FPOViews: Non-Fungible Tokens (NFT)

Introduction

There is a good chance you have heard the acronym NFT. That’s because NFTs went from virtual obscurity to dinner conversation starter in the spring of last year after an artist named Beeple used an NFT to sell a piece of artwork for $69 million.

So, you may have heard of an NFT. But you may not be familiar with what they are and how they work. So, let’s break them down.

A Non-Fungible Token (NFT) will play an important role in the digital world going forward. Conceptually, it provides a public facing title to a digital asset. This title is then housed on the blockchain digital ledger. Because it is on the public blockchain, everyone can see that you own the asset. However, the devil is in the details as to what “ownership” and “digital asset” really mean when it comes to NFTs. This is something we will explain in more detail later in this paper.

NFTs are a trendy subject. They are generating a lot of buzz both inside technology circles and outside of them. We are being asked by both clients and family members if they should invest in NFTs. It is a question worth exploring.

The “Mona Lisa” is an extremely valuable painting. However, it is ultimately just a visual image. There are millions of physically printed and digitally rendered copies of it out in the world that are not worth much at all. You get, roughly, the same information looking at the original “Mona Lisa” (which is very valuable) as you do with a copy (which is far less valuable). What causes the huge difference in value for what, in many respects, are the same things? The answer is originality, plus a known trail of ownership (provenance) and singularity (there is only one known and verifiable original).

We value the original copy. The marketplace reflects that. There really is no other reason why the original is far more valuable than very good copies, whether they are physical or digital.

It’s been a long time since Da Vinci put paintbrush to canvas and produced the “Mona Lisa.” The world has changed. Today, much of the content that is created (such as movies, music, poetry, and art) rests in a digital form. Originals often lack any notable difference from copies of the original. A Marvin Gaye hit sounds the same whether it is streamed on Spotify or downloaded from Napster.

In the digital world, things are easily copied and distributed. I can make a copy of this paper much more effortlessly than I would were I forced to recopy these words by hand. However, there remains no real verifiable provenance, or chain of ownership, for any copies I might make. That is until NFTs came along.

In short, NFTs, try to emulate aspects of the physical world of originality, provenance, and singularity via blockchain and smart contracts. It seeks to create a market for digital created/existing things that would otherwise have very little value, as they lack these three key attributes that humans and the marketplace deem valuable.

It can be somewhat artificial and contrived when you consider how originality helps to increase the value of a digital asset. But, as is with all pieces of art, value is in the eye of the beholder.

Above is “Onement VI” by Barnett Newman, which sold at auction for $48.5 million. It’s hard to argue that the art marketplace isn’t artificial and contrived when looking at the above.

When you look at either (taste or aesthetics aside), there is nothing at all obvious as to why these are worth much of anything. It is only the market for originality or supply and demand that created a vehicle for such things to gather multi-million-dollar valuations.

Human desires, and the marketplaces that feed and support these desires, are often based on human psychology. Human psychology is powerful, fickle, and volatile. It can also change dramatically based on circumstance. For instance, in a war-torn place (where food, medicines, and safe shelter are hard to come by) most would quickly take a loaf of bread over a “valuable” painting.

NFTs simply feed into and support those same human desires and psychology in the digital world, just as the art market has done for many years in the non-digital world. These markets’ consistency depend on the exact same things: fickle human psychology and environmental stability. Humans with disposable income often collect seemingly useless things, things that fall outside of our basic physiological or safety needs.

NFTs are only new in their implementation and underlying mechanisms. While we all understand Certificates of Authenticity (provenance) in the physical world, NFTs are not so readily (or easily) understandable, due to their newness and technical nature.

Fungible vs. Non-Fungible

NFTs are a special kind of cryptoasset. While fungible tokens (like currency) are used to store value, non-fungible tokens are used to store data or digital assets (like artworks, recordings, and virtual real estate or pets).

When it comes to fungible tokens, each token is worth the same amount. Every bitcoin is worth as much as every other bitcoin. Every five-dollar bill is worth $5, whether it is in your wallet or mine. NFTs, on the other hand, are all unique.

Concert tickets, as an example, are non-fungible. Even if every Grateful Dead ticket is the same price, they aren’t directly exchangeable. Each represents a specific seat and a specific date (no other ticket will have those exact characteristic). There is also a tacit agreement between supplier and customer that the price will float based on customer desires and availability.

Because each NFT is stored on a blockchain, there is an immutable record starting with the token’s creation and including every sale of it over time. It’s complete provenance if you will.

You can only buy or sell some NFTs directly via a compatible crypto wallet.

You might consider NFT by a different name: “unique digital asset related blockchain entry”. Although this may be a more appropriate moniker for NFT, the phrase does not roll off one’s tongue. So, NFT it is!

FPOV’s View

If the art world can survive and thrive via human psychology and market demand, then there’s no reason why NFTs can’t do the same for digital assets. But, like the art world is and always has been, expect the NFT world to be equally as fickle, if not more so.

Buyer Beware. It is important to keep in mind that there are a high number of fraudulent NFTs in the mix. This is because digital criminals are experimenting with making money from ignorant buyers. Also, the rules of this game are still being written. I can create an NFT of a Marvin Gaye song, but does that mean I own the rights to the song? Absolutely not!

On the positive side, more content will be digital in the future. Because of this, NFTs make sense and fit a need. Furthermore, the actual NFT itself is seemingly much less susceptible to counterfeiting, which plagues the art world, and even the collector worlds of wine, coins and, more recently, bourbon.

NFTs can and likely will extended to other assets besides digital art, music, and virtual pets. Any digital content is a candidate, and that might include IP of every kind. Right now, even with an NFT, anyone can still read and use the digital asset the NFT is storing (whether that be an article, artwork, or tweet), but it gives one person (or a small group of people) “ownership” in that work.

But it is important to underline that buying an NFT doesn’t confer copyright ownership (I still do not own the rights to any of Marvin Gaye’s work, even if I purchase an NFT of his song). Owning an NFT, by itself, doesn’t grant one the right to print or distribute the work without the copyright holder’s permission. This is doubly so if the artist didn’t authorize the NFT in the first place. This means that those who don’t own the NFT are still able to access it and the rightsholder is free to continue providing it, selling it or otherwise distributing it to the public. That Marvin Gaye song will still be available on your favorite streaming service, even if someone purchases an NFT of the song and stores it away in a digital vault.

In many ways, buying an NFT is far more akin to buying a limited-edition poster or an autographed copy of a book. It is special and (more) unique to you, but that doesn’t mean that the original work is now yours. You own the album, but not the recording rights. It confers to you no rights that others do not possess, you just have a slightly more unique (purely psychological) connection to it.

If NFTs can, in the future, be extended to include these various rights, then there would be more utility to them for other types of digital IP.  We know of no such plans, however, to institute such a true ownership extension (though one evolving wouldn’t surprise us should NFTs become far more commonplace).

Getting Started

While there is not now any direct/obvious utility in the non-arts, business world, this might change in the future.  Accordingly, we suggest adding NFTs, and the technology behind them (blockchain, digital ledger, etc.), to your RIVERS OF INFORMATION®. This is because this type of technology is going to play an important role in the future, although what role is still being understood. At the very least, you can be apprised early of something interesting or novel that a competitor might be trying in your space with NFTs. Hey, maybe that competitor could be you. Maybe your organization can find a way to “hit a chord” with NFT enthusiasts and use NFTs to generate some additional income or gain credibility and cache by doing something novel in an edgy space.

Summary

More and more mainstream artists are getting involved in the NFT space — especially from the world of music. In early March 2021, the band Kings of Leon released their new album in the form of multiple NFTs. Depending on which a fan buys, various perks would be unlocked — like alternate cover art, limited-edition vinyl, and even a “golden ticket” to a VIP concert experience.

Director Quentin Tarantino has been considering releasing/selling pages of original scripts or movie still images as NFTs. Why not? It is a new market that can generate some serious revenue for assets that were, nonetheless, going to be created or have already been created.

NFTs’ more practical uses (outside of the human psychological desire to “own” something unique) are not entirely clear just yet. This is especially true when the ownership pertains solely to the asset and not the ownership behind the asset itself (copyright, etc.) However, if there is one thing clear, this technology will continue to transform.

For those thinking of investing in NFTs, know that it is a high risk and volatile market. This likely will continue for some time. However, the equilibrium of market forces should help to discipline the NFT system and new possible capabilities might be added that increase the actual value of NFT ownership, such as copyright visibility and transferability.

While we would hesitate to recommend investing heavily in NFTs, this technology is worth exploring. It is also worth considering creative ways that you can use NFTs to bolster your organization’s brand and gain credibility as an edgy innovator in a unique space.