Sep 10, 2021
A Primer on Non-fungible Tokens (NFTs)
NFTs
• A Non-Fungible Token (NFT) is a unique digital asset whose ownership is tracked on a blockchain
o Most NFT activity currently occurs on Ethereum.
o ‘Non-fungible’ means that something is unique and can’t be exchanged for something else.
o Bitcoin is fungible — you can swap one bitcoin for another with no difference.
• Assets that can be represented as NFTs range from digital goods such as digital art, to claims on physical assets such as real estate.
Why NFTs are important
It’s easy to dismiss NFTs as another crazy fad when mainstream media typically only covers the outrageous amount of money someone has paid for digital art, tweets or replays of NBA dunks.
The media usually neglects to explain that NFTs unlock new use cases and new business models.
Traditionally contracts, deeds, bills of sale, shares, titles, have conveyed and proven ownership.
The current transfer of property ownership is extremely labour-intensive and
expensive. By tokenising property rights, NFTs can make property easier to trade and manage.
NFTs are a new way to register ownership into a ledger, like entering a line into an excel sheet to record who owns what. The token is a digital receipt of your ownership rights.Unlike a record that’s kept in a central place, the ledger on the Ethereum blockchain is constantly updated and encrypted on multiple computers across the world.
Ownership and provenance are always immutably tracked by the blockchain. What’s yours is yours, without the need for a third party to verify.
In the traditional world, we’ve relied on layers of middlemen to establish trust in the transaction, exchange contracts and ensure that money changes hands.
Smart contracts (code that can specify a series of actions that happen as a result of specific triggers) can be used to ensure that both parties honour their agreements, replacing the need for lawyers and trust accounts.
NFTs go beyond a simple legal agreement. They also create the opportunity for new income streams — artists can attach stipulations to an NFT that ensures they get some of the proceeds every time the NFT gets resold, which allow them to benefit if their work increases in value.
NFTs has the potential to completely transform markets by:
• Making recording/transferring ownership more efficient and transparent
• Proving the authenticity and provenance of both physical and digital items
and allowing them to be traded without an intermediary
- Creating new business models for creators
Current Use Cases
Although property and NFTs may sound like a marriage made in blockchain, this space is not even close to reaching its infancy. The technology has yet to mature for homebuyers to utilise an NFT in the purchase of physical property.
There are other industries where NFTs are currently disrupting:
Art
The Mona Lisa is likely the most popular artwork worldwide, but most people would be hard-pressed to distinguish the painting from a replica.
Why do millions of people stand in line for hours in order to see something that they can purchase on a keyring? Well, of all the Mona Lisa’s in the world, there’s only one that counts.
• This indicates that the value of art is not in its physical form but in its perceived value as a result of its provenance and scarcity.
- To put it simply, people like to own original or at least limited-edition items.
NFTs allow us to create digital objects that are truly unique, with an individual history that can be tracked & verified, much like the one true Mona Lisa.
Digitizing art and putting it on a blockchain will be recognized as one of the most important developments in art history.
• Art auction house Sothebys uses ten factors to value art, and blockchains enable three of the most important ones:
o Rarity: Collectors can look at the blockchain and see exactly how many assets exist.
o Authenticity: Collectors can look at the blockchain and inspect an artist’s contract address to ensure artwork is authentic and made by a specific artist. Forgeries are not possible if you inspect the blockchain.
o Historical Importance: Collectors can see exactly who owned a piece of art, when they owned it, and even how much they spent on it
Artists can use NFTs to sell directly to their fans and collect royalties every time their NFTs are resold.
• This is an entirely new revenue stream that is only possible because of true digital ownership that can encode royalty logic in the media itself.
• A common critique is that because digital art be copied, they don’t carry much value
o This is not true — the more a file is shared or seen, the more cultural value it accrues
§ Consider the mass production of posters or t-shirts of Warhol imagery which drives up the value
o NFTs introduce a new possibility that enables true ownership to exist while a work continues to freely circulate online
• NFTs are designed to give you something that can’t be copied: ownership of the work (however the artist can still retain the copyright and reproduction rights, just like with physical artwork).
o To put it in terms of physical art collecting: anyone can buy a Picasso print. But only one person can own the original.
o The pride of ownership is one reason to own an NFT — it’s 100% yours, even if someone else can enjoy it.
