A Primer On NFTs For Brands And Business Professionals
In the Spring of 2019, a highly sought-after plot of land was put on the market.
Estate 331, nicknamed “The Secret of Satoshis Tea Garden,” is centrally located in a busy, expensive area known as “Genesis Plaza.” But it’s also spacious—its owner had diligently bought up 64 adjacent parcels of land which, together, form a perfect square.
There are plenty of other perks to boot. For example, while busy roads line each edge of the square, bringing high traffic from nearby regions, no roads go through it. And, by law, the more contiguous parcels a single landowner possesses, the higher they’re allowed to build, so 64 together allows for some near-unprecedented potential.
Of course, there’s one other important thing to say about Estate 331: that it’s not a real estate asset in the way you’d imagine. You can’t drive there or walk there, there’s no dirt or grass. It’s just computer code—virtual land in a digital world that you can visit only on a computer.
Trivial as that may sound, Estate 331 is nonetheless a valuable real estate asset. On March 24th, 2019, it sold for just over $80,000.
Fast forward to 2021 and a plot of land on the Axie Infinity gaming and virtual real estate platform has just sold for $1.5 Million, breaking prior records. This trend is only expected to continue with virtual land sales like The Sandbox’s recent Public Sale Wave 2, selling out in less than a minute. The fashion world is also taking notice with the most recent example of a FEWOCiOUS x RTFKT sneaker NFT collaboration drop that generated $3 million. All three sneaker editions sold out at $3,000, $5,000 and $10,000 levels.
Real estate in Decentraland is just one example of a popular, growing asset class called “non-fungible tokens,” or “NFTs” for short.
NFTs are blockchain-based assets, distinguished from other blockchain-based assets—like, say, cryptocurrencies—in that they cannot be substituted or exchanged for similar items.
Where one Bitcoin can be swapped for another Bitcoin, or an equivalent sum in Ether, or Bitcoin Cash, each plot of land in Decentraland is unique. Like real land, some plots are centrally-located in the universe, some are nearer to roads, some are larger and some smaller. Other examples of NFTs are artwork, unique in-game items for video games, and web domains.
So that’s what an NFT is, but non-fungibility on its own hardly explains how a plot of virtual land in a virtual universe can run for tens of thousands of dollars. No, to understand that phenomenon we have to go even deeper. We must understand what gives anything value at all.
How NFTs Derive Value
Since time immemorial items were traded between two parties according to who needed what. If a goat herder had lots of goats but not enough furniture, they might trade a goat for some furniture, or some furniture yet-to-be-built. The goat had value to the hungry, the furniture to the minimally-furnished. Thus, items held value according to scarcity and need, or supply and demand.
Over time, our notions of value have expanded. Mainstream economists generally subscribe to a “subjective theory of value” or STV, (in contrast to a “labor theory of value” which, amusingly enough, was supported by both Adam Smith and Karl Marx, albeit in different forms.) According to STV, a good or service is not valuable in and of itself but, rather, in proportion to how important it is to a consumer. A beautiful, vintage dining room table costs more than a simple Ikea table, but only if the consumer has a more expensive taste.
Supply and demand are as fundamental as food and water, and STV frees us from the notion that things have inherent value—that a dining room table, or a plot of dirt, is, simply by virtue of being what it is, worth what it “should” be. Together, these concepts can help us make sense of how NFTs, intangible and unintuitive as they may be, can be worth lots of money. A plot of land in a vibrant 3D world, or a digital artwork, or an in-game item, may be worthless to some people, yet highly attractive to a few. And even more importantly, NFTs are, by their nature, unique and non-reproducible (think: Estate 331). That swings the supply-demand curve far towards one direction.
All this doesn’t mean that NFTs must cost tens of thousands of dollars, of course. But that kind of price tag isn’t a total outlier in the space. In fact, relative to certain other NFTs on the market, $80,000 is pennies. As of this writing, a digital artwork titled “Everydays: the First 1,000 Days” is on auction at Christie’s, the highest bid just shy of $3,000,000.
Now we understand how NFTs can be valuable, yet certain other matters remain unresolved. For instance, an astute observer might note that software tends to be highly reproducible. You can’t recreate a plot of dirt, or a Matisse, but you can copy a PDF, or free software, onto as many computers as you’d like. What, then, gives NFTs their irreproducibility? What’s stopping anyone from simply pirating Decentraland and recreating Estate 331—bit for bit—to sell a second time over? Or, for that matter, what’s stopping Decentraland’s developers from doing the very same thing?
These are important questions for anyone looking to invest in NFTs. If you’re going to drop $80,000 or $3,000,000 on such a thing, you’ll need a good way of ensuring that someone can’t come along and steal it, or destroy it.
This is where the blockchain comes in.
Blockchains are, in their purest form, lists.
Each blockchain records a series of events, or transactions: Alice sent Bob two Bitcoin, Bob sent Charlie one Bitcoin, et cetera. Because transactions are causally linked together cryptographically (in a kind of “chain,” hence the name) it becomes near-impossible, after a certain number of new transactions have occurred, to modify an old one. Alice, for instance, can’t retroactively erase her payment to Bob if 300 Daniels, Ericas and Freds have all paid one another in the time since. As an analogy, you can picture a house of cards: each card stands only by leaning on the others, so you can’t pull one out from the bunch without making a mess.
NFTs are recorded on-chain just as cryptocurrencies are, so once ownership is transferred it cannot be reversed. As “tokens,” they possess a unique ID which distinguishes them from other NFTs. And because blockchains are typically open—that is, anyone can view the history of transactions for themselves—it’s easy to spot shady deals and forgeries. In these ways, NFTs are verifiable like historic artworks: they travel securely between parties, they possess certain qualities that distinguish them from copies, and anybody who looks can make these determinations for themselves.
How Big Will NFTs Become?
Now that we understand how NFTs derive value, and how they ensure security, the notion of an $80,000 plot of virtual land, or a $3,000,000 virtual artwork, is at least conceivable. What, then, does the future hold for this strange and intriguing asset class?
While there’s no saying for certain, evidence suggests NFTs will only become more and more widespread. They’re still very new, after all, and their popularity has been underestimated since the start.
The big debutante ball moment for NFTs occurred just three and a half years ago. Cryptokitties, based in the Ethereum blockchain, was a kind of blend between trading cards and Tamagotchi: Ether investors could pay for digital kittens, each with their own unique combination of attributes (or “cattributes”) such as fur and eye color. The kitties didn’t do a whole lot, but they could grow and produce offspring which, like their parents, were also one-of-a-kind.
The thing is: neither Dapper Labs—the app’s developers—nor the Ethereum community anticipated just how fast the interest in this simple game would accelerate. Within weeks of its release, Cryptokitties experienced so much activity that it nearly took down the entire Ethereum blockchain. The most expensive kitties sold for upwards of $100,000. In one case, a spunky grey kitty sold for nearly $150,000.
When Cryptokitties hit Ethereum like a tsunami, the blockchain community learned the power of NFTs. But, even three years on, that fact still seems to elude the rest of us. Hip investors like Chamath Palihapitiya, Mark Cuban, and Elon Musk have gotten on board, but most people are still underestimating NFTs, or simply don’t know about them.
This new alternative and digital asset class is driving value and expanding the virtual goods ecosystem, which is expected to reach $400 billion by 2025.
As augmented reality, virtual reality, spatial computing and the direct to avatar economy collide, NFTs will probably be one of the ways that we will conduct commerce in the metaverse. How many $80,000 deeds, how many $3,000,000 auctions will there need to be before we all take notice?