What Is An NFT?

You might have heard the acronym NFT thrown about recently, but what exactly is an NFT? And why is this new blockchain trend a big deal? Business school professors pitch in

If you discovered that soccer superstar Cristiano Ronaldo had just been bought for $290,000, you’d probably wonder who had landed such a bargain. You may be more shocked, conversely, if you found out that’s actually the price tag for a Cristiano Ronaldo virtual playing card.

Welcome to the strange world of non-fungible tokens, or NFTs.

It’s the latest digital trend fueled by blockchain technology, and it’s recently ballooned in value. The NFT trend is attracting attention across the arts, media, and entertainment industries. Through 2020, the market value of NFTs tripled to around $250 million.

What are NFTs?

Much like cryptocurrencies, NFTs are stored on digital ledgers—or a blockchain—which makes them both verifiable and unalterable. An NFT is essentially a unique digital asset. NFTs are secured through smart contracts on the Ethereum blockchain. Unlike cryptocurrencies, which are identical and therefore interchangeable, these tokens are ‘non-fungible’, meaning they are each unique.

This sense of uniqueness has seen NFTs take off quickly in the art world. The First 5000 Days, a digital artwork by artist Beeple, sold as an NFT at auction house Christie’s in March 2021 for just shy of $70 million. That's the third highest auction price ever for an artwork by a living artist.

NFTs have also resonated well with the sports world, tapping into collectible culture.

SoRare is a European startup that creates and sells collectable virtual soccer cards from top leagues around the world. There’s also NBA TopShot, a range of basketball cards produced officially by the NBA. These are more than just stats of your favorite players. You can buy and own specific moments, like a legendary slam-dunk from basketball icon LeBron James.

In general, the NFT trend has captured the attention of celebrities, creatives, and influencers. Jack Dorsey, CEO of Twitter, sold an NFT of his first tweet at auction for nearly $3 million. Paris Hilton sold an NFT drawing of her cat for 40 Ethereum (equivalent to around $17,000 at the time).

Why have NFTs been so popular?

NFT popularity has been fueled by the growing trend towards digital assets in general. “This is just like what boomed the popularity of cryptocurrencies. People are getting more and more into digital,” explains Murat Kristal, associate professor of operations management and information systems at Schulich School of Business at York University in Canada.

The trend has also boomed off the back of the same scarcity that cryptocurrencies thrive off. Each NFT, in a sense, is limited edition, much like original artistic prints or vinyl pressings are in the analog world.

But what distinguishes NFT popularity from that of cryptocurrencies? Lory Kehoe, professor in technology trends at Trinity Business School in Dublin, points to the ‘AMC’ of NFTs.

‘A’ stands for access. “NFTs provide an access point which was unavailable for the majority of people on the planet,” Lory says. This has been particularly true during COVID-19: if you can’t go to museums, or go see musicians live, how can you interact and engage with their art?

‘M’ stands for market. Sites like SoRare and TopShot, and even auction houses like Christie’s, create a market of willing buyers and sellers. Without this, as with any product, there would be no demand.

‘C’ stands for community. For Lory, this is the biggest differentiator. Buying into an NFT is more than just purchasing a piece of art or a collectible. It’s like buying into and engaging with a specific community. This could be for the purpose of selling your asset, or more importantly for engaging with a shared interest around a topic. For soccer or basketball fans, for instance, NFT collectibles give you access to a global community of likeminded individuals.

For artists, too, this deepens their access to fans—particularly important when galleries are closed, and concerts postponed. Lory praises the ingenuity of US band Kings of Leon, who released NFTs of their new album in January 2021. These came with special perks including limited edition virtual artwork, front-row seats at gigs, and even a chance to meet the band.

“What NFTs have done is brought the possibility of digital ownership of a moment, of something more tangible, and that feeds into a community,” Lory says.

Will NFTs have long term value?

Undoubtedly, the valuation of NFTs has partially been driven by their link to the art world, which is highly speculative—not entirely dissimilar to the speculation around cryptocurrencies.

“With art, you can buy something for $300, and in two years, it might go up to $3000, or it might be worthless,” Murat explains. It’s hard, therefore, to predict the long-term financial value of an NFT without a deeper understanding of art valuation.

The technology may have opened new opportunities beyond the world of art and merchandising. Murat expects that we may start to see certain digital documents being turned into NFTs. Coronavirus passports, for instance, may exist as an NFT in your iPhone or your digital wallet.

NFTs, and blockchain technology in general, still have several challenges to grapple with. Firstly, legal complications. “It raises questions around sovereignty. Is blockchain a new form of sovereignty?” asks Nathalie Devillier, professor at Grenoble School of Management.

Secondly, blockchain has a profound environmental impact. The ‘proof of work’ mechanisms, or mining, that many NFTs use are highly energy intensive. Creating an NFT on average is estimated to produce around 200 kilograms of carbon. “People don’t like to talk about this, or raise that query,” Nathalie asserts.

Many NFTs are hoping to switch over to ‘proof of stake’ mechanisms that are far less energy intensive, although that transition is unlikely to be quick.

Given the potential millions to be made from NFTs, their popularity seems unlikely to wane soon. Moreover, it feels like we’re only scratching the surface when it comes to their potential applications and uses. Like any fledgling technology, NFTs create an exciting opportunity for people to create and innovate in the space: those able to do so effectively could be heavily rewarded financially.

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