Let’s start with what NFTs are. NFTs are effectively serial numbers tied to items. These items can be physical or digital but currently tend to be almost exclusively digital. The difference between an NFT and something like a serial number that comes on the back of a Macbook is the amount of information and where the information is stored. Apple’s storage system is private. NFTs are stored on Public Blockchains. Apple owns and operates its storage system which makes it centralized. Blockchains are community owned and operated by global networks of computers which makes them decentralized.
Centralized — Controlled by a single authority
Decentralized — Controlled by several local offices or authorities rather than a single one.
The most prevalent usage of NFTs is with digital media like music and images and there’s a reason for that. Digital media is infinitely duplicable where supply consistently exceeds demand. This either degrades value or keeps it neutral. NFTs provide a way to add scarcity to digital items thereby allowing demand to exceed supply and value to grow. The concept of digital scarcity and the way NFTs are used to implement it are the driving force behind the cries of it being a scam.
On one side, you have the digital media — the audio, image, or video file — which is the object of desire. The digital media has an infinite supply, as we’ve already noted. An artist says “buy my music video NFT. Only 1,000 available” people think they’re buying the music video in the same way they would buy a movie from iTunes but, the video is free to watch and download. With the content being free, people don’t get the point of paying. With the supply being infinite, people don’t get how it could be limited. On the other side, you have the NFT which is the serial number. The NFT/serial number is what has a limited supply of 1,000. Critics and even a lot of NFT buyers don’t understand that they’re paying for the serial number. Knowing so, I assume they’d want to know the point of paying for the serial number, really I have to assume they’d want to know because I want to talk about it.
Everyone that downloads the music video file is an owner, no matter if they paid for it or got it for free. It’s like the Bandcamp music store’s Pay-What-You-Want option where you can choose to not pay anything. No matter what you pay, the download is yours. What the NFT does is allow someone to be identified as an owner. What’s the significance of that? Let me explain.
NFTs are housed in wallets and those wallets have addresses. The information carried by NFTs stored on Public Blockchains carries those addresses. As a result, anyone can look up the addresses of everyone that owns or has ever owned an NFT. What this results in is extended benefits for buyers. To understand this, you have to understand the culture of Crypto and Tokenization.
Tokenization — is the process of converting ownership rights into purely digital representations of an asset that can be subdivided, traded, and stored on decentralized ledger technology
NFTs are a form of Tokenization. It’s an acronym that’s short for Non-fungible tokens. Being Non-fungible means that, like people, each one is unique. An artist releases a collection of 1,000 NFTs, one from the collection could be worth $100 and another worth $10,000. Fungible Tokens are like money where every dollar carries the same value. You can’t walk into a store and get 8 quarters in exchange for a dollar no matter the dollar. It could be crisp, wrinkled, your first dollar, or your last dollar it’s still worth 4 quarters. What’s common for the space is entities that sell NFTs — Non-fungible tokens, after achieving success, create Fungible tokens and reward the buyers of their Non-fungible Tokens with a supply of their Fungible Tokens. Those fungible tokens can then be traded for money.
Rewards could come from the creator of the NFT, the platform where the NFTs are sold, or a third party that values the audience of the creator or platform.
Examples:
An entity by the name of Ethereum Name Service sold domain names as NFTs. Ethereum Name Service created a coin called ENS. Everyone that had an Ethereum Name Service domain name NFT in their wallet, got to claim a portion of the supply of ENS Fungible Tokens. If you purchased an ENS domain name NFT over a year ago, you got a portion of the supply of ENS coins worth around $20,000.
The OpenDAO created a Fungible Token called SOS. The Token was launched by giving away a portion of its supply to people that had purchased NFTs on the Opensea NFT Marketplace. The amounts received depended on the number of NFTs purchased and the amount spent. This was an example of a third party rewarding a platform’s audience that it valued.
RAC is an artist that created a Fungible Token called $RAC. Fans were rewarded with his NFTs that supported the music in places that collected emails like Bandcamp, Patreon, etc. According to CoinGecko, the market value of one $RAC at the time of writing is $2.51 meaning if you have 100 $RAC you have $251.
The duality of this is that, unless otherwise stated, nothing is promised. When an artist sells you an NFT, that NFT could result in a reward of Fungible Tokens, grant access to exclusive content, physical products, or anything you can imagine. It could also grant access to nothing at all. There’s no promise that any 3rd party will find it appealing to deliver anything to the holders of a particular NFT, or that a platform or creator will Tokenize. It’s all about the possibilities.
Communities of users are the reason for the success of platforms. Facebook, TikTok, Instagram, Youtube, etc. are successful because people give them their intellectual property. They give them their dances, their opinions, their stories, and their art. When these platforms become successful and generate billions, the creators that contributed to their success don’t get anything. NFTs allow for initial supporters to be treated like Seed Investors. If and when the company goes public, which in Crypto would be Tokenizing, the same way investors get stocks, supporters would get Tokens. Again, the key difference is, no guarantees!