Today we attempt to get to the bottom of NFTs – the latest craze that has the over 50-year-olds scratching their heads in incomprehension, while the under 30-year-olds are making fortunes from what they see as the blindingly obvious.
Whenever writing or reading about anything crypto-related, it is always worth reminding ourselves of the golden rule. Those who have invested in the tech will say it is the next big thing; those who haven’t tried the tech will dismiss it as a bubble. But it’s easier to dismiss something as a bubble than it is to learn a new technology.
Like bitcoin, NFTs, or non-fungible tokens, take a lot of effort to learn about and understand, and I’ve held off writing about them because I’m not sure I quite understand them myself. Don’t let the easy option of declaring it a bubble be your excuse not to learn.
One of the things I love about the crypto space is the way it has educated people. I remember back in the 2000s, every time I wrote about gold and the decline in the purchasing power of fiat money, it would take two sentences to explain what “fiat” meant. Thanks to bitcoin “fiat” has now crept into everyday parlance. Something similar is now happening with the word “fungible”.
It took me several years of reading the world in academic papers about the history of money before bitcoin came along to fully understood what it meant, and, more importantly, its implications.
I was working for privacy holding company Cypherpunk Holdings (CSE:HODL) a few years ago and the word kept cropping up. The history of the movement of every bitcoin can be traced on the blockchain. Certain bitcoins had, it could be seen, passed through wallets associated with darknet marketplaces. American exchange Coinbase, among others, had begun freezing accounts with bitcoins that had some kind of darknet market provenance, even if their provenance pre-dated the actual account in question.
To be fungible
The implications of this were enormous. It meant that not all bitcoins were equal. Any bitcoin that had darknet provenance became, essentially, a liability on mainstream exchanges, while “clean” bitcoins remained an asset.
The history of the movement of every bitcoin can be traced on the blockchain
If bitcoin is to succeed, it is essential that one bitcoin be interchangeable with another, no matter what some previous holder has been up to. To use the correct jargon: The money must be fungible.
Fungibility is essential to the success of any money system. It’s one of the reasons metal was money for so many thousands of years – an ounce of copper, gold or silver is interchangeable with another ounce of copper, gold or silver, anywhere in the world at any time in history. What is stamped on the metal only changes its value marginally.
Moving onto non-fungibility
So there is a rather long-winded definition of the fungible, which brings us to the matter in hand: non-fungible tokens.
The point of a non-fungible token is that they are not readily interchangeable, rather, they are unique.
We need to back up again. Let’s just talk about the digital economy for a moment.
One of the breakthroughs of digital technology was that it enabled instantaneous, widespread and exact replication. Rather than press and dispatch a million vinyl albums, I can upload an MP3, and a million different people can download it. Google’s search engine gives access to more information than any library; one small improvement to the search engine means that billions of people can benefit. But this same scalability that enabled extraordinary growth in the digital economy, also meant that achieving any kind of digital scarcity was a near impossibility.
The breakthrough of Satoshi Nakamoto’s blockchain was that it enabled digital scarcity. If any old Joe can copy and paste money, it would have no value. Its very value lies in the fact that it is scarce. Blockchain technology – essentially a process of decentralised verification – meant that something’s scarcity can be proven. The initial application for the tech was money. Now the same principles are being applied to art and authentication.
The NFT is essentially a token representing ownership. Anyone can view Beeple’s “Everydays — The First 5000 Days”, the artwork recently sold for $69 million at a Christie’s auction, but only one person has the ownership token.
In a week since going live, @beeple's 'First 5000 Days' has climbed from a staring bid of $100 to $3.5 million. Tune in to see what happens in the final week at https://t.co/HlySLocQap. #NFTs @makersplaceco
— Christie's (@ChristiesInc) March 4, 2021
That ownership is now verifiable, digitally secured, potentially divisible and easy to transfer. Everydays can be copied and pasted. You could have it, for example, as your screen saver, just as you could Botticelli’s Venus. But neither would be the original. Only one person has the token of ownership.
It must be stressed that the token of ownership is only as secure as the underlying platform. If ethereum, the platform on which most NFTs are verified, were to collapse (a possibility according to some, albeit a remote one), then the NFT would be endangered.
Why might an NFT have value? Most don’t. Look at the NFT market places and you’ll see that the majority of submissions don’t sell. Enough people have to believe in it for it to have any value. The Mona Lisa only has value because many centuries of intelligentsia imbue it with value. Show the Mona Lisa to someone who has never looked at a painting before and he might chuck it in the bin along with the other rubbish he is dumping that day.
A Banksy piece is million-dollar-art to some, while to others it’s just graffiti.
The only reason the pound or the dollar or the dirham have any value is that enough people believe it has value. The same goes for bitcoin, a house or a stock. It only has value because the market imbues it with value. The value of NFTs, like most things, is market driven.
If NFTs attract a lot of media attention, they’re collected, displayed and generally shown off, and other people start wanting them, then their value is likely to increase. But the success of an NFT is likely to be determined by the community surrounding it. And there will always be those who deny that these, essentially, digitized social contracts have any value as tokens, but they will be those who I warned about at the beginning of the article.
Some NFTs might have value in that a ticket might get you into a show, a photo might generate usage fees or a song might give you a royalty stream, in which case the valuation metrics would be different. But the above rules about the importance of the underlying platform, as well as some trust in the original creator still apply.
It must be said that most art has little value. In all likelihood most NFT art will have a little value as well, though some will acquire considerable value and headlines. It’s not that different to Hollywood actors, really.
But those incredibly amusing memes that get shared across the internet and delight millions will soon find themselves tokenised – and the original creators may well find themselves with some financial reward for their efforts, as well as the not inconsiderable reward that of seeing your creation delight millions.
In the words of philosopher Naval Ravikant, “We are going from a world where every protocol has a token, to where every (decentralized) application has a token, to where every valuable digital representation of an object or person has a token. Public blockchains will be the title registries for everything of value. Ultimately, NFTs will authenticate the world.”
At last we will know who owns what.
The revolution will not be televised. It will be cryptographically time stamped on the blockchain.
Dominic Frisby is the author of Bitcoin: the Future of Money? (2014)
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