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On the value of NFT

An NFT (Non-Fungible Token) is a data structure that points at a particular data object in a unique way. See it as a way of naming digital objects, such as photos, texts, audio or video, in a way that allows referring to them with no ambiguity.

The ability to refer to data objects allows to “mention” them in transactions. This seemingly trivial ability, when combined with the ability to create immutable records of transactions (as provided by Blockchains), allows us to create immutable records that refer to data objects.

Technically, NFTs do not require blockchains. You could take a photo of a cat, create an NFT for this photo, which is essentially a unique pointer to (or: a descriptor of) it, and then go on to write a real contract on paper that says “this photo of a cat, bearing this unique ID, is hereby assigned to John Smith”, whatever this assignment means.

Blockchains and smart contract technologies allow for such digital agreements to be stored in a public immutable record that does not allow anyone to change it once it was written. The combination of NFTs and blockchain-based smart contracts thus allows us to securely record agreements that declare ownership of digital goods. If you have any file (photo, text, video, etc.), you can create an attestation that tells the entire world that you assign this file to be owned by whoever. What does this “ownership” mean? – Good question; but whatever it means, billions of dollars have already been paid towards such ownerships. Is this real? The money surely is, but is also the value?

Assets are becoming digital

It is always empowering to digitize something that has not been digitized before. Remember how excited you probably were when photos could first be stored in a computer as JPG files, backed up properly, shared easily, and accessible wherever you are. Also remember how happy you must have been when MP3 files took over cassette tapes and CDs, enabling music sharing as well as portable MP3 players. Similarly, TIFF file formats and document scanners revolutionized how offices handle the paper documents that still remain. We like our assets to be digital, because it makes them easier to handle and use, and this holds true even if those assets are pieces of art.

So what’s wrong with taking a piece of digital art, such as a photo of a cat that I took, creating an NFT for it, and selling that NFT? Nothing is wrong, but is this really “selling”? Even if the photo is worth being sold, is it also reasonably worth being bought?

The reasons for possession

People have different reasons for buying stuff. I’m no expert on the subject, but such reasons are usually one or more of:

  • Being able to use the product (video game, book, software, refrigerator)

  • Being able to control who can use the product (copyrighted work, real estate, art)

  • Bragging rights, to others and to oneself (collectibles, items of emotional value)

Obviously, publicly available digital works that are assigned to you by NFT do not allow you to use them more than you could before, nor to preclude their use by others. If you are the only person who is supposed to view that rare photo of a cat that you bought, then NFT is not the way to attain that, but secure delivery is. If you want to limit what others can do with the photo of a cat that you bought, then buying the rights on copywritten material is also nothing new. (If you want to buy the right to post a certain Dilbert strip on your homepage, then there is a link on dilbert.com that allows you to purchase just that legal right.) No NFT there. NFT could be used to streamline some of the process, but honestly, I cannot see how it could become easier than it already is. NFT is more suited for the case where you want to assign ownership to one person, in a way that is viewable by all. It is thus more about selling a bragging right than anything else.

The quest for bragging rights

Whether NFT is worth our time or not depends on how much “bragging right” value can be attained by “owning” an NFT token. This is not a technical dilemma but a sociological one. The owner of a rare painting earns his bragging rights also from his ability to control who can use that original painting (i.e., view it). If you want to experience the thrill of looking at a genuine painting by Vincent van Gogh, you have to go through one of the few owners of such. Of course there are many reproductions, which look pseudo-exactly the same, but they don’t give you that same thrill as when looking at the original. Quite differently, whoever owns the NFT of a publicly available picture of a cat, has nothing that the rest of us don’t have, other than a proof that he spent whatever sum of money for the mere right to make this claim of ownership, for what it’s worth.

The closest analogy I can think of is the iPhone app called “I Am Rich” by Armin Heinrich. This app sold for $999 a pop, and all it did was display the text “I am rich” (plus a few other words) on the screen; nothing else. People were expected to pay just for the right to demonstrate that they could afford shelling off a thousand bucks for this banner on their screen. How many people bought this app? Eight, of which at least one did it by mistake, until Apple took it off.

The utility of NFT is up to our culture

Society will decide what gives people valuable bragging rights and what doesn’t. Over the next years, it will decide if “virtual” ownership that has no practical meaning is worth as much as its traditional equivalent. Such ownership can enable interesting use-cases, e.g., a market for tokens of ownership that can keep on changing hands forever. All those use-cases, however, still rely on those NFTs having a recognized value. This value will only be determined by mankind and its appetite for such esoteric notions of ownership.

The other route: value without utility

My view is that NFT actually stands a chance of being valuable, but for reasons that are entirely detached from traditional senses of ownership, and even from utility. NFTs are assets; NFTs can gain and lose value, and they can be traded, regardless of any artifact of traditional ownership.

Our economy is long past the time of measuring value in labor or in tons of rice, for good or bad. (Read “The Value of Everything: Making and Taking in the Global Economy” by Mariana Mazzucato for more on this.) If you have something of proven scarcity, people might happily trade it and its derivatives, as such trade may be perceived as generating value, regardless of the utility of what is being traded or lack thereof. If a certain string of characters, call it an NFT, can only be assigned to one person at a time, and there is a limited supply of similar such strings of characters (such as because this particular string points to a very special photo of a cat), then people will assign value to it. They will buy and sell it, they will speculate on it and buy it today to hopefully sell it for more tomorrow; and all this could be done regardless of the type of cat that appears in the photo, if one appears there at all.


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Rafi on :

Exciting!! A real challenge for economic analysis.

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