headache, they might also provide a future solution. Once the blockchain becomes a more familiar place for artists, they will, in all likelihood, create NFTs around their work and then be in a position to sell it directly to their fans.
Musicians have been at the mercy of third parties for as long as discs have been pressed. In recent years, the hegemony of the streaming services has also put a limit on independence and profits: for example, the Spotify Royalty Calculator suggests that an artist receives $4 for every 1000 streams. That might be OK if you are Ed Sheeran, but for others who need to see 400,000–500,000 streams per month to be in the ball-park of the minimum wage, it can be a struggle. A musician selling an NFT album can sell directly and receive full royalties, without third party involvement.
As with tickets, artists can also offer add-on experiences or benefits. The Kings of Leon recently released NFT versions of their new album, these included 18 “golden ticket” NFTs which also unlocked guaranteed front row concert seats for life.
Because artists and musicians could earmark copyrights to the NFTs, they can also receive a percentage everytime an NFT changes hands, allowing them to benefit from any increase in value.
Collectibles
The concept of collectibles isn’t a new one. For example, for over 50 years, children and grown adults (mainly of the male persuasion, but let’s not assume!) have collected and traded Panini World Cup stickers. And, the cost keeps mounting, with a full album currently setting you back anywhere from £120 — £880. This year, however, FIFA is also entering into a partnership with Algorand to produce NFTs — which they coyly call collectibles — for the Qatar World Cup. These will take the form of “affordable, inclusive and accessible” collectible “moments” and art. An animated great moment in World Cup history which you can carry on your phone is certain to hold more appeal for the youthful cohort within the 5 billion people who are expected to watch the tournament this year.
Gaming
In game purchases are a huge market for gaming companies. Unique in-game characters or objects could be NFTs that can be traded or sold. For a generation who played the FIFA computer games alongside taking part in Fantasy Football leagues or for those who created their own Dungeons and Dragons characters, it isn’t hard to see where this might go!
THE FUTURE
With so many applications, it isn’t any wonder that the big boys are getting interested in the potential to unlock value with NFTs. Adidas, Coca Cola, McDonalds, Mastercard and many more multinationals have announced or launched projects in the space. As with all asset classes, spotting opportunities and sustainable applications will be key. As investors, we think that analysing the trends and identifying the beneficiaries in this market full of promise will be a rewarding experience.
