NFT means Non Fungible token, in Dutch this is a non-replaceable token. An NFT is seen as the registration of ownership of a digital object on a blockchain. These tokens are ‘not replaceable’ because they represent a unique object, but also because the token itself is unique.
It is the ‘non-replaceable’ part that really matters to the potential value of NFTs, as non-replaceable means that each NFT has a different identity and cannot be exchanged for another just like that. That is a big difference with bitcoin or the euro. One bitcoin is just like another, just like one euro is exactly the same as another, so it doesn’t matter which euro you own. NFTs, on the other hand, are all different ‘objects’.
Pioneering with video games
The first NFT tokens were designed for video games, where characters and other properties cannot be used by those who have not bought them, and where money can be made. Think of unique digital playing cards with a limited edition.
These unique tokens have been further developed and are now also used for digital art, video footage of memorable sports moments and much more. But that’s where the shoe pinches, and the discussion starts about what the value of NFT really is.
What is the added value of NFT?
Lebron James is one of the greatest basketball players ever. His video highlights are all over YouTube and other sites to watch for free. Yet someone spent $208,000 for an NFT version of a video of a sneering Lebron James. The investor doesn’t get the broadcasting rights to the clip, or even a physical copy of it: he owns a few lines of code that prove he owns a unique digital asset.
Anyone can watch the dunk online for free and share it with the rest of the world.
But what is the added value? Let’s look at it from the point of view of the NBA, the basketball organization to which Lebron James is under contract. In October 2020, Dapper Labs launched a new product called NBA Top Shots, which is a platform to trade NBA highlights NFT cryptos.
On Top Shot, users can purchase digital packs containing NFTs called “Moments” – short video clips of NBA highlights, such as a memorable dunk or shot. As with physical trading cards, some moments are “common” (common) and others are “rare”.
For old paper trading cards, the NBA sells the license once and may also receive a percentage per pack of cards sold. But the revenue model changes completely when it comes to Non Fungible Tokens. You can attach a smart contract to such a unique digital token, which ensures that every time an NFT of the NBA is traded, a small part of the proceeds goes to the NBA.
Tokens as proof of ownership
From the investor’s point of view, you can see the NFT concept as a new concept of ownership. With a little imagination this can be applied to all property rights, art and financial instruments to owning a home.
Concert tickets are already being sold through NFTs. These cannot be forged and can no longer be resold at high rates.
There are many practical options for using the NFT concept. But they are also increasingly seen as an investment.
A brief history:
- 2017: NFTs gain widespread public attention for the first time with CryptoKitties, a game in which users breed and trade digital cats.
- 2018: Platforms were built to buy and sell NFTs, such as SuperRare, OpenSea, Rarible, and Nifty Gateway.
- 2019: Big brands like Formula 1 and Nike want to do something with NFT.
- 2020: The market for NFTs triples in size to more than 200 million euros.
But since the beginning of 2021, the NFT market has exploded. Large amounts of money generate a lot of media attention. In February alone, EUR 360 million worth of NFTs was traded. NFTs have attracted the attention of tech investors such as Mark Cuban, the art world (auction house Christie’s) and large corporations (Nike and NBA). And everyone from Lindsey Lohan to the rock band Kings of Leon wants to monetize their own virtual creations.
What determines the value of NFT
Obviously, NFT can represent many different things. But what is the value of an NFT? Objectively, a video clip of a LeBron James dunk is not worth $208,000. A cartoon of a cat is not worth $100,000. And a Lindsey Lohan selfie isn’t worth $59,000 either. But the same can be said of Pokémon cards, which really only consist of ink and paper. Like most things, the value of NFT is determined by extrinsic factors, and hardly by intrinsic ones.
- Authenticity: There are many ways to confirm authenticity for physical collectibles, but even appraisers are often wrong. The authenticity of an NFT is recorded on the blockchain.
- Scarcity: Many NFTs are made in limited edition, or even only one of them.
- Send: NFTs can be sold at the touch of a button, to anyone in the world. The transaction can be arranged within a few seconds. This means that potentially anyone in the world can be your customer. That gets a bit more difficult with physical collectibles.
- Immutable: The NFT’s code and metadata cannot be changed, making it permanent.
- Utility: Some NFTs can serve functional purposes, generate income or be exchanged for physical assets such as a concert ticket.
NFTs are also seen by many investors as an investment in the future, regardless of any price increase of the asset itself. If that growth continues, it is inevitable that NFT will integrate with the real world.
But there is another way to gain exposure to the NFT ecosystem without having to buy an NFT. NFTs are offered on various marketplaces and each has its own cryptocurrency. These are called governance tokens.
Holders of these tokens from NFT related platforms will eventually claim fees from the platforms they operate. There are several marketplaces that already have such a liquidity program.
The value of these tokens is determined (in addition to hype) by the revenue fees, the influence a token holder has on the governance of the platform and the potential of the platform to generate additional revenue in the future. That stands and falls with the popularity of the NFTs on those platforms. Which NFT will rise or fall in value will largely remain a gamble. But those marketplaces, or platforms, profit from the popularity of NFTs, not whether they make a profit or loss.
Or as the saying goes: You can gamble and win or lose money, but it’s much safer to be the casino.