The Year of the NFT

Not long ago, I was patiently waiting my turn at the deli counter and could not help but overhear the wildly entertaining conversation that two older women were having in between the rapid-fire instructions, corrections, and inspections aimed at the handiwork of the deli folk. As a co-founder of Rubicon Crypto and chief correspondent for this Rational Exuberance series, you can only imagine how my interest really peaked as they started talking about the recent record-setting auction price for work by the digital artist Beeple— almost $70 million. Although these ladies referred to the artist as Beep or Peep and adorably used the term "online painting", the point is that just about everyone has by now heard about non-fungible tokens, better known as NFTs!

To Fungible or Not to Fungible…

So far, 2021 has certainly felt like the year of the NFT. Is it just me, or does it seem as though just about everyone has been launching an NFT for just about anything, just about everywhere?!? But, exactly what are non-fungible tokens? And, why do they matter? Well, to begin, let's talk about the fungible before we delve into the realm of the non-fungible. A fungible asset refers to an asset that is interchangeable with any other like unit of that asset. For example, one US dollar is the same as any other US dollar in circulation. One euro is the same as any other euro in circulation, and indeed, one Bitcoin or one ETH is also the same as any other Bitcoin or ETH in circulation. It's also important to keep in mind that these fungible assets are divisible and essentially indistinguishable from one another. By the way, all these features are essential for any asset to serve as a viable form of payment. Now, in contrast, non-fungible tokens are crypto tokens that are absolutely unique and indivisible. And while NFTs are built on top of smart contracts such as Ethereum, NFT contracts contain very specific code that makes each NFT different from the rest. In this way, NFTs are not interchangeable with other NFTs nor can the whole be broken down into smaller units for any reason. These are the very traits that define nonfungibility, and thus, the name NFT. By now, you might be wondering: if they are not interchangeable nor divisible, then what makes them so important? Well, for starters, by default NFTs are scarce. Computerized code verifies that an NFT is the only asset with a specific digital fingerprint. As such, NFTs are used to create perfectly unique digital goods and can even be used to represent rare physical assets whose so-called provenance or historical record of ownership can now be forever tracked cryptographically through its underlying blockchain technology. As a result, endless possibilities for trading exclusive, rare items from the worlds of art, music and collectibles.

CryptoKitties, Gronks and ERC-721s…Oh, My!

Today, Ethereum is easily the most popular blockchain for creating NFTs. Ethereum uses a blockchain standard called the ERC-721 which outlines a minimum set of features that each non-fungible token should contain but does not at all limit the potential for any extra attributes of a given NFT. As in much of the digital and crypto world, the number of use cases, both existing and under development, are almost unlimited. Some of the more popular use cases today include: creating digital or crypto-collectibles; proving the authenticity of digital art; managing the ownership of digital items within the blockchain gaming world; developing digital identity systems that allow users to control their data; and even the fractional ownership of expensive items such as real estate. Personally, one of my earliest memories of NFTs stems from the 2017 launch of CryptoKitties, the Ethereum-based game. It stands out not because of its cute name or because someone paid a couple hundred thousand dollars for a single CryotoKitty NFT. For me, it stands out because the ensuing overnight popularity of the game created such a frenzy—it crashed the blockchain and exposed one of the flaws of Ethereum: the question about scalability and the blockchain's ability to handle huge surges in usage. As a result, it forced Ethereum founder Vitalek Buterin and the Ethereum Foundation to become more serious about addressing the long-standing concerns regarding scalability and speed.

While these concerns have not completely vanished, today the Ethereum platform has become the destination of choice for the new wave of NFT entrepreneurs, artists, and business models which have included major global sports leagues such as the NBA, NFL stars such as Rob "Gronk" Gronkowski, artists, musicians, and, of course, the obligatory celebrity influencers. With no disrespect to this vibrant and easily visible side of the NFT marketplace, what is perhaps most exciting from both a business and societal perspective is the use of NFTs to establish digital identification, certification, and proof of ownership of property and residential real estate. The NFT industry will certainly evolve, and there is little doubt that NFTs will become a major part of our ever-growing digital world.

As always, whether or not you are crossing the digital divide with Rubicon Crypto…please remember to do so with common sense and with Rational Exuberance.