Where do you go when the things you want in real life are already spoken for? The latest For Sale sign is for all things digital.

In the early 90’s I began a magazine called FamilyPC to look at how digital life would change family life. One prediction was that the generation of kids growing up back then would understand the value of digital currency and digital assets as part of their DNA. They would grow up in a tokenized world where acquiring virtual items like castles or swords online would be just as real to them as owning Legos and HotWheels.

Fast forward several decades and we’re here. Those kids are now adults. And one of their new currencies are NFTs or non-fungible tokens.

No, It is Not a Fungus

While it sounds kind of like an infectious disease, for something to be fungible simply means anything like it can be interchanged at the same value. Commodities, common shares, options, and dollar bills come to mind. If I have a $5 bill, my $5 bill and yours are completely interchangeable. Similarly, my ten can be traded for two fives.

Non-fungible goods are things whose values are not readily interchangeable. Think American Girl dolls, sneakers, trading cards, art, and real estate.  Each item is unique and has its own intrinsic and extrinsic value.  What creates value?  Demand, scarcity, uniqueness, authentic-ness, and a particular moment in time—essentially whatever someone else is willing to pay. As a mother who waited on line at toy stores for Cabbage Patch dolls and Hotwheels, I can attest that none of this is news.

What is news is that non-fungible items are finding their way into the digital world.  You can now scarf up digital “things” like art, music, video, avatars, images of castles or fashion. These things exist only in the digital universe.  How do you show you own a piece of that digital world?  With a token, which is made possible by the set of innovations that came into the world along with Bitcoin, back in 2009. A token is the digital equivalent of a deed or certificate of ownership. This proof of ownership is not stored in your filing cabinet or safety deposit vault.  It is recorded in perpetuity on a blockchain. The proof that you own it, that it’s unique and that it cannot be duplicated is an expression of its value.  (See sidebar on how to mint an NFT.)

The concept isn’t especially new. People have been investing in pieces of digital things for over 15 years, ever since games like Second Life made it possible to buy a home in cyberspace, or when, even earlier, China’s Tencent offered games that sold virtual blue jeans that actually wore out. What is new is that the blockchain, theoretically, can be the immutable repository and record of ownership.

Ownership of digital things has always been a thorny issue. Think about it. You buy a copy of Microsoft Word, but you don’t really own anything, you own the right to use it. And that didn’t even feel fair to many–until Adobe changed its business model, unlicensed versions of Photoshop were rampant among creative rebels. The travels of anything — graphics, an article like this one, a video, or any cyber-creation– has been near-impossible to track, much less protect and show ownership on the Internet. And even when you own something tracked by an NFT, the rest of the world will still generally be free to view it and pass it around without any royalty payments to you (yet).  You know the way the Mona Lisa is owned but sits in the Louvre for all to see? Well, that’s how NFTs are on the Internet… they are still very much in the public sphere.

The Perfect Storm

The maturation of blockchain technology, a pandemic that provided us with excess free time to explore the digital world, and a gamification mentality created the perfect storm for NFTs. Suddenly, there is a rabid interest in owning pieces of digital stuff. (Goods tracked by tokens are themselves often referred to as NFTs, but the NFT is, properly, just the means by which they are recorded and “tokenized.”)

Just look at some of the wacky digital-only stuff that has recently been purchased (and for ungodly sums of real money):

• $6 million for a variety of forms of the musician Grimes’ artwork
• $6.6 million for a 10-second video clip by the artist Beeple, via a Sotheby’s auction
• $3.6 million for a custom song by the DJ 3LAU
• $2.5 million (the highest bid so far) for Jack Dorsey’s first tweet
• $1.5 million for a pixelated drawing of a so-called “CryptoPunk”
• $1.5 million  for the CryptoPunk called “ape in a fedora”
• $590,000 for an animation of a cat shooting a rainbow out of its ass
• $280K for a video clip of Lebron James dunking a ball

• Other NFTs are less celebrity-dependent. Decentraland sold $1 million in virtual land. And in Axie Infinity, a crypto-Tamagotchi virtual ecosystem, a community member purchased nine digital plots of land as one parcel for 888.25 Ether (equal to $1.6 million at today’s price), making it possibly more expensive than physical land.  Musicians like the Kings of Leon are experimenting with releasing their albums as NFTs—you can own their song, which should help add a chunk of change to their Spotify revenues.

Something Happening Here

So, is investing in an NFT asset a sane thing to do?  It depends. Taking a cue from the real world, it helps if you know your market.  Just like in the real world, owning the millionth reprint of Van Gogh’s Starry Night isn’t worth much. Owning the original is a different story. Influencers and famous folks making digital things will generally result in those achieving the highest initial values. But unknowns will likely be discovered.  It is the monetization of influence.

For brands, NFTs can provide a field day.  Virtual merchandize from t-shirts to artwork to front row seats at virtual events will become new sources of income and loyalty. (For more on brands, businesses and NFTs, follow Cathy Hackl.)

Environmentalists are not going to be NFT lovers   It takes a ridiculous amount of computing power to create digital currency, blockchains and other tools for this new way of declaring ownership.  To quote Shelly Palmer, NFTs are so hot they’re making the earth hotter.  On average, he says, “minting a new NFT takes about 130 kWh of electricity. That’s about $27 worth of electricity here in NYC. Selling your NFT will use about 340 kWh of juice, which is about $71 per transaction, which is enough electricity to power your whole house for about two weeks or run your refrigerator for a year.”  You can see the energy consumption of individual NFTs at cryptoart.wtf.)

In the macro sense, NFTs could place a big “For Sale” sign on pretty much any digital internet property.  And like other gold rushes and land grabs before them, there will likely in the end be more pile-ups than short cuts to easy street.

SIDEBAR:

How to Mint an NFT

The geeks tell me that creating a tokenized digital assets is pretty easy. I didn’t think so. I followed an in-depth tutorial on Kapwing.  Step one was to take something I created digitally — a song, a GIF, or an avatar, and then open an account on the Ethereum network (or another blockchain service).  To do that I would need to put some “coin” in the account and buy my own digital asset. Then I need to head to an NFT marketplace like Rarible and list my asset for sale.  After completing these steps another buyer could buy my NFT with their own Ethereum coins.  The process of creating an asset and putting it into the marketplace is called “minting”. Minting a token is not free. You will pay fees to open accounts and join marketplaces.  After attempting to do this myself, I can see an entirely new sector of jobs as “minters” opening. After trying for a while, I eventually gave up.

Source: https://techonomy.com/2021/03/next-land-grab-digital-nft-tutorial/