I am sure you have heard of NFTs, the cover picture of this blog is a famous “Everydays: the First 5000 Days” NFT sold for $69.3 Mn. Nope, sadly I am not the owner of the NFT, though. I am just using its clone. It’s mind-blowing to think that an image that I just used can be worth $69.3 Mn. Well, that’s NFTs for you. They are much more. Let’s take a look.

Tokens are the fundamental building block in Web3. The crypto movement started primarily with fungible tokens. BTC, ETH, Matic, Mana, Dot, and many more represent a currency in their ecosystem/network. Ethereum made it extremely easy to create tokens with just a few lines of code. The demand and supply of these individual tokens like any other currency determine the value of these tokens. More recently, the interest in the Web3 community shifted to a new kind of Non Fungible Tokens i.e. NFTs. The basics of NFTs can be read here. These are unique tokens representing any specific asset. In our real life, we deal with NFTs all the time! Every time you buy any kind of membership to a gym or even an online streaming service, you essentially bought an NFT. When you buy a property, insurance, art, or even a car, the legal ownership document you receive is a kind of NFT. Buying a mobile or phone number is also equivalent to buying an NFT. Even when you buy a T-shirt, you get an ownership token embedded within the product itself. You have full autonomy on usage and transfer. From buying a property to a t-shirt, everything can or are generally Non Fungible Tokens. NFT generally represents one or a mixture of the following -

1. Service - Often implemented via subscription or membership models
2. Product

Talking about service, any membership has a utility that cannot be copied or replicated. It is scarce as well. They were in some way already implemented in the digital world with different kinds of subscriptions tied to a specific account at the server. Netflix, Youtube, and Spotify subscriptions are such examples. Now, they can be represented via NFTs which can even be traded. This itself can open up endless possibilities.

The more interesting use case that a crypto-based NFT solves is for digital products. Let us look at physical products first. Usually, physical items are bought for one or more of the following reasons -

1. Utility - Convenience, Functionality, Beauty, etc.
2. Ownership -
   1. Expressing Identity
   2. Signaling wealth/status

NFTs fundamentally provide both utility and ownership of the entity they represent in the digital world. Remember the T-shirt buying example, we discussed? Now, I agree calling a T-shirt an ownership-enabled token may be a bit too much, this is because ownership is embedded in the product. However, ownership becomes really important in the digital arena where anything can be replicated with 0 effort and cost! Imagine every time you bought a T-shirt, anyone could just duplicate it right away and use it. This will derive the value or utility of the item to 0. Digital NFTs face a lot of heat due to the same reason of ease of duplication which can move their value towards 0. However, the interesting aspect is that even with 1000s of NFTs out in the world, the number of projects actually cloning the NFTs are very few and rather looked down upon for doing so in the community. Therefore, even when people can use or show collections of the Crypto Punks or Bored Apes, they don’t. Even though I can mint and use any of the famous NFTs but I am not doing it as it would be evident that I have cloned the NFT. This is because the entire history of any NFT can be tracked from its inception. This means that everyone in the world has a consensus on who owns the original one and everyone else using it if at all are just using a copied one, the likeliness of people using copied ones is not high. Even though they might not mind using replicas in private but not in public. Digital Scarcity is truly at play!

One other interesting aspect is that duplicate in the digital world is the exact duplicate and there is no “quality” difference. When people buy branded products, they tend to justify it with the difference in quality even when it is often not present or very minimal in comparison to the price difference. However, this helps buyers to psychologically justify that they are buying products because of the utility also and not merely as a means for signaling wealth/status. However, in the digital world when this reason is not applicable and it would be interesting to see how it impacts buying decisions. Since these digital NFTs can be copied, these original NFTs often come with access to additional perks like club membership with events and invites. A kind of service NFT model. This utility cannot be copied at all and this could potentially serve as a value differentiator to justify the uniqueness of the NFTs.

NFTs have many other use cases as well. NFTs can be used for access and governance where the authentication can happen via NFTs. NFTs have naturally gained a lot of traction in gaming as well which actually has a digital world with digital goods. NFTs can even be used for loyalty rewards, community building, event ticketing, royalty distribution, etc.

So while buying overpriced NFTs can seem insane from the outside, there is definitely a potential use case for buying them. I also bought an ENS NFT - avigupta.eth! As we move towards a digital world, towards Metaverse, the culture of buying digital goods for your avatars can become common. These digital goods will provide both utilities as well as a means to express identity and status. Here is a whacky idea. Believe it or not, we are already in a kind of a Metaverse! Our photos are the digital avatar of ourselves. Currently, we also buy things and take a picture with them and upload it on the digital universe (Instagram) for our social circles. The time is not far when we will buy digital goods for our digital self and use them directly in the metaverse to attend virtual events & parties. You will own these things and use them on your unique avatar as you please. Although a lot of this seems far-fetched, the rate of change is remarkable and strong indicators are already present. Will you buy a JPEG? Maybe you will, you just don’t know it yet ;)