How do NFTs’ create value?
Or simply put – why does anyone pay for a digital piece of art that can be freely downloaded. Who pays for pixels?
With working parents, I was raised mostly by my (very financially prudent) grandmother, who looked at ROI on everything she spent.
Being widowed quite early, she was quite astute in how she managed finances. She had to, in order to run a household with 8 kids on a measly pension.
So my first question was, why would/should someone pay for an NFT? “How much could a cluster of pixels possibly be worth?
More pointedly, why is it worth anything at all?”
Here is what I have learned and what you should know. Spend 15 mins this weekend, to learn 5 reasons why?
“In March 2021, a work of art called Everydays: The First 5000 Days sold for $69 million at Christie’s Auction House”
“It’s not out of the ordinary to see eight-figure art sales, but this one received a lot of attention because the piece was sold as a non-fungible token (NFT) – an electronic record corresponding to an image that lives entirely in the digital world.
Put differently: Someone paid almost $70 million for a picture on the internet”
It is not just a digital record of transactions,
“Blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders. In other words, NFTs can do things — or let their owners do things — in both digital spaces and the physical world”
Real Life Use Cases
- How Creators can expand on their product ecosystem with their fans by granting additional tokens : “owners of a particular goat NFT, for example, were recently able to claim a free baby goat NFT that gives benefits beyond the original token; holders of a particular bear NFT, meanwhile, just received honey.
- How folks can build properties on top of “their NFTs that can grow value of the overall brand” – “The Bored Ape Yacht Club, for example, comprises a series of NFT ape images conferring membership in an online community. The project started with a series of private chat rooms and a graffiti board, and has grown to include high-end merchandise, social events, and even an actual yacht party. SupDucks and the Gutter Cat Gang similarly began building communities around NFT image series and associated online spaces; the former has bridged into a boardwalk-themed metaverse game, and the latter has focused on real-world benefits like extravagant in-person events.”
- Blending online ownership with offline use cases – ‘A few restaurants, for example, have started using NFTs for reservations’. ‘companies are exploring how NFTs could be used in establishing and recording people’s identity and reputation online. MIT recently started offering blockchain-based digital diplomas, which are effectively non-transferable NFTs’
So what is the logic here of how and when they create value.
Here are 5 reasons why –
- What are NFTs – Non-fungible tokens are a unique one-of-its-kind digital item. They are stored on public-facing digital ledgers called ‘blockchains’ (check out this video on ‘Explain Blockchain like I am a 5 year old’). What this means is that you can trace the lineage of ownership of NFTs across time. Alice sold it to Bob who sold it to Cathy who now holds it, for example.
- Easy transfer of ownership – If you have done money transactions from one account to another, online, this is no different. Transferring ownership is similar to how ‘banks move money across accounts’. It is very hard to counterfeit them.
- Verifiable Digital Ownership and driving a new market that didn’t exist: We have never to date, had a way of identifying ‘ownership’ of digital assets. Markets cannot exist or operate without the clarity of an owner and a buyer. This is where NFT’s come in. They provide a means of allowing folks to agree on ownership. What does this create? It makes possible new markets around ‘new types of transactions – buying and selling products that never be sold before”
- Be more than a digital record of deeds – So by now, you are probably thinking, ‘ok, so it’s like a digital deed or record of transactions that cannot be counterfeited”. Yes, it is that and more. “blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders. In other words, NFTs can do things — or let their owners do things — in both digital spaces and the physical world”
- How can it be more than ownership? What can you program NFTs into? Think membership or loyalty cards Tickets, access to events, creators using it to interact with their fans to gamify, add special discounts, and ‘serve as digital keys to online spaces where holders can engage with each other‘. As the HBR article states, ‘it’s even possible to send additional products directly to anyone who owns a given token’. As I recall from a podcast I was listening to, this allows creators to engage and build their communities around their personal brands. The programmability has also allowed for “royalty contract, whereby each time a work is resold, a share of the transaction goes back to the original creator.”
- NFTs be faster in adoption vs Cryptocurrency as a ‘medium of exchange of value’ – “NFT-based markets can emerge and gain traction quickly, especially relative to other crypto products. This is both because the NFTs themselves have standalone value — you might buy an art NFT simply because you like it — and because NFTs just need to establish value among a community of potential owners (which can be relatively small), whereas cryptocurrencies need wide acceptance in order to become useful as a store of value and/or medium of exchange”
- As with everything, what are the unique challenges of this space? Direct applications are around digital rights management. But it makes little sense to use it for ‘managing physical collectibles’. It also has to leverage a community of users to drive value. Essentially, you need early adopters and users to provide it value. ‘Lack of engagement can then become a self-fulfilling prophecy, devaluing the NFTs themselves.’
This is not a championing of the technology – no, you shouldn’t invest in one that you don’t understand.
But awareness and knowledge are power.
And something from the HBR article on which this is based, made for a great concluding remark – ‘In the long run, the market will need to contend with the transaction and environmental costs currently associated with using crypto technology.
We will also need to establish more explicit legal frameworks around NFT ownership, and clarify how NFTs relate to existing forms of ownership rights — especially around intellectual property.
At the same time, it’s likely that the most valuable applications of NFTs haven’t even been envisioned yet.”
Original Source : https://hbr.org/2021/11/how-nfts-create-value
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