GM! Welcome to my blog series to help those stuck in Web2 better understand Web3. I’m calling it “Web3 For The Masses,” an explainer series so basic a 67 year old retiree could understand it. Reason being, after explaining the below to my 67-year old Dad, he went on to collect some pretty amazing art from the comfort of his back porch during his first year of retirement. As someone who has professionally spent the past 15 years in creating Web2 innovations, and the past year immersed in an NFT ~~hobby/~~addiction, if I can help him understand this digital media transformation then I can help you too.
So WTF are these NFTs anyways?...
If you’re reading this post, that means you’re interested in learning more about NFTs. Odds are it also means you’re entering this space with a lot of skepticism and asking yourself “how are these images worth so much f-ing money?” Good question!
Well, spoiler alert – not all NFTs are worth a lot of money. In fact, most aren't. But those that are worth a lot are valuable for a reason. And, despite what “normies” might comment on Twitter, that reason has nothing to do with money laundering or Ponzi schemes.
Now if you’ve googled “NFTs,” most explainers state that NFTs, or “Non Fungible Tokens,” are like digital trading cards – a digital file that is unique and tradable. While that definition is somewhat true, it leaves a lot out. I personally define NFTs as closer to a medium, not an end product. Let me explain…
Let’s say I draw a picture and upload it to my computer. That’s “just a jpeg” – meaning it’s literally just a digital image. All “jpegs” are unlimited. For example, if I email you the picture I just drew, you don’t actually have the image I drew – my computer makes a copy, and sends you the copy. You now have a copy of that image, and I also have a copy. There are now 2 copies of my image, with no record of who drew the image, when it was created, or anything else about that drawing. It’s “just an image,” with millions of potential copies from people right-click-saving and sending, and for this reason… it’s completely worthless.
Enter the completely revolutionary tech of NFTs. Let’s say I take that same picture, and “upload it to the blockchain” (for lack of a more technical explanation). The second that image is uploaded to the blockchain, that jpeg is now an NFT. Why? By adding that image to the blockchain, there’s now a record of who created that image (my account), when they created it (today), how many versions were created (one), along with other information. Most importantly, however, that image can now be transferred from me to you – as in actually removed from my possession (computer/account) and sent to your possession. This is similar to if I had just sent you $1, digitally, via Venmo. This medium of exchange is what makes NFTs so revolutionary, and so valuable.
What makes an NFT valuable?...
An NFT enables a digital asset to be valuable because the medium records who created it and enables it to be sold, but being an NFT doesn’t make that digital asset valuable by default. The digital version of the picture I drew and uploaded to the blockchain is as valuable as the physical picture I drew. Despite my B- in high school art, that drawing is completely worthless. Additionally, so is the NFT version.
Besides the sentimental value of an image, there are only 2 reasons why NFTs are actually valuable: (1) the creator, and (2) the utility.
Imagine if Banksy spray painted a picture and drove it to your house and gave it to you. That picture would be very valuable to a lot of people, and you could thus turn around and sell that picture for a lot of money. However, that Banksy picture is only valuable if it can be proven to be created by Banksy, otherwise it’s just a random picture “someone painted.” This is the exact same with digital files. A Banksy jpeg is worthless, as no one knows who created it or how many Banksy-created copies there are. However, a Banksy NFT would be incredibly valuable – if created from a verified Banksy address.
The idea of art appreciating in value due to the popularity of the artist -- “buying art now, and reselling it for more once the artist is famous” -- is the entire business model of the traditional art world. In the traditional art world, a buyer buys, and no (monetary) value is derived until the buyer resells it to someone else. The answer to “what do you do with that art” is simply “look at it” until it’s time to sell.
Unlike physical art, NFTs are completely digital. And with digital assets, “if this then that” logic can be built by artists to give utility to those that own their work. Those statements could be “if you own X, you could win Y” or “in order to buy Y, you have to own X.” This simple logic statement is what makes NFTs, as a digital medium, so incredibly valuable -- even compared to traditional/physical mediums. More on utility in a bit, but for now let’s focus on the monetization model.
If you're not a traditional artist, let’s pretend you are for a second -- you’re Banksy before Banksy was famous. You pour your heart and soul into a new piece and sell it for $1k. That $1k is the only money you will ever make off that piece of art. Even if you become famous, and the buyer resells that art for $10k, you get nothing. And because of this model, traditional artists are incentivized to do 2 things: (1) sell their art to the highest bidder, and (2) create a lot of art to sell.
The key difference with NFTs is that they are digital. These digital works of art can contain “if this then that” logic, and almost every artist includes a “rev-share” percentage. That logic is similar to “if this sells, then 10% of the revenue goes to the artist who created the NFT.” Artists can now monetize every resale transaction of their art, forever.
This artist-rev-share is not only incredibly lucrative for artist, but it also changes the monetization opportunity for creators as a whole. Resale volume on old art can actually be more profitable in the long term than initial sales on new art. Volume is an NFTs artists key to success. Due to this, artists are often incentivized to create less art (quantity is tracked digitally), sell for lower initial rates to generate more sales volume, and sell (or give away) their art to previous collectors who are more likely to command higher prices. This “if you own my old art, you can win/discount/etc my new art” utility is how so many early NFT collectors have additionally made substantial money alongside their favorite artists. A small investment early in an artist’s career can lead to multiple discounts or free works of art from that artists at a later time.
Utility, Utility, Utility…
In addition to simply being able to get new art at a discount or win new art by having an artist’s old art, there are endless digital utilities that can be built into NFTs. Within the “if you own X, you get Y” logic, “Y” can be literally anything. It could grant private access to a website, unlock exclusive perks, provide monetary revenue-shares for licensing agreements – the possibilities are literally endless.
This utility is why you see projects like Bored Ape Yacht Club selling for hundreds of thousands of dollars -- the value isn't (just) in the picture of the ape, the value is because the company is creating an entire global brand at the intersection of tech, luxury, and street-wear, complete with merch, concerts, and video games where a portion of the money spent within that ecosystem will be given to NFT holders as a revenue share (via upcoming $APE token). Think of this similar to the Bored Ape Yacht Club NFT representing venture-capital investment share during a seed round, where holders get a % rev share as part owner of this ecosystem.
Obviously utility is only as valuable as the project/artists that created the NFT, but the key differentiator is that the right NFT can actually generate passive income simply by owning it.
Final Words on NFT Value…
It’s important to remember that NFTs are much closer to being a medium than an end product. That medium allows for proof of origin, record of transfer, validation of ownership, and more, all through a decentralized process where no single entity can modify or change any information about the piece. While people today are using that medium to buy and sell art and collectables, the underlying technology has huge implications for other fields. For example, blood donations are starting to be tokenized and tracked via NFTs. Yes, one day an NFT will literally save someone’s life. #RightClickLive
What’s up next…
In the coming weeks I’ll be publishing more content. Up next will be details on buying NFTs -- where to buy, how to buy, and how to decrease your investment risk if you’re just starting out and/or on a budget. So stay tuned!