NFTs, Non-Fungible Tokens, have broken into the mainstream in the past few weeks.
Nifties, as some call them, are a way to prove ownership of a digital asset like a photo, illustration, or video using the blockchain. NFTs aren’t a currency like BitCoin or Ethereum, they have no intrinsic value, the value of an NFT comes from the value of the actual asset that it represents.
The NFT markets have been skyrocketing and this excitement and energy is largely centered on NFT art. Digital art is being sold as NFTs. It usually comes in the form of a jpeg, gif, mp4, or other common image and video file formats. NFTs contain metadata and the metadata usually includes a link to the artwork, hosted elsewhere on the web. This means the artwork itself is not on the blockchain but the certificate of ownership, NFT, is on the blockchain or public ledger.
Because of this, if you want to use one of these pieces of art as your background image on your device, there’s nothing in place to stop you. The file is public and anyone can right-click and download it just like any other image on the internet.
So then why own NFT art?
Nifty art has little utility beyond being able to display it in somewhat obscure virtual worlds. Some say to buy them for bragging rights, because owning things feels good, or to start a collection. Maybe that resonates with you, maybe, like me, it doesn’t. I’d say a lot of people are buying NFT art because they don’t understand the speculation trap they’ve fallen into.
NFTs today, feel a lot like the crypto craze of 2018. The difference is that NFTs have no inherent value, are not a store of value, and there’s no way to get your money out besides finding a buyer for your specific token.
The nifty art market is based on artificial scarcity, hype, and speculation. Artificial scarcity isn’t enough to drive lasting value. Almost every article about NFTs mentions Crypto Kitties as an example of the power of artificial scarcity but they overlook the fact that the cats offered utility in that you could breed them and sell the offspring to others, for a profit.
While nifty art is getting all the attention, there are very practical use cases for NFTs that will outlast the art craze.
NFTs have two important traits that make them valuable tools. They are tradable on open markets and they prove ownership. Taking advantage of these traits to provide utility is where the real value of NFTs comes from. NFTs are not art. Art is just one type of asset that an NFT can represent and it’s important to remember that.
These are a few of the real-world scenarios where NFTs could be game-changing.
Tickets are a great use case for NFTs. Tickets to concerts, games, conferences, or other events and shows — both in person and online. In this case, there are already markets set up to sell your tickets to another person but they’re fraught with uncertainty and fraud. Oftentimes, all you need is a barcode printed out or on your phone to get into an event. If you bought the ticket second-hand, which has become increasingly the only way due to a proliferation of bots buying tickets as soon as they go on sale, how can you be certain that they didn’t sell the same barcode to someone else or several others? First one to arrive gets in and everyone else got scammed. That’s not a good system.
There have been attempts to make physical tickets have holographic or otherwise hard to counterfeit traits but to a one time buyer I wouldn’t know how to know if what I’m looking at is real or an elaborate fake.
This is what provability of ownership solves. With the NFT, you can see that the ticket originated from the official organization in charge of the event and there is no way for someone else to use the ticket. You can be sure that you didn’t buy a fraudulent ticket and be sure that it will work to get in.
Movie ownership feels a little different than it used to. We used to own DVDs. They were ours and we could do what we wanted with them, permitting we weren’t breaking laws. These days, if you click buy in iTunes, what do you get? You get the privilege to watch the movie from your account, in iTunes, and that’s it. There’s no transferability. You can’t move that movie to Google Play or lend it to a friend because you didn’t buy the movie. You bought a privilege to consume it through a service.
If digital movies instead used the NFT model, you would own a copy of the actual files and you could watch that movie through any service or player that you want. You could give it to a friend for the weekend. When you’re tired of it, just like a good old-fashioned garage sale, you could sell it off.
I don’t foresee large movie studios being at the forefront of this innovation, they are currently benefiting from this lopsided system. I would expect smaller studios and independents to be the driving force in this change.
Have you ever bought in-game items? If you have, you’ve given money to the makers of the game, and in return, you get to use the item with your account in their game and that’s it. If instead, you bought an NFT that represents a digital asset in the game, doors start to open. You could exchange your items on a public marketplace. You could show off the items you own on your blog. If you no longer play this game, you can sell off all of your items.
At first, it feels like all of the power is being given back to the users and the game makers are losing if they adopt NFTs. But, they won’t lose if they adapt. NFTs create more reason to buy items and an ability for users to show off items which drives demand for more limited-run items. The switch to an NFT model creates a more thriving market and the ability for the game makers to produce more items to sell.
There are so many more ways that NFTs can and are being used but just because they can be used, doesn’t mean that you should. No article about crypto would be complete without including a mention of the environmental effects of using crypto, which is enormous. With such high environmental costs, NFTs should only be used when it offers real utility and value that is hard to obtain otherwise.
To understand the environmental costs, I’ll send you to this article explaining them. https://everestpipkin.medium.com/but-the-environmental-issues-with-cryptoart-1128ef72e6a3
Originally published at https://joeczubiak.com on March 11, 2021.