Non-fungible tokens (NFTs) are "tokens (on the blockchain) that we can use to represent ownership of unique items". NFTs are making headlines lately (see TechCrunch, The Verge, Forbes to name but a few), with more money being spent on them. NBA Top Shot - one of the most popular marketplaces - sold >USD$250M in the past 30 days (source).
Some NFTs could command very high unit prices, such as a digital artwork selling for thousands of USD equivalent, or a digital card with an NBA top shot moment asking for five-digits. Unsurprisingly, there has been lots of skepticism about the (monetary) value of NFTs. Many are asking: are NFTs really worth the price tag? Why pay a lot of money for something entirely digital, when you could take a screenshot of a digital picture for instance (also known as the "copy and paste" problem)?
A common answer to why NFTs have value is focusing on their scarcity and verifiable ownership record - two traits that are mutually reinforcing each other. Because NFTs live on the blockchain, the record of ownership transfer is stored forever and not falsifiable (assuming the underlying blockchain has not been hacked). Therefore, let's say Alice and Bob both claim to be the rightful owner of an NFT, then Alice could show the transaction records on the blockchain to prove that one of the wallets she owns is the current rightful owner of the token. Verifiable ownership records pave way for creators to issue scarce items on the blockchain, such as limited edition artwork, by issuing a fixed number of NFTs representing their creation (e.g., think minting only 100 copies of a LeBron James top shot moment on the blockchain, each copy with its unique serial number). The verifiable scarcity of the creation is one of the reasons for its high price tag.
Another answer by a16z to why NFTs have value for the seller is because NFTs offer better economics by removing intermediaries (via P2P direct sales), allowing for tiered, granular pricing (e.g., charge different prices for different editions) and minimizing user acquisition costs.
I would add another reason on why NFTs have value: NFTs are a path of least resistance to (the benefits of) ownership.
As context, Robert Fritz wrote a book called "The Path of Least Resistance", in which he shared three insights:
- Everyone goes through life by taking the path of least resistance, just like how a river will flow along the smoothest path.
- The underlying structure decides what the path of least resistance is. It is difficult (if not impossible) to sustain changes by pure will power. Just like how water always takes the shape of its container, changes cannot be sustained unless one also changes the structure.
The rise of NFTs can be explained by those two insights.
First, NFTs take less effort for the owner of an item to benefit from it => thus NFTs are a path of least resistance to ownership. Whether the item in question is a piece of art or an in-game collectible, the common reasons someone would want to own the item are: (a) value appraisal and monetization; (b) sign of status / fame; (c) support for one's favorite creators and (d) personal appreciation. The NFT marketplaces today make it much easier and more effortless for owners to realize (a), (b) and (c).
On (a) monetization: NFT marketplaces allow instant P2P transactions - there is no need to find a dealer or auction house for your item, thanks to them being 100% digital (no need to arrange for physical transport or display) and the decentralized nature of blockchains (elaborated in the next point). This is not to mention royalties for the creator on all second-hand sales, a feature that is made possible by the verifiable ownership records on the blockchain.
On (b) status / fame: marketplaces have a gamified experience by showing the leading buyers or sellers, giving most popular creators & active sellers their spotlight. The owner of a sought-after NFT (e.g., a #023 edition of a LeBron James shot) could also proudly show it off.
On (c) supporting creators: decentralized NFT marketplaces make it very easy for any creator to organize "drops" (scheduled releases) of their artwork. Their fans could follow them and be sure to not miss a release that are directly from the creators they like.
Second, the decentralized, trustless nature of blockchains (and NFT marketplaces built on top of them) is the underlying structure that makes NFTs a path of least resistance. Before we had the likes of Amazon or eBay, we had to physically visit a store or dealer to buy (sell) an item. Then e-commerce came along and became a path of less resistance than traditional brick-and-mortar venues for transactions. The Internet served as the underlying structure that empowered faster transaction and coordination of logistics.
A few decades after the birth of the Internet, we saw the birth of Bitcoin and other blockchains in the 21st century. Blockchains enable anyone to send cryptocurrencies to anyone else anywhere in the world, assuming both parties have access to the Internet. Blockchains make money transfers faster and cheaper compared with using traditional financial institutions (such as banks). Thus, the blockchain is the underlying structure that empowered applications built on top to become a path of less resistance for value transfer. NFTs are one type of value that is being transferred on-chain. Once creators see how easy it is to create NFTs and monetize with easy sales and guaranteed royalties, and once fans see how easy it is to follow their favorite creators and not miss exclusive items, NFTs are destined to take off as a more effortless path to the benefits of ownership.
Blockchains as a path of last resistance to value transfer will continue to revolutionize other aspects beyond NFT, including traditional financial services such as savings & lending. The best is yet to come.