A big part of the digital ownership conversation these days revolves around NFTs. Non-fungible tokens are similar to other types of cryptocurrency like Bitcoin or Ether, with a couple of small caveats. NFTs are unique in so far that each token has a distinct set of properties, whether that’s the name, description, or media. However, even if two NFTs look similar, they are distinctly unique from a provenance and history perspective.
NFTs are recognizable as part of the same collection, distinguishable from one another, and they cannot be divided into smaller pieces.
NFTs are often associated with some sort of digital image. Projects create NFTs with different applications in mind, but there are fundamentals that most NFTs share.
Digital NFTs have two pieces:
A token with a unique ID (the Non-Fungible Token) in a series. The series can consist of just one token, but often consists of more than one. Artists may create a 1-of-1 piece of art, comparable to a signed copy of a unique painting in the real world. They could make a digital “print” run of 5–10 pieces. Larger-scale projects regularly see tens of thousands of tokens in the series.
Media that is associated with the token. This media is often digital art, and can be the same for each token (a digital “print” run of 10, for example), or can be different (generative profile pictures using randomized traits from the same pool). It’s all up to the creator of the tokens.
When someone purchases one of these NFTs, they are purchasing a token in this particular collection of tokens. They can interact with this token in many of the same ways that one would interact with other cryptocurrency like Bitcoin or Ether. For example, by sending tokens to another address, or exchanging them for other tokens.
The Value of NFTs
There are many different types of NFTs, and their utility and functionality is evolving constantly. Artists create NFTs to sell their art. NFTs can be used in games. The NFT space is largely unregulated, so many people treat NFTs as speculative investments as well.
NFTs can hold value for most people in the following ways:
Collectibles
People like collecting things. Whatever it may be, sneakers, baseball cards, watches, or vintage cars, many people are willing to pay top dollar for collectible items that have little or limited utility and are of not at all interesting to those who don’t follow that particular hobby.
Circling back, NFTs have two pieces:
The token
The associated media
The utility, which we’ll get into shortly, is usually granted in full to every holder of a token in the NFT series. The collectibility of a token is usually determined by the media associated with the token.
When it comes to media, they may or may not appeal to you just as any given painting, artisan mug, or other piece of art. Pieces released by well-established artists may be in high demand, and unknown or new artists may struggle to find an audience for their works.
For larger generative projects, some items in a collection may have traits that are rarer than others. These rare traits may drive the price of certain tokens in the series higher than others. Some tokens may have traits that are desirable by collectors, regardless of rarity. Some collectors may have an eye for certain traits that make certain tokens of interest to them in particular. Think POGs or Pokemon cards, but digital.
These parallels to traditional art and collectibles make certain NFTs a vehicle for financial speculation just like many real-world art and collectibles. Some people buy sneakers to wear outside. Others put them on display in their home. And some folks like to flip them.
NFTs as Speculative Investments
NFA (This is Not Financial Advice.)
If you’re relatively new to NFTs or the idea of expensive collectibles, it may be shocking to read that an NFT sold for $69 million dollars, or that NFTs of cartoon animals are being bought and sold for tens of thousands of dollars everyday. Critics of NFTs make comparisons to the Beanie Babies craze of the 90’s. Looking objectively at some projects and NFT trading habits, the comparison fits pretty well. Many digital NFTs have no utility or functionality outside of their collectibility.
If NFTs were only valued for their collectibility, what would they be worth? In ten years will they go the way of Beanie Babies or first edition Pokemon cards?
For speculators, this is an important question.
For all of us, it serves to keep in mind the difference between NFTs and other classes of collectibles.
Utility
Putting aside collectibility and speculation, a great parallel to understand the utility of NFT projects is the traditional real-world membership card.
A library membership card grants access to the books, computers, and other amenities at the library. A country club membership grants access to the swimming pool, golf course, and certain social circles.
Many NFTs, in addition to being collectibles, are a membership card to a digital club. But unlike traditional membership cards, they can be easily resold, they cannot be forged, and their authenticity can be verified by anybody with access to the internet and a little know-how. Common perks are access to merchandise drops or private online spaces. Some projects hold real-life or online events for NFT holders.
The utility of NFTs is as vast as our imaginations and regulatory structures allow. Homes have been sold using NFTs. Physical goods are redeemed, tickets to events issued. Every day, brands are exploring new and creative ways of using NFTs to bring valuable and novel experiences to their customers.
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