Non-fungible tokens (NFTs), have gathered a lot of interest recently. They certify digital assets, including millions of dollars of digital art pieces. Christie’s has already sold an NFT work of art by Beeple. Of course, it raises the question, is this something more concrete than Initial Coin Offerings or ICOs in 2017.
NFTs are digital certificates on a digital ledger, or blockchain, that proves a digital asset to be unique and therefore not interchangeable. NFTs are used to represent and certify photos, videos, audio and other types of digital files. Art is currently getting all the publicity, but NFTs can certify many other items, including text, software code or even Twitter tweets. The fundamental idea is that a digital object can be tokenized, and it becomes unique in that way. It is, in principle, not possible to make further copies of it.
Some people have commented that the value and irony of NFTs is that although their name is non-fungible, they are easily fungible. They can be unique, but it is easy to trade them. And as we know, things can have value and liquidity if there is enough demand and supply and transactions costs are low enough.
Many of us can still remember the 2017 ICO boom when companies started to offer their own tokens. Typically, they were startups (or not even startups but startup ideas) with business plans (called white papers). They included a token as an important component of their business plans and then started to sell those tokens. Some projects were able to collect significant money and, in rare cases, built a long term business. Many people participated in ICOs to learn how to buy a token, not thinking of its ROI. Some people had many bitcoins, and some had a hard time selling them (because they had no idea how they had acquired them) and wanted to diversify to other tokens.
A fundamental difference between NFTs and ICOs is that ICO tokens usually represent only some future promises. NFTs represent assets, especially digital assets. In that way, buyers can evaluate how they see the value of their assets. It is always complex to evaluate the value of art, and NFT art has precisely the same challenges. Then there are many other digital items like pieces of music, virtual items in games and software components that can have an NFT.
There are also plans to expand the NFT concept from virtual and digital items. There could also be digital certificates to represent physical items, for example, a certificate to prove real estate ownership. This part requires a legal framework that enables the use of this kind of digital certificate.
NFTs have also generated crowdfunding plans. People and companies could sell fractions of their work, for example, music, movies or software. NFTs can make this market more effective, but it doesn’t remove all crowdfunding challenges, especially how to find the correct value and then make the secondary market liquid. It is also good to remember the model can work for some items that have enough supply and demand, but it doesn’t mean NFTs alone guarantee them for any item.
There are several new business plan ideas based on NFTs. For example, if software is published as an NFT, there could be a new GitHub, especially for NFT software. Companies and individuals could start to license data as NFT packages, and media companies could also offer NFT content.
Ethereum, which is based on the proof-of-stake model, is the most commonly used solution for NFTs. Blockchain still has fundamental questions around which solutions have a long term future and value. When blockchain software is updated, and a fork created, backward compatibility is an important question. A soft fork means a new version is backward compatible, and a hard fork means it is not. If a new version is not backward compatible, then old tokens won’t work in the new system. In the end, it is the community of each token that can decide which updates and forks take place. The fundamental question for each blockchain solution is its future backward compatibility. At the moment, Ethereum looks like a safe bet to implement blockchain-based solutions. With lesser-known blockchains, it is harder to predict their future.
The NFT concept is more concrete and makes it easier to evaluate items than ICOs did. But in the end, an NFT’s value depends on the underlying items, so it is impossible to say if an NFT as such represents something valuable or only empty promises. NFT is an excellent model to manage and trade the value of digital items. But it is crucial to remember that an NFT alone doesn’t create value for a digital item. The items must have value, and NFTs help to make the value tangible.