This article by Rafi Reguer of Forefront Communications dives into NFTs: what they are, why they’re receiving so much attention, and how they could impact everyday life.
In the last month or so, you may have seen a lot about non-fungible tokens (“NFTs”). An animated cat with a Pop-Tart body sold for $580,000. Taco Bell offered a bunch of animated GIFs of tacos at auction – and with a minimum price of $2, some went for several hundred dollars at auction and now cost over $1,000 in the secondary market. Twitter CEO Jack Dorsey is selling his first tweet for millions of dollars. A digital artist who goes by the name Beeple sold an NFT for a digital piece of artwork that fetched $69.3 million. Even Rob Gronkowski, NFL tight end and self-acknowledged meathead, is selling NFTs.
What is going on here?
In my opinion, the answer is that NFTs are the future, and the future is now. (Also, in my opinion, a virtual taco is the only kind you should buy from Taco Bell.)
WHAT IS AN NFT?
Let’s go back to basics, starting with the term itself. Fungibility means interchangeability. A fungible asset is one that can be easily exchanged for another of like kind. Pure gold is fungible — 10 troy ounces is 10 troy ounces, no matter which mine it came from. But if you take those 10 troy ounces and have a jeweler make you a necklace, it is now non-fungible. Depending on how nice people think the necklace is and its uniqueness, it has its own price.
A token is a unique unit of cryptographic information. For now, let’s think of it as a unique string of numbers and letters, a secret code. That secret code is what you use to prove you have rights to something. For example, many software companies have websites where you can download the software they sell. Trick is, you need a unique code, and you can only get one by purchasing it from the software company. That’s a token, more specifically a digital token.
In truth, there are many kinds of tokens and the definitions do matter. NFTs fall under the category of cryptocurrency tokens. There are two kinds of cryptocurrency tokens: intrinsic (aka “basic” or “native”) tokens, like Bitcoin and Dogecoin, and asset-backed tokens, like NFTs. For an in-depth primer on tokens, see here.
WHY DO NFTs EXIST?
NFTs are useful in many situations. Just as basic digital tokens revolutionized software purchasing by removing the trip to the local store to buy a box that contains a disk, NFTs have the ability to streamline processes.
One element that has been driving the NFT craze is digital content: art, media (yes, even cat videos) and other content that you see on the internet. From the perspective of content creators, it’s often difficult to monetize their work because what they produce is easily copied and shared. Some creators have monetized their content, especially videos, using the advertising model offered by platforms like YouTube, but that only works for certain digital content. So came the move to digital tokens, as a way of cashing in on people’s penchant for collecting things, sometimes even non-tangible things.
In some cases, such as with Jack Dorsey’s first tweet, the value of the NFT is simply being able to say you own it, even though anyone can see it and you don’t really own anything other than the digital certificate of ownership. Even copyrights and intellectual property rights often remain with the creator. This may seem foolish to you, but people bidding up the price of positional goods to ridiculous levels is hardly new.
In many of the other cases, though, the headlines belie a more complicated truth. Some NFTs come with more than just some digital art anyone can copy. The Kings of Leon were in the press because they are releasing an album using NFTs, but there is also the opportunity to bid on six golden tickets that allow the buyer to have front-row seats to their concerts for life. In the case of Rob Gronkowski, some digital cards come with a meet-and-greet with Gronk himself. It’s certainly easier to understand the appeal when you consider these perks.
HOW DO I BUY AN NFT?
Right now, the tokens are mostly being used for digital content, so visiting one of the auction sites is your best bet. OpenSea, KnownOrigin, NBA Top Shot and Nifty Gateway are four of the largest and best-known. At the moment, these sites hold auctions in cryptocurrency, thus requiring you to convert your cash into cryptocurrency and download a wallet app to keep it in. It’s not exactly a user-friendly process, but there’s no reason you won’t be able to buy and sell NFTs in the future using traditional currency and a simple, Amazon-like interface.
WHY ARE NFTs THE FUTURE?
The NFT craze may seem irrelevant to your life, especially if you aren’t someone who collects things. But it isn’t. In a generation, we may look back on our pre-NFT days the way we currently look back on the days when news was transmitted via telegram.
You see, the example of buying software and receiving a unique string of numbers and letters is one kind of very basic token. An asset-backed token, such as an NFT, exists not in an email sent to you by a software company, but as an entry in a ledger, an encrypted public ledger that all can access. That’s blockchain technology and that’s the reason NFTs are here to stay.
A digital certificate of ownership can prove ownership of anything, from a virtual Taco Bell taco to the land that an actual Taco Bell restaurant sits on. An NFT can prove you own the car you’re driving and prove you have a license. It can prove you have a college degree from your alma mater. The applications for NFTs are boundless, and their usage will soon grow enormously because they make transactions smoother and safer.
Many of our current systems are suboptimal, but we rarely question the way we do things until a new, better way shows up. We have a lot of instances in which paper and signatures serve as proof of something, even though we all know that documents can be phony and signatures forged.
Let’s consider real estate. We don’t use land deeds in real estate because they’re great; we use them because we have been doing so for centuries and there hasn’t been a better method available. We verify signatures using a notary public. (The first clue that you’re not on the cutting edge is when you’re using a term like “notary public,” which entered the lexicon so many centuries ago that it uses the French format of noun followed by adjective, meaning it comes from the time just after the Norman Invasion.) Real estate transactions often require escrow accounts held by a trusted third party. Deeds are recorded, often manually, in a county office. An NFT could eliminate many of these current steps, making real estate transactions faster and safer and eliminating middlemen. And if there’s one thing we have learned in the digital revolution, it’s that faster, cheaper, safer methods displace the old way of doing things rather quickly.
There are still significant hurdles. Laws must catch up with NFTs. Traditional methods of tracking ownership (and other things) will need to evolve. And NFTs aren’t without their controversies. The blockchain itself might be safe, but any password-protected accounts accessed over the internet are susceptible to being hijacked by thieves, and sites that sell and store NFTs are no exception. Plus, as much as NFTs save on paper, travel, etc., they may not be as good for the planet as one might think because blockchain technology has a surprisingly big carbon footprint, thanks to all the electricity needed for computing power.
But make no mistake: NFTs are here, and they will be booming soon. Hope you’re hungry for some virtual tacos.
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