Introduction
One new asset you might have seen exploding onto the market is the NFT or Non-Fungible Token.
From music and art to everyday items like toilet paper, these
digital assets are “selling like 17th Century exotic Dutch tulips,” say
Forbes writers Robyn Conti and John Schmidt.
The question is: are they worth the money (or the hype)?
Some experts feel they are “a bubble poised to pop,” while others
believe NFTs are going to change investing forever.
In this special report, we’ll take a close look at what NFTs are, how
they can help your business and so much more.
NFTs Explained
What exactly is an NFT?
It’s a digital asset that represents some real-world object like
music, art, in-game items, or videos. NFTs are bought and sold
online, often with cryptocurrency, and are usually encoded with
the same underlying software as many cryptos.
NFTs are becoming well-known now, though they’ve been around
since 2014, because they’re an increasingly popular way to buy
and sell digital artwork.
Conti and Schmidt report that “a staggering $174 million has been
spent on NFTs since November 2017.”
NFTs are usually either one of a kind, or one of a very limited run,
so they have unique identifying codes. Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain
Council and managing editor of Yellow Umbrella Ventures says
they “essentially … create digital scarcity.”
This contrasts with most digital creations, which are almost
always practically infinite in supply.
So, cutting off the supply of a given asset should raise its value
(assuming it’s actually in demand at that moment).
Many NFTs, especially nowadays, have been digital works that
already exist in some form elsewhere (like securitized versions of
digital artwork that’s already out on Instagram).
Why are people willing to spend so much money on something
they could screenshot or download elsewhere?
“Because,” say Conti and Schmidt, “an NFT allows the buyer to
own the original item.”Also, since it has built-in authentication to serve as proof of
ownership, collectors can amass an online collection. Some
collectors even value “digital bragging rights” almost more than
the item they’ve purchased.
People are starting to answer the question: how do we assign
value to something that doesn’t exist? What is a digital object
worth?
“While we were all waiting for virtual worlds to spring up,” says
Joe Procopio, entrepreneur and founder of TeachingStartup.com
and GetSpiffy.com, “Facebook was selling out of Oculus.
While we were laughing or wincing at the pop culture references
in Ready Player One, Minecraft was letting its players build their
own blocky starter-kit societies.And while we were debating the ‘realness’ of Bitcoin as a
currency, someone was paying 170,000 real dollars for a
CryptoKitty.”
If you’re an entrepreneur, you can’t help but wonder about the
method of calculation on that $170,000 digital cat’s valuation.
The value of that CryptoKitty was determined by the expectation
that its value would increase over time. That same speculation
“drove the great alt-coin rush of 2017, and some painful lessons
resulted in a hardening of the rules of value for digital currency.”
Many have found that some of the “must-haves” for almost every
type of token come down to scarcity, supply and demand, ability
to transact, and tangible proof of ownership.
The digital coin is still only a virtual piece of money, and
ownership is still only in the virtual sense. But thanks to the implicit rules in the blockchain (documented by smart contracts),
virtual ownership became “real enough.”
What’s the difference between an NFT and cryptocurrency then?
NFT stands for Non-fungible token. A fungible asset, like physical
money and cryptocurrencies, can be traded or exchanged one for
another.
They’re also equal in value. One dollar is always equal to another
dollar and one Bitcoin equals any other Bitcoin.
In fact, cryptocurrency’s fungibility makes it a trusted means of
conducting transactions on the blockchain.
On the other hand, a non-fungible asset, even if built using the
same kind of programming as cryptocurrency, cannot be
exchanged with any other non-fungible asset. Each NFT has its own digital signature that makes it impossible for
it to be exchanged for (or equal to) another one.
For example, say you have two different video clips from an NBA
game.
One clip isn’t even necessarily equal to the other clip, much less to
an entirely different work of art. How NFTs Work
You’ve heard of blockchain, probably as the underlying process
that makes cryptocurrencies possible. It’s basically a ledger
recording transactions.
NFTS exist on a blockchain, usually the Ethereum blockchains
(although other blockchains support them as well).
An NFT is “minted” (created) from digital objects representing
both tangible and intangible items, including art, GIFs, videos,
sports highlights, collectibles, video game skins & avatars,
designer sneakers, and music.
You can even sell a tweet. In fact, Twitter co-founder Jack Dorsey
sold his very first tweet as an NFT for nearly $3 million!
Essentially, an NFT is like a physical collector’s item, only it’s mantel, you get a digital file. You also get exclusive ownership
rights because an NFT can only have one owner at a time.
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Its unique data makes it easy to verify ownership and transfer
tokens between owners. Also, the creator or the owner can store
specific information inside their NFT, such as the artist’s signature
in the metadata.
NFTs give artists and creators the power to protect and
authenticate their work like nothing before. With an NFT, a
creator can certify that a piece of art is one of a kind. This can
make the demand for NFT creation higher than ever.
The problem is, all the value proposition of a digital work is tied to
speculation—the promise that the value of that work will increase
(or at least hold steady) over time. Who’s making that promise,
though? This is where things can get sketchy, according to Joe
Procopio.
digital. Instead of buying a physical painting to hang over the “Speculative value is not to be confused with value derived from
usage.”
Let’s say you buy a saw to cut a piece of lumber for a shelf in your
bedroom. The value of that saw is directly tied to the cost of
making it plus how badly you need that board sawed. And as a
saw owner, you’re not really interested in whether or not the
value of the saw is going to go up over time. Speculative value is
tied to market value.
“Your company,” says Procopio, “is worth what’s gone into it +
the speculative value of the investment in that solution once that
solution reaches peak market saturation.”
Investors buy shares in a company for one reason: they believe
that down the road, someone else will pay more for those shares.
Collectibles like NFTs don’t have usage value like the saw does.
You buy a painting, and the value of that artwork is mostly tied to how it makes you feel, not how well it can cover a stain on your
wall.
Collectibles have speculative value—and lots of it. You can
purchase a piece of someone else’s painting, sitting on their wall.
You may never even see that painting in person, but that’s not the
point.
What you want is the return when someone else buys your piece
of that painting for more than you paid for it.
“When you get your head around that,” says Procopio, “it opens
up the possibilities for digital collectibles.”
When you stop caring about having an actual painting above your
mantel, it doesn’t really matter whether or not that painting even
exists in the real world—so long as the rules of ownership apply.
How to Use NFTs
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"Blockchain technology and NFTs afford artists and content
creators a unique opportunity to monetize their wares,” say Conti
and Schmidt.
Instead of having to rely on an art gallery or auction house, an
artist can sell their work directly to the consumer as an NFT. This
also lets them keep more of the profits.
Artists can also program in royalties so they will receive a
percentage of the sale when that art is sold to a new owner.
This is a very attractive feature to an artist, as they usually don’t
get any future proceeds after the art is first sold.
And art isn’t the only way to make money with NFTs. Brands like
Taco Bell and Charmin have auctioned off themed NFT art for
charity. Taco Bell’s art sold out in minutes, with the highest bids topping $3 million worth of cryptocoins. Charmin dubbed its
offering “NFTP” for non-fungible toilet paper.
A 2011-era GIF of a cat with a pop-tart body, called Nyan Cat, sold
for nearly $600,000 in February.
Sports is a big seller also. NBA Top Shot generated more than
$500 million in sales as of March, while a single LeBron James
highlight NFT brought in more than $200,000 on its own.
Even celebrities are jumping on the bandwagon. Snoop Dogg and
Lindsay Lohan have released unique memories, artwork, and
moments as securitized NFTs.
Let’s get back to that imaginary painting that only exists in the
digital world. The blockchain, NFTS, and a system of record for
ownership would seem to solve all your problems.
But here’s part of that problem you might not have thought
about—and its one entrepreneurs need to solve. The markets for physical things like saws are (for the most part) standardized and
regulated.