NFTs (non-fungible-tokens) are all the rage right now. Startups and investors seem to be going crazy for the things. People are exploring ways of implementing “proof-of-ownership” through NFTs, talking about the problems they might solve, and the potential technology that could emerge from these blockchain-based tokens.
So just how valuable is this new concept?
First I want to establish a baseline. What is value? In economics, value is a measure of the benefit provided by a good or a service.
As an example, take a potato. What is its value? Well you may be able to plant it to try and grow more potatoes. You can cook it and eat it. Or you can ferment it and drink it later. These are all useful things a potato can do that give it its value.
Another value of a potato is that you can sell it. You could use it to cook a nice meal and sell it for someone else to eat. You could sell it as a raw ingredient for someone else to use. This will net you something in exchange, say some money, based on the value that the buyer places upon it.
Of course, economics expands on this basic concept a lot, and I’m no economist. So for the purposes of this article I’m going to define value as a measure of how useful something is. For our purposes this is fine, since I want to focus on the value that a normal person like you or I would place on an NFT.
NFTs are non-fungible tokens. For now I’m going to ignore the non-fungible part of the definition, and focus on the token.
A token in computer networking has many uses. If you are browsing reddit, a token is used to keep track of your session, and is used to prove that you are the currently logged in user.* You may have pasted a token into Steam to unlock a game you bought from a third party. Tokens are used to keep track of transactions in Amazon, ensuring you are paying for the right order and to confirm payment from your credit card/Paypal/Alipay/etc.
What I’m saying is that in technology tokens are extremely useful. They have value. But tokens don’t actually cost anything do they? How can they have value if no one pays for them?
Let’s take reddit. You are logged in using a token. That token identifies you as you contribute content to the platform. By giving you a token, reddit gets content in return. That token is also used to track your habits on the platform. By doing this they can serve you targeted advertisements. These benefit other companies as this makes it more likely the right people will learn of their products. Companies pay for these adverts which is where the money comes in. And ultimately, if the adverts work, users of reddit go on to buy the products offered by these companies. The monetary value isn’t obvious on the surface, but it is there.
Buying something on Amazon? There is an obvious exchange of money, but why do we need tokens. Essentially Amazon will send a token to the bank that identifies a specific transaction. The bank will then process the transaction, send the money to Amazon, then return the token to Amazon to let it know that the specified transaction has been paid for. The value here is that the token facilitates the transaction of money for goods or services.
Unlocking a game on Steam? The token you are given is proof that you own the game. As long as you are the first to provide it to Steam, the platform will unlock the game for you and allow you to download and play it. The value here is that the token proves you own the game.
So to sum up the value that tokens provide include:
- Identifying a user providing/receiving content
- Facilitating a monetary transaction
- Proving ownership of a digital product
*For the technical folks I know the examples here are more complex than described, but these basic descriptions are good enough for this article.
Now we can talk about NFTs. I’m not going to detail how the blockchain works, or how cryptocurrency works. What I am going to focus on is the value of an NFT.
The basic use case of an NFT right now is as follows:
- There is an asset online you want to own (an image, a gif, a video, etc) that you want to own
- You pay for the NFT that “proves” you own the image
- Your NFT is added to the blockchain so everyone else knows
So if you buy an NFT you own the image right?
Well, no you don’t. You own the random string that has been added to the blockchain. A URL can be decoded from this string that links to the image. But you don’t own the actual image. You own the NFT.
If someone takes a screenshot of your image can you sue them for stealing? No.
If someone posts the image can you sue them for copyright infringement? No.
If someone creates a print, marketing campaign, or some other project with your image can you do anything? No.
Who can do anything about all of these things? The copyright holder can. And if you buy the NFT but not the image, you only own the token and not the image itself. The NFT itself has no real use and no real value.
So what is its value? Well the whole point of NFT isn’t its value now. Its the potential value it has in the future. NFTs are said to be able to solve a specific problem. They can be used to prove the ownership of digital art.
You mean solve the problem of who owns a digital product? Like tokens can already do? What is already supported with trademarks, copyrights, and other legal systems? You mean solve a problem that has literally already been solved?
Ultimately the value of an NFT is zero.