Transforming Value Through the Non-Fungible Token Phenomenon
By: Frederik Gregaard, CEO at the Cardano Foundation
The year is 2008. You are a young investment analyst at a top Wall Street firm, trying to make a name for yourself despite diminishing returns across the traditional investment landscape. You enter a boardroom of seasoned portfolio managers with a carefully curated pitch months in the making—invest in sports trading cards.
In a year marked by one of the worst financial crises of our time, your foray into alternative investments would have likely seen you relegated immediately to the fringes of professional finance.
Yet, according to Forbes, a position in ‘blue chip’ trading cards opened in 2008 would have yielded more than double an equivalent investment in the S&P 500 over the next decade. Of course, our readers will know that 2008 would also have presented an entirely new avenue of investing—digital assets and the rise of Bitcoin.
If you hadn’t been immediately shown the door, you may have lasted long enough to see your strategy vindicated, as traditional markets entered one of the most bearish periods in the last century shortly after. The lesson here? We don’t always understand new trends, but that doesn’t make them less valuable.
We stand now at a new juncture of value, one born alongside digital assets in the 2008 financial crisis, but only just beginning to bear fruit—the non-fungible token revolution.
Non-fungible tokens, or ‘NFTs’ as they are more commonly referred to, are taking the world by storm. Representations of unique digital assets and items, NFTs have much in common with trading cards, in that they are unique, scarce, and sought-after. But unlike trading cards, you won’t be able to hold or covet these assets in your hands.
It may still be an alien concept for some to buy virtual items in exchange for real value. But it is second nature for swathes of digital natives—and this generation is growing at an unprecedented rate.
This has been evidenced most recently by several events that have transcended the digital frontier and made ripples across the traditional financial world. In late-February 2021, a non-fungible video token—featuring just 10 seconds of content—fetched an eye-watering US$6.6m at an auction. Miami art collector Pablo Rodriguez-Fraile had spent just US$67,000 on it six months prior.
Of course, the core NFT-economy will be driven not by record-breaking sales, but by the steady growth of functional and usable NFT tokens. These tokens, bought and sold regularly by digital natives on gaming and social platforms worldwide, will carve out new economies based entirely on bytes of data.
L’Atelier, part of BNP Paribas, described NFTs as a new economic frontier, even going so far as to claim they could facilitate the next intergenerational transfer of wealth. But let’s take a few steps back and discover exactly what NFTs are, and how their characteristics differ from other forms of digital assets.
What Makes a Token Non-Fungible?
Anything digital can essentially be represented as a token on a blockchain. For fungible assets, this could include a euro-backed stablecoin, an equity stake in a new startup through a security token, or a governance token.
On the other hand, for assets that could be considered rare or unique, a different approach is needed—one which can adequately represent scarcity, origin, and individual characteristics.
Some of the most ubiquitous examples of NFTs arrive through the world of gaming, where players are naturally accustomed to buying unique items for their characters and virtual worlds. These could include unique, one-of-a-kind appearances, or ‘skins’. Alternatively, they could represent rare in-game achievements or equipment.
When represented as an NFT, these in-game assets become valuable and can be sold to other players or transferred across accounts. A similar scenario arises with digital art. As we have already explored, scarcity written into an NFT through the blockchain can give provenance to an original digital work of art, proving when, where, and by whom it was created.
Just as the Mona Lisa is housed in the Louvre, digital art is housed on the blockchain. You can find millions of photographs, prints, and convincing copies of the Mona Lisa across the world, but none have value remotely comparable to the original. Similarly, NFT artwork can be copied and shared across the internet, but the original piece of art will always be provable and immutably stored on the blockchain.
It’s important to note that NFTs are not a new concept. Many NFTs were first proliferated alongside the rise of other forms of tokens, made possible through the first blockchains to offer layer-two solutions.
But what is new, and most interesting from a financial and ecosystem growth perspective, is the sudden and unprecedented demand for NFT assets. Driven by a mix of technological maturity and more easily-accessible infrastructure, the NFT value web is evolving before our eyes.
So, as technologists and investors, how do we respond to new NFT value models and ecosystems?
Reacting to the NFT Age with New Value Models
As you may imagine, the rise of NFTs has started a chain reaction in both the financial and tech industries. And, quite unique in the blockchain space, NFTs have encountered little in the way of resistance to their adoption—even by traditional institutions.
For example, the centuries-old auction house, Christie’s, recently announced that they would be offering the works of Mike Winkelmann, the digital artist known as ‘Beeple’. Winkelmann’s works, collected into a collage of over 13 years’ worth of individual digital pictures, were minted as an exclusive NFT for sale at Christie’s. The NFT art, around 319 million bytes in size, is issued by MakersPlace, a rare digital art marketplace.
Christie’s quick adoption of NFT art has been seen as a crossover moment for the blockchain industry by some experts. For others, it highlights the need to move with innovation, or risk being left behind.
Landmark sales of art NFTs cross borders with the existing art industry, but what of the growing NFT gaming industry? Moreover, how can the GDP growth of virtual economies be measured when the product is digital, borderless, and essentially intangible in any traditional sense?
One company exploring and responding to this phenomenon is Animoca Brands, a Hong Kong-based NFT company founded by Yat Siu in 2014. Animoca Brands have created ‘The Sandbox’, a virtual game world—or metaverse—where players can mint, own, trade, and sell their own NFTs.
Uniquely, this includes not only digital items for players to use, but also includes what essentially amounts to digital deeds for virtual real estate, hosted on the blockchain through NFTs. Through these tokens, Sandbox users can buy entire digital estates with real-world funds, proving ownership of their corner of the metaverse.
Such virtual worlds have given rise to complex digital economies, many of which even contain market-based financial products not too dissimilar from that of traditional banking establishments—with item lending and leasing economies emerging, virtual land and real estate being brokered, and services undertook all for payment in NFTs.
With over 2.7 billion gamers worldwide, this new and emerging economy is closer to mainstream adoption than many believe. But at present, it exists in the realms of what some may consider a shadow economy, with users transacting digital value—often significant sums—peer to peer rather than through formal agreements.
This is where the rise of NFTs confer tremendous opportunities to both investors and entrepreneurs alike. Through blockchain technology, the value of digital items, artwork, are finally representable and tradable through official marketplaces, and the digital world can benefit from access to formal financial products.
The only question left is where will the biggest opportunities be? First-mover blockchains may currently have the advantage in the number of NFTs minted to date. But new challengers, like Cardano, could quickly capture value in this nascent field through access to more affordable and faster transfers of NFTs, more expressive smart contracts, and greater security.
What is certain, is that the NFT frontier will continue to make its advance on existing industries, from digital art all the way to gaming. Those who quickly adapt and innovate to this phenomenon could find it dramatically shapes opportunities in the future.