Non-fungible Tokens: Just a fad or here to stay?

Non-fungible Tokens (NFTs) have recently been all over the news and media. Reports of celebrities purchasing millions of dollars of NFTs and the founder of Twitter listing an autographed tweet for sale has only amplified the emerging trend. Actor Will Smith’s slap of comedian Chris Rock during their Oscars confrontation has already been sold for $45k in the first day. People are paying six-figures for clip arts of rocks, yet your mom most likely doesn’t understand what an NFT is. 

So what exactly is an NFT?

Fungibility and the Concept of Value

NFT stands for Non-fungible Token. “Fungible” refers to goods or commodities that are replaceable by another identical item (i.e. mutually interchangeable and indistinguishable). The most common example of a fungible asset is money: a $1 gold coin can easily be converted into 2x 50c coins or 10x 10c coins. If your friend lends you a $50 note, it doesn’t matter to them whether you repay them with a different $50 note, or two $20 notes and a $10 note, as long as the total equals $50. 

“Non-fungible” conversely refers to goods or commodities that are unique and irreplaceable. If your friend lends you their car, it wouldn’t be acceptable for you to return a different car, even if it is the same make and model. Cars are non-fungible, however the petrol powering the car is fungible. Other examples of non-fungible assets include diamonds, land and sports cards. Each unit of a non-fungible asset has unique qualities that add or subtract value.

NFTs are part of the Ethereum cryptocurrency blockchain. They can essentially be anything digital and are designed to give ownership of the work. 

Traditionally, the concept of value was defined from production costs and utility. However, in art and culture, the idea of sign value may be more significant. Sign value is derived from the prestige associated with owning an item. Owning original fine art may be valuable due to the reputation of the artist. In a similar manner, the ownership of digital items is tied to the societal perceptions of the creator’s reputation or its legacy in pop culture, despite it having no utility. This results in a completely speculative perception of value.

A Rapidly Expanding Market

Sales of NFTs have shot up from $13.7 million in 2020 to $2.5 billion in 2021. NFT sales range from art to fashion products and tweets, hence attracting the attention of VC investors who are drawn to the limitless possibilities for the creation and sale of NFTs. 

According to a recent report by PwC, blockchain technology has the potential to add $1.76 trillion to the global economy by 2030, with NFTs comprising a large share of that total.

Accessibility to Digital Assets

NFTs have enabled independent developers and artists to gain access to a diverse and vast market of digital assets, with unlimited possibilities for creative and commercial applications. Creators can sell their work directly to anyone willing to buy through the facilitation of secure blockchain transactions, thus tearing down barriers and enabling the global and instant creation and exchange of digital content.

Each token has a verifiable metadata and transaction log that prove the history of the ownership of that asset, whilst the blockchain provides security by keeping the data safe and impossible to replicate. This provides authenticity for each digital asset which creates endless opportunities for the practical application of NFTs:

Ticketing 

Ticket scalpers are a major issue for many venues that run events. Event hosts may often struggle with controlling the number of tickets whilst avoiding the creation of a reseller market. NFTs provide an opportunity for hosts to create non-transferable, digital tickets to derail value from ticket resales.

Documentation

NFTs have the potential to accelerate the use of digital documentations. For example, a digital passport would help travellers easily manage their important documents and alleviate some of the anxieties related to travel. Similarly, traditional contracts could become smart contracts that are digital legal bindings built securely on the blockchain. 

Supply Chain

It is often very difficult to verify where certain products come from and what’s in it. Using blockchain technology, products can be given an unique NFT identifier that can not be tempered with. This gives companies the ability to track their products from manufacturing through to shipping and delivery, provide customers with insights into where their money is going and maintain transparency within a company’s supply chain.

Future Implications

Up to now, NFTs has been predominantly associated with digital art, but recently it has been adopted into sports, fashion and music.  In 2020, the NBA licensed NBA TopShot to capture videos of NBA highlights and in March 2021 rapper Lil Pump released albums in the forms of NFTs. The broad application of NFTs demonstrate the potential to revolutionise art and the value for creators across a diverse range of industries in spite of its speculative and volatile nature.

Conclusion

NFTs have been receiving a lot of hype recently, leading many to believe that it may be a bubble. The concept of non-fungibility is new, however it has enabled digital goods to be monetised and allowed artists to instantly create and exchange their products globally. Yet, cryptocurrency is notorious for being volatile and NFTs are no different. There are many useful features to NFTs which are valuable and can be expected to last. However the phenomenon of 6-figure sales of digital assets is unlikely to persevere. Ultimately, some sort of rebalancing can be expected, where the hype starts to fade and NFTs find their niche.