Explaining NFTs

Writing at the Harvard Business Review, Steve Kaczynski and Scott Duke Kominers have en excellent explanation of how NFTs create value–the best I have read.

NFTs don’t just provide a kind of digital “deed.” Because blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders. In other words, NFTs can do things — or let their owners do things — in both digital spaces and the physical world.

In this sense, NFTs can function like membership cards or tickets, providing access to events, exclusive merchandise, and special discounts — as well as serving as digital keys to online spaces where holders can engage with each other. Moreover, because the blockchain is public, it’s even possible to send additional products directly to anyone who owns a given token. All of this gives NFT holders value over and above simple ownership — and provides creators with a vector to build a highly engaged community around their brands.

It’s not uncommon to see creators organize in-person meetups for their NFT holders, as many did at the recent NFT NYC conference. In other cases, having a specific NFT in your online wallet might be necessary in order to gain access to an online game, chat room, or merchandise store. And creator teams sometimes grant additional tokens to their NFT holders in ways that expand the product ecosystem: owners of a particular goat NFT, for example, were recently able to claim a free baby goat NFT that gives benefits beyond the original token; holders of a particular bear NFT, meanwhile, just received honey.

Thus owning an NFT effectively makes you an investor, a member of a club, a brand shareholder, and a participant in a loyalty program all at once. At the same time, NFTs’ programmability supports new business and profit models — for example, NFTs have enabled a new type of royalty contract, whereby each time a work is resold, a share of the transaction goes back to the original creator.

This all means that NFT-based markets can emerge and gain traction quickly, especially relative to other crypto products. This is both because the NFTs themselves have standalone value — you might buy an art NFT simply because you like it — and because NFTs just need to establish value among a community of potential owners (which can be relatively small), whereas cryptocurrencies need wide acceptance in order to become useful as a store of value and/or medium of exchange.

Read the whole thing. Kaczynski and Kominers also offer good advice to firms and organizations interested in creating NFTs. It remains true, of course, that there is a lot of foolish and wasted spending in the space–that’s typical of most new asset classes where the rush to get into the space throws up a lot of noise making the signal more difficult to detect.

Addendum: Don’t forget you can buy the Marginal Revolution NFT! You will be purchasing from the new owner (we sold it) but I believe we get a royalty which also illustrates an advantage of the NFT model.

Image: SupDucks6484.

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