You can't spell 'non-fungible' without 'fun'

A (somewhat fungible) collection of expert thinking on NFTs

Apr 01, 2021

You can't go anywhere these days without hearing about 'non-fungible tokens,' otherwise known as NFTs, or for the really hip crowd and/or baby boomers, Nifties.

Christie's recently auctioned off an NFT from famed artist Beeple for a cool $69 million.
NBA Top Shot has now done over $400m in NFT transactions on its platform

And just to confirm that this trend has indeed gone mainstream...

Saturday Night Live even did a skit on the topic last week

So what is going on here? And what should you make of it?

Well, those are big questions, and while this article does not intend to be comprehensive, its author does intend to:

Help you understand exactly what NFTs are and why they might be extremely important innovations, and…
Provide you with some of the best resources on the topic written or recorded to-date

Let's start with definitions

I'll give you four different takes on what NFTs are, which together form a helpful mosaic

Here is Jesse Walden's, founder of Variant Fund, an early-stage VC firm in his conversation with Invest Like the Best's Patrick O'Shaughnessy

"I think a really simple way to define NFTs is as a file or a file type that lives on the blockchain. You have MP3, you have JPEGs, these are files that live on your phone or your computer. NFTs are a new file type, a digital media file that lives on the blockchain. And that's technically not correct, but it's a good metaphor for what we're describing. The idea is when you upload a file to the blockchain, it becomes a token that can't be meddled with just like Bitcoin is a digital token that is provably yours independent of any third party. So, in a nutshell, NFTs make it possible to own a piece of digital media in the same way that you are able to own a digital currency like Bitcoin."

Here is Chris Dixon's, General Partner at VC firm Andreessen Horowitz, from his piece ‘NFTs and a Thousand True Fans’

"NFTs are blockchain-based records that uniquely represent pieces of media. The media can be anything digital, including art, videos, music, gifs, games, text, memes, and code. NFTs contain highly trustworthy documentation of their history and origin, and can have code attached to do almost anything programmers dream up (one popular feature is code that ensures that the original creator receives royalties from secondary sales). NFTs are secured by the same technology that enabled Bitcoin to be owned by hundreds of millions of people around the world and represent hundreds of billions of dollars of value."

Here is Linda Xie's, Co-Founder of the crypto investment firm, Scalar Capital (from the a16z podcast)

"An NFT is a unique digital asset that proves ownership and is tracked on a blockchain. This can be a really broad set of assets from digital goods like virtual land and artwork, to a claim on physical assets like real estate or clothing items."

And just for good measure...

Here is Wikipedia's (aka the central repository for all human knowledge)

"A non-fungible token (NFT) is a unit of data on a digital ledger called a blockchain, where each NFT can represent a unique digital item, and thus they are not interchangeable. NFTs can represent digital files such as art, audio, videos, items in video games and other forms of creative work. While the digital files themselves are infinitely reproducible, the NFTs representing them are tracked on their underlying blockchains and provide buyers with proof of ownership. Blockchains such as Ethereum, and Flow each have their own token standards to define their use of NFTs."

Okay, so you can see we've got some common themes here.

NFTs are:

Digital records on a blockchain (mostly Ethereum so far, but others are popping up quick)
Non-fungible (in other words, each is 'one of a kind')
Representative of other assets from art, to videos, to audio, to video games (and many more on the way)
Provable records of ownership (of digital OR physical assets)
Programmable (or customizable in the form of a smart contract)

I'll add two more:

Anyone can buy, sell, or mint an NFT
NFTs allow for fractional ownership—you can own a piece of [you name it, an album, a photo, etc.] This feature be very important in finance and other applications.

So let's tackle some common questions that were at least on my mind before I dove down this rabbit hole:

How can it really be non-fungible or 'one of a kind'?

You might think, "Why on Earth would I ever pay (hundreds or thousands or millions of dollars) for an online image (like a JPG) as an NFT? Can't it be easily replicated an infinite amount of times?" And, of course, the answer to that is: yes, of course, it can. But, and this the difference, what you own when you buy the NFT of that image is the original. So you have a provable record (based on the history of transactions recorded on the blockchain) that shows that you are indeed the holder of, for example, serial number 001 of that picture, song, album, etc.

Why does that matter? Because the original version of anything that eventually becomes popular or sought after, is very likely to increase in value. Music is a good example here. There are millions of copies of The Beatles 'White Album' in circulation, but of course, only the holder of the original copyright actually owns the piece of IP that is truly valuable. In fact, Jesse Walden argues that the more a media asset (song, photo, etc.) is shared online, the more its 'digitally scarce' original will become. Albert Wenger at Union Square Ventures even argues that the digital (or NFT) version of the Mona Lisa might be easier to prove as the original than the one hanging in the Louvre.

Why is 'programmable' important?

Well, for a lot of reasons, but how about we just cover three here:

Creator economics — Many NFTs being minted today include a feature that distributes a portion of proceeds (say 10-20%) of any future sale of the asset back to the original creator in the form of a royalty. This could be transformational for creators—musicians, writers, artists—who would stand to benefit from the long-term appreciation in the value of their creation
Less money to the middle man — The broader trend accelerated by blockchain technology is the decentralization of everything. And NFTs are no exception. What is happening in NFTs today has the potential to displace centralized platforms across media (think: Twitter, YouTube, Spotify) and other industries we aren't even thinking of yet. Basically what's happening is that creators will own the rights to their [video, article, picture], and new decentralized applications will be built on top of this technology to distribute them without the need for rent-seeking middle men.
New incentive structures for creators and fans — NFTs could represent a new way for creators to fund their projects that is mutually beneficial. For example, let's say I told you I was creating an Intentional Wisdom NFT. You could buy into it, and a) provide monetary support for me to produce content like this article, but just as importantly, b) participate economically in the upside of Intentional Wisdom if it were to somehow take off and become a household name. Now think of that across music, film, investigative journalism... you name it, any project that needs funding where you'd like to 'bet' on a creator. NFTs have the power to inspire new business models and forms of collaboration by changing incentive dynamics—that could be projects getting funded that previously wouldn’t have had a chance, and it mean fans and creator becoming more closely (even economically) tied than ever before.

Why should I care? I'm not even THAT into digital kitties.

"New, transformational technologies often start out life looking very much like games," said someone much smarter than me. And NFTs are no exception. So it's no surprise to see them first enter the global consciousness in the form of digital kitties, memes, and "nice to haves" for your favorite video game characters. But like blockchain technology itself, the fundamental characteristics of NFTs will (and already are) resulting in massive levels of innovation across many industries—and it's still the proverbial first inning.

Seth Ginns, Managing Partner at Coinfund, and an early pioneer in crossing the rubicon from 'traditional' finance to crypto says that we're about to see NFTs hit the world of finance in a big way. It makes all the sense in the world for the deeds to our homes or the titles to our cars to find their way into the digital world as NFTs. Again, provable and non-fungible. One of the interesting concepts that Ginns spoke about with Ted Seides (link below) is that he ultimately expects the NFT or blockchain component of these contracts to be "abstracted away." In other words, a consumer doesn't need to know the specific internet protocol in use when they are searching for cat pics on Google... they just need it to work. The same will go for NFTs.

It's reasonable to assume that NFTs and blockchain technology are on the cusp of being just about everywhere. Finance is an obvious place. NFTs themselves could be used as collateral backing loans. NFTs can also be created to represent physical collateral (think: Hertz's rental cars or American Airlines' planes), assets that are already sliced, diced, and repackaged into asset-backed securities. NFTs may take the sophistication of tracking and proving ownership of such assets to new levels. And that is just one drop of an example in an ocean of possibilities.

From a media perspective, Jesse Walden thinks we are entering a world where "every piece of media is incepted as an NFT." He says "I think what we're building here is this universal library of media that's programmable and where value flow is baked into the technology itself, and that's just going to lead to a renaissance in online creativity where the creators of the work are remunerated more fairly than they have been in the web2 era."

Imagine that. Every piece of media. That's every iPhone picture you take. Every blog post you write. Every social media post you send. All of them, NFTs. Seamlessly transformed, without you having to memorize a single acronym. Maybe 99% of them are ultimately worth nothing. But some of them? Valuable. And potentially quite valuable.

So you don't need to be into digital art galleries or crypto kitties to begin feeling the effects of NFTs in your life in the very near future.

Are NFTs a good investment?

I hope you don't think you were about to be served up an investment recommendation here. Didn't you read this piece? Here's what I'll say: Like everything in the crypto world right now, it's almost impossible to say what is and what isn't good value. Is Bitcoin attractive? Is Ethereum? Who knows? We just don't yet have appropriate valuation models or frames of reference to truly answer these questions. But just like blockchain technology itself, the underlying technology behind NFTs appears to represent a truly transformational innovation. However, it's still pretty much a shot in the dark as to who that value ultimately accrues to.

For the zillionth time in this article, I'll quote Jess Walden: "There's so much happening. And so let me preface first by saying we're definitely in a hype cycle for NFTs. This is classic Carlota Perez technology, Financial Hype Cycles, where the markets for these things have exploded really fast, and there's going to be a correction. That said, the technology and the utility of this technology are very real and developers are going to keep developing it regardless of what the markets do."

So, sorry... I've got nothing for you when it comes to what the next hottest NFT to buy will be.

In conclusion...

If we zoom out here, we can see clearly that this entire space is developing incredibly rapidly. I feel like everything crypto, NFT, DeFi, etc. is the real-time manifestation of this graph from Tim Urban of Wait But Why.

Even the experts in the field are having trouble keeping up. But the trend toward greater decentralization and reliance on blockchain technology is not going anywhere. It is accelerating very rapidly and likely will reshape almost every industry over the next decade—the change is as significant as the proliferation of the internet.

There is some amazing content being produced on all of these topics. And let me be clear, no idea is original (unlike NFTs), and the ideas presented in this article are at a minimum inspired by—and at a maximum liberally borrowed from—the excellent resources listed below. I recommend you check them all out. Also, the only thing I know for sure about this article is that it will be out of date the minute it's published, so please share other sources in the comments.