NFTs and the Hype of Digital Ownership
NFTs have infiltrated the news. Despite not escaping the headlines, most of us still have no idea how NFTs work, why they’re important, or why they sell for millions upon millions of dollars. But with household brands creating and selling NFTs, it’s to the point where we can no longer ignore the frenzy surrounding them.
When tech and crypto experts talk about NFTs, it’s like they’re speaking another language. And that creates a dystopian-like mystery around NFTs, but we promise you, it isn’t that deep. Yes, it’s a vast, intimidating world to explore. But we’re here to demystify these digital assets and reframe the discussion about what people consider valuable.
The Basics of NFTs
NFT stands for “non-fungible token.”
Unless you’re an economist, you’ve probably never heard or used the word “fungible.” It’s certainly not a part of our everyday vocab. But “fungible” basically means that something is replaceable or interchangeable. Think of mass-produced goods. There are many copies, and it doesn’t matter which one you buy because they’re all the same.
When an item is “non-fungible,” it means it’s one of a kind. It cannot be replaced with anything. It is unique, and there are no other copies available. As a result, non-fungible items can have emotional or sentimental value because they are irreplaceable. This also makes them more expensive than fungible items.
For example, a pet is non-fungible. If your dog is stolen, getting another dog of the same breed and age won’t replace your beloved companion. A car, on the other hand, is fungible. If your car gets stolen, it can be replaced with the same model and year.
EVERY NFT IS UNIQUE.
In the context of NFTs, “non-fungible” refers to an individual file. There is only one of them. This is where the “T” comes in. NFTs represent the ownership of a digital file, which are called tokens.
We don’t need to overcomplicate the concepts here. Let’s translate.
Token: DIGITAL FILE
NFT: ONE OF A KIND DIGITAL FILE
In its most basic form, a token is a digital file that can be bought and sold. Except you can’t buy NFTs using cash. They’re purchased using cryptocurrency, which is part of the appeal.
When the purchase is complete, it’s recorded in the blockchain ledger, which is essentially a bank ledger for cryptocurrency. It’s a list of transactions, but everything is publicly recorded, and it cannot be altered. And that’s where the allure comes from.
Ownership data is made public. A buyer can purchase a digital file, and they have the crypto equivalent of a paper trail to prove it’s theirs. Anyone can see who owns an NFT and how much the buyer paid for it. In many ways, it’s a flex of disposable income and about bragging rights of owning a one-of-a-kind file.
THE VALUE OF AN NFT IS DETERMINED BY ITS DEMAND.
In general, NFTs are sold via digital auction. The more buyers want to own it, the more they’re willing to pay for it. The same is true for traditional artwork that is auctioned for private collectors.
An original work of art can’t be assigned a monetary value based on its quality or materials. Its value is determined by how much someone else wants it. And that’s why bidding makes the most sense for these transactions.
Beyond their initial sale, NFT creators receive royalty payments from secondary transactions. Each time an NFT gets resold, the original creator gets a cut of that money. And that’s how the people in the headlines are becoming millionaires with minimal effort.
“I think the simplest way to describe NFTs is as signed posters from your favorite artist. For instance, you like Madonna, and she has created a poster of her latest album. She just issued 100 copies of this poster with her signature on it, and it’s all serialized.
So when you buy an NFT, you’re buying one of these 100 copies. Of course, on the internet, you can always download one copy. But that’s not the one with her signature, and it’s not the one with a serial number.”
News Writer at The Verge
In February 2021, Taco Bell sold 25 tokenized designs on an NFT marketplace called Rarible. They launched the collection at $1 per piece, and they sold out in 30 minutes. Many of the pieces were resold, bringing thousands of dollars in royalties for their Live Más Scholarship program.
According to Jenny Stanley, content contributor at The Drum, Taco Bell’s “campaign not only proves that NFTs work well for pieces costing hundreds of thousands of dollars, but that it is also good for $1 gag purchases.”
“As soon as humans have enough abundance to have their basic needs met—food, shelter, warmth, et cetera—the next frontier is to create value in things that have no inherent value. The value turns into psychological hype, excitement around a certain thing,” said journalist and YouTube content creator Johnny Harris. “And if there’s anything that gets human psychology to value something, it’s if an entire group validates that it’s real and that there’s only one of them.”
That’s how artist Mike Winkelmann, known as Beeple, sold a JPG image for $69.3 million. Let that sink in for a minute. A JPG image—one that is downloadable for free and embedded into this blog post—sold for the price of the Thompson Center, a 17-story governmental building in Chicago.
Most of us can’t fathom that kind of money or why anyone would want to spend it on an image that everyone can access for free. But we can understand that exclusivity fuels our buying decisions. It’s the innovation and scarcity that spark a buyer’s interest.
“We’re excited to own a unique picture. Not to go all Ready Player One, but it seems inevitable that people will want the means to express and represent themselves, their aesthetics, in the digital space,” said Donnie Dinch, the CFO of the NFT storefront called Bitski.
That’s why limited-edition products sell out within minutes online. We place value in expression and even more value in rarity. And the hysteria around NFTs is what keeps capturing our attention. It’s a cycle that feeds itself. It doesn’t matter if it’s an artist selling their work or a brand selling files of their logo. The novelty makes NFTs relevant and here for the long haul.