Non-Fungible Tokens

At this stage of my life, I thought I had seen, heard of and experienced almost everything the investing world had to offer. NOT SO, for along comes the rather strange sounding term, non-fungible token or NFT. More commonly referred to as digital or crypto-art, NFTs have been around since 2014 though here in 2021 they have gained widespread notoriety as the “new” way to buy and sell digital artwork.  NFTs turn digital assets into one-of-a-kind assets by creating a unique digital signature which defines the ownership of the digital asset and allows for the smooth and safe transfer of tokens between owners. An NFT is created or minted from digital objects that represent both tangible and nontangible items. As defined, a non-fungible token “is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable.” This certification gives digital assets like collectibles (games, art, music, photos, sports memorabilia and multi-media to name just a few) a unique, trustworthy and easily transferable identity. One of the oddest examples of recent NFTs is digital sneakers! Think of the blockchain as a ledger or spreadsheet that is duplicated many times across a network of computers. This ledger can be used to record not only financial transactions (as with cryptocurrencies), but virtually anything of value (examples include file storage, identity management, land ownership records and now even art).  Information held on a blockchain exists as a shared and continually reconciled database that is not stored at any single location. The underlying technology and programming languages used in creating NFTs are the same as those used by cryptocurrencies. It is important to understand that blockchain is the technology (or cryptographic standard) for the digital ledger and NFTs and cryptocurrencies are simply two different implementations or uses of it.  

This is starting to make sense. While a fungible item can replace or be replaced by another identical item, a non-fungible item is distinctly unique and cannot replaced or substituted for. The best example of something fungible is money, like say a 1$ bill, which is easily converted into a combination of coins. Let’s consider two different art collectors – the first has a beautiful painting to hang on the wall and the second, the NFT owner, owns a digital file instead. Both collectors get exclusive ownership rights as both the painting and the NFT can have only one owner at a time. Both can enjoy the “beauty” of their asset, while maintaining full control over it. While a painting could be forged a NFT cannot. Remember, it is a unique digital asset that has been authenticated. What is the value proposition here? Are both collectors getting meaningful value in their acquisition? Depends, on who you ask. With NFTs, the value proposition is tied to the perceived scarcity of the token acquired, however, as the token represents an item (and is not the item itself), token owners must hope that creators do not create similar art pieces in the future. That is an important distinction as up to this point most digital creations had already existed in some form elsewhere.  NFTs and blockchain technology offer artists or content creators a new and readily scalable opportunity to monetize their artistic creations. Artists no longer have to rely on third parties like galleries or auction houses to sell their art, instead they are now able to sell directly to the collector. Cutting out the middleman allows the artist to keep a larger share of the profits.  Some artists will even include royalty clauses in an NFT, which clauses stipulate that a percentage of all future sales be paid to the artist.