The cryptocurrency ecosystem strikes as being in a perpetual state of boom and bust, though the long-term trend is an increasing valuation for crypto assets. Within the crypto space, NFTs are particularly bubbly. Individual NFTs have sold for as much as $67 million, while total NFT sales reached $40 billion in 2021.
Many find it hard to understand exactly what an NFT is and find it even more difficult to understand why NFTs have such high valuations. This is understandable. The current NFT market is entirely speculative—the value of NFTs are based on their rarity rather than any intrinsic value.
NFT stands for Non-Fungible Token. Cryptocurrencies like Bitcoin or Ethereum—or “fiat” currencies like the U.S. dollar—are described as “fungible” because they can be exchanged for one another or can be subdivided. Your $10 bill is worth exactly the same as my $10 bill, and we can exchange either bill for 1,000 cents or 10 $1 bills.
An NFT, however, cannot be subdivided, and no two NFTs are identical. Each NFT represents a unique object stored on a blockchain. The uniqueness of an NFT is, well, unique in our digital world. All other digital objects can be copied, and although an object might be encrypted to prevent unauthorized use, there is no way to identify the original digital object.
Because NFTs are unique, they can be used to testify to ownership of digital goods. In today’s NFT marketplace, each NFT represents ownership of a collectible—a sort of digital trading card—or a piece of artwork. NFTs can be given attributes that represent “rare” characteristics. For instance, in the popular Bored Ape NFT collection, a small percentage of the apes are “mutants” and therefore more valuable.
If you find all this trivial, or the valuations of NFTs excessive (the cheapest Bored Ape will cost
you about $100,000, for instance), then you’re not alone. However, it’s true that the value of rare collectables has always been objectively excessive. An 1856 British Guiana 1-cent stamp will set you back more than $9 million! That stamp has no practical use and no objective value. It’s simply a rare asset that the market has decided is valuable.
However, there are potentially more exciting roles for NFTs in the future. Because NFTs represent transferable, counterfeit resistant, and unique digital objects, they can be used to facilitate the ownership of all our digital assets and potentially real-world assets as well.
To illustrate, consider a Kindle library. If you own a Kindle, you probably believe that you own the books on the Kindle as well. But in reality, Amazon still maintains complete control over your books and reserves the right to withdraw them at any time. You can’t sell your Kindle books to other people, and you can’t gift your library or leave your library to your children in your will.
The same is true of your iTunes library and many other digital assets. However, if an ebook or digital music was represented by an NFT, then the NFT owner would have full possession of the object and would be able to resell, gift, or bequeath the object concerned. NFTs also make perfect sense as a vehicle for event tickets or for in-game assets (rare swords in World of Warcraft, for instance).
The current speculative bubble surrounding NFT collectibles and artwork may or may not burst one day, but I think NFTs will serve serious purposes in the future.