$600K Memes: A Primer on NFTs
NFTs are the latest thing from the cryptocurrency world to hit mainstream media. From Nyan Cat being sold as an NFT for $600K to fashion houses making clothing items that don’t exist, NFTs are making their mark.
What is an NFT
NFT stands for non-fungible token. While that doesn’t make it more understandable, it gives the key detail: “non-fungible”.
What exactly does a non-fungible asset mean?
Let’s examine this by looking at the opposite: fungible. A fungible asset is something that can easily be interchanged. The best way to understand this is to examine it through the lens of currency.
Let’s say Bob has a $20 bill and Alice has two $10 bills. If Alice wants to exchange her two $10 bills for a single $20 with Bob, she can do so and her assets won’t lose any value. The bill could be ripped or wrinkled, but regardless of these attributes, it is exchangeable.
So if fungible means that the value of something is independent of its attributes, then non-fungible means the value of an asset is dependent on its attributes.
Taking this definition of non-fungible, we can construct the definition of a non-fungible asset to be: an asset whose value is dependent on the attributes it has.
Spinning the example of Bob and Alice, we can create a non-fungible asset. If Bob was a currency collector and had a $20 bill with a special serial number (this becomes an attribute for the bill and changes its value); the value of his $20 is not dependent on the note’s value rather the serial number. Because of this key attribute, Alice can’t exchange her two $10 bills for his $20 bill. Bob’s particular $20 bill is more valuable than Alice’s two $10 bills thanks to the serial number.
The asset, in this case, is the $20 bill, and the attribute is the serial number. An NFT takes these concepts and applies them to digital assets. Digital assets include images, videos, documents, or anything that is stored digitally.
The important thing to note is that NFTs are not digital assets, but a record of the attribute that makes an asset unique and who owns the asset. Think of an NFT as the authenticity certificate for the $20 bill. Without the certificate, the $20 becomes fungible and can easily be interchanged.
NFTs are used on blockchain networks. A blockchain network is a digital ledger (similar to a database)that is shared amongst all participating devices. The distributed feature of a blockchain means the data must be the same on all devices giving it 2 main advantages over the ownership of physical assets.
Security
Blockchain technology makes NFTs very secure. Unlike storing diamonds in a vault that could be broken into, there is yet to be a technology strong enough to hack a blockchain. This means any ownership contract an individual has, cannot be changed and can exist on the blockchain network forever.
Authenticity verification
Due to the unchangeable and distributed nature of a blockchain, any asset that is tied to a contract can easily be verified as authentic. For any collector or investor, this provides a level of safety that traditionally may not be available through physical assets. Imagine buying a Louis Vuitton handbag and not being able to identify whether it is authentic or not no matter how many tests you do. Blockchain technology solves this issue by having NFT contracts exist forever on the network.
Applications
Now that we have explored the fundamentals of NFTs, let’s take a look into some of the different areas they are currently used.
Digital Art
Digital art is at the center of the NFT boom. The ability to own a piece of digital art is starting to have the same allure as owning real pieces of art. This places the power back into the hands of the artists who can then choose their desired quantity of reproductions, generate royalties from the continued sale of their artwork, and have full control over the pricing of their artwork.
Sports
NFTs have also made their mark in sports as well. Every fan wants to own an exciting moment; whether it is Kawhi’s buzzer-beater or Encarnacion’s walk-off home run. Through NFTs, sports leagues can provide these moments for sale, and engage fans further with the sport. The NBA has already implemented it through NBA TopShot. NBA TopShot allows fans to bid on the most iconic moments in the NBA and own them. A similar concept is also being developed for UFC as well.
Fashion
Picture this: you just bought a new pair of Dior Jordans and are ready to flex them on Instagram; you already know you’re going to get so many likes. That is until one of your friends goes out to the store and takes a picture of themselves merely trying it on, only to receive the same attention as your post. They didn’t buy it, but they got the same bragging rights as you. NFTs have brought about a new way to show off the coolest fashion items that only real owners can stunt.
Through designing the coolest sneakers that are only available on a digital platform, owners get the sole right to use them in their pictures. Just like in video games where you can dress your character with cool and rare skins, NFTs allow you to dress your pictures with cool and rare clothing items.
Now each application of non-fungible tokens extends far beyond the scope of this article, but the basic idea behind each one is: if any set of players in an industry are dealing with unique assets, there is a potential for the involvement of NFTs to allow the introduction of digitization for the trade of these assets.
Outlook
Corporations are starting to see the benefits NFTs carry for engaging their customers and developing new revenue streams. Legacy company Playboy announced the development of NFTs to help customers own some of the most iconic moments in the magazine. Following the announcement, company shares shot up. Sotheby’s, a fine art auctioneer, recently sold an NFT artwork collection for $17 million. One could argue that the interest in NFTs may soon wane (or not) but with such large amounts of money tied up in them, a high degree of confidence in a positive long-term outlook can be expected.
While NFTs may seem like how cryptocurrency was in 2017, the reality might be far from it. Individuals are more cognizant of what they are investing in and by revolutionizing traditional industries and corporations, larger amounts of institutional money are flowing into them. This inflow of capital already makes it different than 2017, and it is only a matter of time before investing in NFTs becomes as alluring as collectibles.
Sources
Jai Betala is the founder of investBETA, an organization aiming to educate young individuals on the basics of value investing. He is happy to serve the Junior Economist as a guest writer on its mission to encourage discourse amongst youth on the business world and spark lifelong interests in business and innovation.
