CMI Explains: NFTs
The $500,000 digital house. Credit: Krista Kim via Architectural Digest.
What are Non-Fungible Tokens (NFTs)?
Non-Fungible Tokens have been frequenting the news lately, with digital artwork selling for £50m at a Christie’s auction, the first ever tweet selling for £2.1m, and a popular internet meme (the ‘Nyan Cat’) selling for $590,000. NFTs can actually be created out of anything which is digital, but where it is exploding in the market is through digital forms of art. While value has always been ascribed to arts and culture, NFTs have shown just how much people are willing to pay for this new type of asset.
NFTs are distinct from physical assets or other types of online assets due to their electronic makeup. They are a specific type of cryptographic asset which uses blockchain technology to ensure that each token is distinct through the unique code of data to which it is attributed. The implication of this is that a new form of individual digital ownership is achieved through the collection of NFTs, as these tokens are not interchangeable, similar to a piece of physical property.
Where is the value in NFTs?
The sky high prices of recent NFTs has clearly shown that there is a burgeoning market for unconventional assets like these, which through their distinctly non-fungible nature ascribe individuals with unique levels of ownership over original art. For observers, it would not be unreasonable to question the reasons for such demand. One answer could be the perception of value, as art collectors who own a unique piece are in a position to gain a lot of equity should the value of their NFT increase. Beyond equity, the mere concept of singular ownership has value in itself, and both of these forward looking aspects serve to promote NFTs as a type of speculative asset.
Is there risk in NFTs?
As aforementioned, NFTs can technically be made out of anything which is digital, so there is a large scope for tokens which are deemed to have no value. As NFTs are able to amass high prices through the perception of value, it is important for those who want to invest to have thorough knowledge and understanding of the markets they are buying into, as structural crashes could leave NFT holders high and dry. NFTs have shaken headlines through their high costs contrasting low utility, and are hence at risk of accelerating prices which merely exist within an economic bubble, indicating the potential volatility of the goods themselves and the inevitable market failure which accompanies them. Those curious in investing need to reconcile the value of rarity comparative to utility, in order to make a personal judgement regarding the worth of NFTs.
What are the larger implications of NFTs?
While the major breaking stories surrounding NFTs typically focus on collectible art, helping NFTs to maintain the perception that it is a market only for the ultra-wealthy, there are other ways which the technology could potentially be used in the retail industry. For instance, in December of 2019, Nike secured a patent for “Cryptokicks”, a system where NFT assets could be produced digitally and tied to individual pairs of Nike shoes. This would allow for the shoes to operate through a verification system, helping to tackle the fraudulent goods industry and subsequently boosting the value of originals and maintaining the reputation of the brand itself. It is through potential real-world applications like these where NFTs can find aspects of utility and sustainability, suggesting that a new industry could arise.