With all of the negative news that continues to come out, trying to pan the NFT space as simply “JPEGs” traded as crypto, it’s time to set the record straight. First and foremost, though $2 billion in revenue was generated from NFT trading in the first quarter of this year, “non-fungible tokens” are still a fraction of what they could be. Yes, most of them are digital art placed on top of a cryptocurrency, in the sense that they can be traded just as easily, and their underlying structure is really just a hash. Still, just because most NFTs exist in this fashion now doesn’t mean that all of them should be simply defined in the same way for all eternity.
Furthermore, just because the picture that gives detail to a piece of NFT-art can be copied doesn’t mean it has no value or that the copy is the same work as the original. That’s why provenance exists, i.e., proof that the work involves actually comes from the artist that created it. In the end, I understand the criticisms of NFTs as they’re really just rough caricatures of what they could be at this point. Down the road, as excellent systems for tracking provenance like the InterPlanetary File System become truly widely and properly used, it will be easier for the masses to grasp the true value of NFTs as a whole.
Imagine, for example, that each NFT painting was actually tied to the option of having its’ identical physical work shipped to you. Systems like CACHE Gold already do this with gold, giving you a cryptocurrency that’s perpetually redeemable for “its weight” in physical gold. If you’re wondering how it all comes down to the fact that each CGT token is pegged to 1 gram of verifiably pure gold(with a minimum of 99.5% purity). This peg is tracked with RFID scanners that follow the movements of the physical gold into institutional-grade vaults and allow you to check the status of your gold upon purchasing the CGT token as long as you create a verified account on CACHE Gold’s site.
The same, if not more, could be done with NFTs.
Physical redemption at a large scale is the next evolutionary stage of the space, but before we get there, it’s important to understand how to truly define an NFT. Fundamentally, a “non-fungible token” is a cryptocurrency or, more accurately, a “crypto token” that represents a unique, non-mutually interchangeable asset. If you understand each US Dollar as being equal in value and structure and, therefore, mutually interchangeable, then it’s easy to see that NFTs fall along the opposite line. Each NFT has a separate, unique value from any other because each one represents a different creative work of some sort.
Still, it’s not easy to understand what can and cannot be an NFT.
All in all, if there’s one thesis that hits the nail on the head in this respect, it’s Jake Brukhman’s from Coinfund. In a Medium post that he penned in September last year, Brukhman defined NFTs as “liquid intellectual property.” In the most general sense, this means that anything that’s content can and should be an NFT because NFTs give any sort of creator a new and truly reliable stream of income and their fans a new ability to own their favorite works, art, in-game items, and even “events or moments,” such as NBA Top Shot already facilitates. In other words, when a piece of content is “minted into” an NFT, it becomes akin to a cryptocurrency representing that content. Each time that crypto is sold to a new person, a percentage of that sale can be sent to the creator and the seller in an automated fashion.
Smart contracts, which act as the tracking and escrow systems for NFTs, as well as their vaults when NFTs are first created, facilitate this. If you aren’t familiar with a smart contract yet, just imagine it like a software program with code that runs on if, then statements, and lives on a blockchain. So, by design, when someone buys an NFT that originates from a certain smart contract, that program “sees” the purchase and sends the NFT to its’ new owner, without any sort of human involvement. Additionally, when that NFT is re-sold, the same contract sees the “re-sale,” sends it to its’ new owner, and splits the funds used for the sale into parts, based on what the creator, seller, and maybe even the platform hosting the NFT and acting as its’ marketplace, are due. Typically, those percentages are encoded into the smart contract at the time of its’ creation, and most existing NFT marketplaces, such as OpenSea, hide the complicated crypto part of that process and make it as easy to do as a few clicks.
All in all, given their ability to facilitate perpetual royalties as well as physical redemption, the sky’s the limit in my mind for NFTs down the road. This doesn’t mean that the market won’t experience a plunge as Bitcoin and all other cryptocurrencies periodically do. What it does mean, however, is that over the course of the long-term, NFTs are here to stay, and even traditional(non-crypto) companies like Christie’s, LVMH(Moët Hennessy Louis Vuitton), and even the NBA itself are starting to see that.
Still, the point we’re at now is like the creation of the first, rough internet-based businesses before Netscape and others fueled the dot-com boom. Over time, it will be interesting to see what the tipping points are that drive NFTs truly into the mainstream. In my opinion, one that’s important to track is the involvement of the film and book publishing industries. The former, through the example of Heyday Films(of Harry Potter fame), is already working with Palm NFT Studio, and the latter, has yet to dip its’ toes in.
In my mind, the first to get involved in the case of the book industry will be the authors themselves, which will force traditional publishers to follow suit over time. Imagine a platform where you could own representations of your favorite passages, chapters, or even characters, as well as purchase special editions of your favorite stories with alternate endings. Sprinkle in the fact that all of this will be as easy if not more easy to trade than Bitcoin, Ether, or digital art.
Book-centric NFT marketplaces should be a thing down the road.
Now it’s time to see who takes the first step to take them there.
If there’s any key takeaway from this post, it’s this. NFTs are much more than just JPEGs tied to crypto, and the future will show that. Critics and supporters alike will just have to wait and see as the space continues to take shape and regulators, companies, and individuals alike come to terms with the staying power of a new, better form of content.
Where does this leave us?
With the above in mind, I hope that you find it easier to understand both what NFTs are now and what they could be down the road. Next time, I’ll share 3 more resources for digging even deeper on the budding “liquid IP” space, but until then, if you have any questions or other thoughts, contact me any time on Twitter here and remember, the crypto movement is for everyone, no matter what any one tells you!
Disclaimer: None of my content, including everything above is financial advice. Everything I write is meant to be purely educational.