All what you need to know about NFTs — A new investment asset class or just a Hype ?
NFTs are a real buzz at the moment. They let us tokenise things like art, collectibles, even real estate. NFTs started in 2017 with CryptoKitties (a game to breed and trade digital kittens) and CryptoPunks and gradually increased over the last years, but it exploded in 2021 (i.e. in 2020 the market was estimated to $250 million over the whole year, while in the month of February 2021 alone already $360 million of NFTs were traded). These enormous prices definitely attract a lot of media attention and investors, but nonetheless NFTs remain difficult to grasp. While for traditional art, the owner has the physical artwork in his possession, this is not the case at all for NFTs. For example, the NFT for the Beeple picture sold for the record amount $69.3 million can perfectly be downloaded on the internet at no cost. This downloaded file will be identical to the digital file owned by the buyer (i.e. the copy is literally as good as the original).
What is fungibility ?
In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable and each of whose parts is indistinguishable from another part.
A non-fungible token is like a hand-crafted gold ring that you have engraved with your spouse’s name, whereas a fungible token is like a gold block with no identifying markers on it.
This means every fungible token has exactly the same value, while non-fungible tokens can each hold a unique level of value based on its individual identity.
So what the hell is an NFT ?
The word NFT stands for non-fungible token, with following characteristics :
- It means a unique, irreplaceable cryptographic object.
- It generates traceability of the owner. It aims to manage ownership of digital content (digital collectible items) by storing the ownership in the form of a digital certificate on a blockchain (usually on the Ethereum blockchain, but other blockchains can also be used). This way the buyer can prove that he is the owner of a certain digital item.
- It also ensures authenticity and (digital) scarcity, thus resulting in its value (via its uniqueness it becomes a collectible item).
- NFTs are typically sold via intermediate platform (like OpenSea, Rarible, Superrare, Foundation, AtomicHub, Nifty Gateway, KnownOrigin…), managing the contact with the artist, setting up the NFT, managing the transactions on the Blockchain and also storing the digital artwork in the cloud (i.e. location to which NFT refers).
This makes it an attractive asset for both buyers and sellers.
For sellers, creating (= minting) an NFT gives an easy option to monetize (without intermediaries like galleries or auction houses) their digital content (products), like digital pictures, animations, music, videos…. Additionally NFTs have the feature that the author can also get a percentage of future transaction amounts (thus profiting of a future increase in value of the NFT).
The buyer can invest in digital art and can be sure of the uniqueness and his ownership (i.e. the bragging right that you own the art) and the ownership can easily be transferred to any other buyer in the world (becoming the new owner) with the click of a button.
What do you actually own ?
The NFT is just a digital certificate on a blockchain. The blockchain does not even contain the digital artwork, but just a link to a location where the digital artwork is stored. This raises automatically questions like:
- What is the legal ground of an NFT? Can you claim the ownership in court, i.e. will the courts consider the blockchain as sufficient proof of ownership? Will the judge even understand it? Will it have the same legal basis in any country in the world? Can I win at court if someone exploits commercially the digital content owned by me?
- What happens if the link to which the NFT refers is no longer available? Does the NFT lose its value? Can the link be adapted?
- What is the exact digital asset I am owning? On the blockchain a hash of the digital asset, together with some ownership info, is stored. However if someone changes 1 (invisible) pixel to a digital artwork, the hash will no longer match. Do I also have the ownership of this new (nearly equivalent) digital artwork?
- How transparent and well-defined are the properties of ownership? E.g. do you also buy the copyright and reproduction rights? Are you allowed to ask royalties if the digital item is downloaded/published? Are you allowed to ask BigTechs (like Facebook or Google) to remove all copies they store of your digital asset?
Are there any standards ?
Ethereum chain of-course does have ERC standards.
- Fungible : ERC20 tokens are interchangeable. An ERC20 token is a standard used for creating and issuing smart contracts on the Ethereum blockchain. Smart contracts can then be used to create smart property or tokenized assets that people can invest in. ERC stands for “Ethereum request for comment,” and the ERC20 standard was implemented in 2015.
- Non-fungible : ERC721 tokens are not interchangeable, and each token of ERC721 is unique and indivisible, which can be used to trade collectibles.
- Both Fungible & Non-fungible : ERC-1155 a newer standard which allows both Fungibles and Non-Fungibles. One can mint an infinite number of both fungible and non-fungible tokens in a single deployed smart-contract which makes it very powerful. It is the only token standard that enables you to create every type of asset, from currency and real estate to digital art and gaming items. (https://eips.ethereum.org/EIPS/eip-1155)
Future ?
Clearly the concept of NFTs is great, as there is a need for managing ownership of digital content. With more and more digital content being produced and some artists even only exclusively producing digital content, there is a need for them to make money and NFTs are a good way to do this. However the too strong focus on the underlying (blockchain) technology and the bullish prices, make it still too much a playground for the (mega)-rich, than a common investment asset class. However even if it remains such a playground, it is still interesting to follow. As there are as many as 100,000 people who have $1 million or more stashed in crypto-currencies, there is an enormous audience with the means, interest and risk appetite to try out NFTs. For them, there is the cool factor of trying out something new, the potential of making same profits as with crypto-currencies, the emotional and bragging aspect of owning digital arts (compared with owning parts of the moon or owning a star. This has no legal ground, but is still very romantic and fun) and the Robinhood aspect of pushing governments to change and fighting the traditional art system (cfr. the actions on Robinhood to stop the short-sellers on the share of GameStop).
This being said, NFTs are clearly an excellent real-live experiment with tremendous potential, where fundamental questions around ownership, value, digitalization and authenticity are being addresses.
Where can I find some NFTs ?
You may explore, buy & sell NFTs here:
references: https://www.fintechna.com/articles/nfts-a-hype-or-a-lasting-new-investment-asset-class/, https://kriptomat.io/cryptocurrencies/tokens/what-is-an-nft/