Non-fungible tokens (NFTs) are a new ethereum-smart-contract powered crypto investment vehicle that is sweeping the digital world, and it may just be the most meaningful (and memeful) crypto investment yet.
A smart contract is a program run on the Ethereum blockchain that automatically enforces a contract. This makes the uses of the technology extremely open-ended. It can handle everything from basic money-like exchanges to more complicated functions, such as allowing people to "own" a specific digitized moment in time and space like a sports highlight video, or to have access to the original-digital copies of art and other collectibles.
This led to the creation of non fungible tokens around 2017. Non-fungible just means that the token is irreplaceable. This is an odd concept to think about in respect to the internet - that a digitally created art, video, or otherwise could be irreplaceable. Especially when you remember that people always say to be careful what you post on the internet, because once it is up there it gets copied and recopied around and can become impossible to take down.
However, the smart contract combined with the ledger of the blockchain allows for there to be a unique copy that, despite there potentially being no observable difference between the copy of an artwork and its NFT, there is a way to prove that the NFT is the original and distinct from the copy. This allows the token to gain value in a similar way to art, trading cards, and other collectibles - which is through an agreed upon notion that a unique "object" has value over identical commoditized counterparts... basically, the difference between the Mona Lisa, and the millions of prints of the Mona Lisa.
In the case of NBA Top Shot, which may be the most main-stream and popular kind of NFT to purchase, collectors are able to purchase "moments" by their favorite player. These moments represent a player’s highlights and can be purchased directly or can be randomly awarded through a pack.
When purchasing a moment, collectors gain no video or intellectual property rights for the highlight. This means that they can’t request that the highlight be taken off of Youtube and other sites. Other people will still have access to viewing the highlight that you own just as they always had, however you now have an exclusive copy of it that is backed by the NBA.
Another way to understand this concept is to think of these moments similarly to jerseys. There are game-worn hand signed jerseys, hand signed replicas, machine signed replicas, and just plain unsigned jerseys. By owning an NFT, you’ve essentially purchased the game-worn version of the jersey.
So what is the purpose of NFTs?
NFTs add a layer of authenticity to digital art and products that restrict their ability to be reproduced. By adding the certificate of authenticity provided by the smart contract, something that used to be essentially worthless (such as a meme) can be turned into a valuable asset if collectors are willing to pay for it.
Besides that, the benefits of an NFT are really on the seller’s side. In the past, artists have struggled to profit off of their own work after it becomes valuable because they sold it before demand deemed the artwork valuable. However, via smart contracts, artists are able to code in that every time the token is sold, they are awarded part of the sale price.
So should you diversify into NFTs?
Likely not. Investing in fine arts, expensive alcohols, and other collectible-style investments tend to be higher risk ventures than traditional markets like stocks. They also tend to have high upfront costs, which aren’t ideal for most investors.
In addition, the current booming valuations for NFTs could be more of a function of increased interest in what NFTs are, rather than because of a sustained demand for actually owning them. This could mean that a lot of these early-purchased NFTs that appear to be appreciating rapidly, may actually just be a fad-fueled momentum trade.
Additionally, every week the internet is on to its newest fad. Whether it is a dance challenge or one involving ice buckets, interest in digital things doesn’t seem to last. So while Cryptokitties seem to be gaining value at exuberant rates right now, perhaps people will one day lose interest in collecting, breeding, and selling virtual cats.
So while pouring your life savings into the Logan Paul NFT may seem like a good idea at first, it may be best to let the dust settle here. Art appreciates in value over time and oftentimes takes a long time to do so. These NFTs that appreciate over the long-term will be the ones that are deemed timeless and will probably not require a "you had to be there" answer to justify it’s value.