What Makes an NFT an Asset?

What Makes an NFT an Asset

NFTs are all the rage in the crypto world–some are even fetching millions of dollars. But what are the benefits of minting and owning NFTs?

Anyone who has heard about NFTs will marvel at the astonishing prices people are willing to pay for them. Recently, the “Side-Eye Chloe” meme sold as an NFT for US$76,377.50, joining many other legendary meme NFTs. But what are NFTs? And why are people willing to bear such an expense to own them?

What are NFTs?

NFTs, short for Non-Fungible Tokens, are digitally unique assets that exist on a blockchain.  

An NFT is akin to a certificate of authenticity (COA) that accompanies the sale of a piece of traditional art. However, in the token’s case, the item itself is the COA. This means that at any given time, an NFT can only have a single owner. This makes NFTs very desirable as new age collectibles.

What is the “value” of an NFT?

NFTs are minted for scarcity, with very few tokens created from an individual art piece. While all NFTs are digitally unique, some of them are the only ones of their kind. The fewer tokens minted of an art piece the more value the collection tends to have. The rarity of an asset is one of the aspects lending to its great value. However, rarity alone cannot do much without a demand.

Let’s take the NBA Top Shots as an example. This platform allows fans to buy, sell and trade what are essentially virtual trading cards of their favorite player’s best shots in the form of NFTs. The appeal lies in the fact that fans can claim partial ownership of a great moment in NBA history.

Image Courtesy of Wikimedia commons

Another example can be Italian artist Maurizio Cattelan’s 2019 art installation known as “The Comedian” or, as it is better known on the internet, “The banana taped to the wall”.

There is nothing particularly special about the banana in Cattelan’s installation; in fact, the original was eaten and then promptly replaced by another banana from a nearby grocery store. This is the very idea behind fungibility– one banana can be easily replaced by another. And yet, the piece sold for US$120,000. 

The cause for these massive numbers, of course, was its immense potential as a meme that went viral globally. It was the demand created by the hype around the piece and the fact that Cattelan is a well-recognized artist that gave it value, and not the actual materials of the installation. 

Similarly, the value of an NFT is determined by the concept that it represents, not its physical attributes or lack thereof. 

The issue of ownership 

Purchasing an NFT does not give the buyer complete ownership of the creation. Buying an NFT makes that particular digital code the buyer’s property. This partial ownership does not, however, give one the rights of a creator, like copyright and distribution privileges. 

In this regard, NFTs are akin to a piece of merchandise. One may purchase an NFT of Kevin Durant’s dunk shot for US$3,270 from NBA Top Shot, but the clip is still owned by the NBA, and anyone can view or copy it directly from the website free of cost. A copy is as good as the original.

Moreover, a blockchain cannot absolutely ascertain the authenticity of a piece of work. Therefore, it is possible to tokenize a piece of content while infringing upon the creator’s copyright. On top of that, the concept of scarcity is limited to each individual blockchain. If an artist were to mint more tokens of the same piece on a different blockchain, is the piece truly rare enough to be a collectible?

Who benefits from NFTs?

Artists

NFTs have been a saving grace for many artists struggling to monetize their skills. They allow artists to market their work on a global scale, improving the probability of making a sale.

Artists can also add a royalty clause to their NFTs. They will earn a certain percentage of the profit every time one of their NFTs is purchased by someone else, allowing the artists to profit from their work, even long after they have sold it. The greater popularity of the NFTs will then lend to the higher reputation of the artist, which in turn adds more value to the rest of their pieces as well.  

Buyers 

Individuals in possession of cryptocurrencies can use them on NFTs to support their favorite artists financially. It also gives the buyer some basic usage rights like posting the image online or using it as a profile icon. Then there are the bragging rights of owning a piece of art with an immutable receipt in the form of a blockchain entry as proof of ownership.

Those looking to monetize the trend can also purchase NFTs to sell them for a profit later.

Investors

Currently, NFTs do not offer much in the way of investment value. One can purchase an NFT and hold on to it in the hopes that it would gain value one day. However, the crypto market is currently too volatile to guarantee any profit.  

Banner image courtesy of Flickr

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