NFTs, NFTs, NFTs everywhere... What is that?

Die Zeit, SZ, FAZ, New York Times, WSJ and Stern - even the last mass media has meanwhile reported about NFTs and the partly horrendous selling prices of the same. My colleague Thomas Euler also dedicated the last issue of his newsletter to NFTs.

Despite all the coverage, however, the understanding of and for NFTs among people outside the tech bubble is limited.





This article is my attempt to shed some light into the - for many still very dark - land of Non-Fungible Tokens. In FAQ-esque fashion, I answer a couple of the most frequently asked questions on the subject.

I can hardly recall a conversation in recent days in which the buzzword NFT hasn't come up. Those who understand it are asking how they can make the trend work for them. Those who don't yet understand it are asking the question with big question marks in their eyes: What is an NFT anyway? What can I do with it? Is it art, or can it go away?

After spending my lunch break today trying to explain to a group of people what this is all about, and being assured that even after lengthy online research the penny had not yet dropped, I decided without further ado to write this article in question-and-answer style. Why bother when Wikipedia exists?







Wikipedia itself has marked the German article on NFTs with the remark that the article is not formulated in a generally understandable way. So here is my attempt at generally understandable - and thus without much fanfare into the questions.







What does NFT mean anyway?

To find out that NFT stands for Non-Fungible Token, all it takes is a quick Google search - but generally leads to more questions than answers, so step by step:

Tokens are digital objects. When you hear about tokens today, they usually have the property of being non-copyable. This means that if I have a token and send it to you, it is clear who the new owner is (you) and I no longer have access to the token. The counterexample would be the photo from the vacation: if I send you the picture file, I can still use it myself.

How does that work? Blockchain makes it possible, but I have firmly resolved to keep this word out of the article as far as possible - after all, I want to answer questions, not raise them.

So to the second part of the compound noun: non-fungible. Fungible, or fungible in German, loosely translates as "exchangeable." Exchangeable goods in the classical sense are, for example, the raw materials oil or wheat - if I fill up with 40 liters of Super, these are just as good for me as the 40 liters that the car before me filled up.







Non-fungible goods are, for example, the various paintings of Leonardo da Vinci - the Louvre would at most laugh out loud if I offered them Leonardo's Horse in exchange for the Mona Lisa.

So an NFT is a non-exchangeable digital good - comparable to a token that has a serial number, cannot be copied, and exists purely digitally. Next question.







What triggered the NFT hype?

A question that is of course difficult to answer in this way, however I would argue that there are two very strong and clearly identifiable factors: NBA Top Shot and Bitcoin.

NBA Top Shot is a platform where digital trading cards in the form of NFTs are issued and traded. However, these digital trading cards do not simply represent images a la Panini trading cards, but short video clips of a wide variety of game situations. Recently, a dunk by LeBron James was purchased for $208,000 on the platform.

The NBA is probably the sports league that has best positioned itself for the 21st century with its digital offerings. That's why it enjoys enormous global attention - clearly, a new technology would come into focus if it were used here.





A quick look at the Google Search Trends of "NFT" and "NBA Top Shot" testifies to at least a slight correlation - not to be confused with causality, of course.

The fact that the Bitcoin price has risen about six-fold from early October to now has almost certainly also played a role in drawing attention to the blockchain (darn it!) and some of its applications.







Are NFTs just a fad?

No. I am convinced that NFTs are here to stay. In a few months if not weeks, will many NFTs be worth only a fraction of what they are today? Most definitely. Will some of the NFTs that are being bought for big bucks today change hands at even higher prices in the future? Most definitely!

Why am I so sure? Limited, digital assets have only been made possible by the invention of Bitcoin in the first place. However, NFTs take this scarcity of a digital asset to a new level not seen before. Some NFTs are unique, and in some cases their value is given by an underlying asset.

Rare objects have been coveted since time immemorial. So it is self-evident to me that, at the latest, our grandchildren's generation will take it for granted that some of the first digital uniques ever will reach price points far beyond the already incredible-sounding $69,000,000 USD recently paid for an NFT by artist Beepl.





However, this story is far better told by the buyer who paid the second highest price ever for an NFT - Twitter user @peruggia_v. In this thread, he explains why he considers his investment of $7.5 million USD for a painting that could easily be painted with Microsoft Paint a real steal.

In addition to his comments on digital scarcity, one of his statements has been echoing in my head since reading it whenever I think of NFTs:

"Those that embrace technology will outperform those that fight it which is a tale as old as time." - @peruggia_v

Loosely translated: Those who welcome new technology have fared better since time immemorial than those who have resisted it.







What does it mean when I own a piece of art as an NFT?

When you buy an NFT, it very rarely means that you get the painting in physical form. Usually you get a purely digital copy of the image. So why spend a lot of money on it when every other person with an internet connection can admire the same image for free?

In this context, the NFT is best compared to a certificate of ownership. If you own the NFT, you own the digital original - all copies of the image are comparable to digital art prints.

At first this may sound absurd, but how absurd is it really? Almost every famous work of art today has been digitized and can be purchased as an art print. Nevertheless, it goes without saying that the original is still recognized as an object of value.







So what do I do with my NFT?

That depends entirely! A simple digital collectible image is still not very exciting - even most NFT fans will agree on this. One of the obvious and already mentioned benefits of these NFTs is the hoped-for increase in value. Many buyers assume that their token purchased today can be sold in the future for more money than they spent on it themselves - a very legitimate reason to set aside an NFT or two. The largest NFT marketplace Opensea.io invites you to get an idea of the current market.

The company Sorare has created a much more tangible value proposition for its digital soccer collectibles. Behind the marketplace is a soccer manager game. You organize yourself into leagues with other users, field a team for each match day, and earn points based on the real-life, on-the-turf performance of each player.

So far, so good. The kicker is that you can only field players whose NFTs you own. Thus, the price development of a player's card on the marketplace has not only a speculative component, but also a game-deciding one. If my squad is currently weak in finishing and therefore uncompetitive, I need to buy a striker on the market - and with an eye for developing young talent, good decisions on the transfer market can increase the chance of selling players (or their NFTs) for more money than was paid for them in the long run.







Where do NFTs have great potential?

There is certainly no one, right answer here. To find a possible answer to this question, it helps to look at where the biggest sales of digital items are generated today - the gaming scene stands out here.

Almost every major game today, from FIFA to Fortnite, invites its players to buy additional digital goods after purchasing the actual game. From new weapons and clothing for one's avatar (skins) to FIFA Ultimate player cards, in-app items are generating billions in revenue.

However, players who buy these items do not actually own them. Rather, they are made available to the user by the game manufacturer. If the purchased item disappears from the game (for example, because a certain weapon is no longer offered in the game), the user has no way to keep it. Also, a secondary market for these items is only possible if the publisher actively provides it.

If said in-game items were sold as NFTs, players would be much better off than they are today in terms of both owning and reselling them. Conversely, this should ensure a higher willingness to pay for these digital game items.







What do NFTs have to do with "digital twins"?

The previously mentioned property of serving as a certificate of ownership is, to me, another promising application of NFTs. This is particularly interesting for items that are easy to counterfeit and whose authenticity is difficult to establish. A fictional example:

Kingsley Coman scored the winning goal for FC Bayern against PSG in the 2020 Champions League final. He auctions off the jersey he wore in the game to raise money for charity.

A jersey with Coman flocking costs me around €100 and in the 10th attempt I also get the signature painted halfway authentically on the jersey - the whole thing pulled twice over the home lawn and even the expert will have difficulty confirming or refuting the authenticity.

This is where the NFT comes in. Even before the auction, Kingsley announces that in addition to the jersey, there will be a token with the identifier XYZ as a certificate of authenticity. If the jersey is ever resold, only the jersey + NFT set will be worth its money, all other offers can only be a fake. So a future lover will have a 100% certainty whether the offer is an original.





By the way, you can prove the ownership of the token without having to transfer it to the potential buyer first. The whole thing works by means of a digital signature. Peruggia_v, whom I mentioned earlier in the context of the Cryptopunk NFT sold for 7.5 million USD, added this signature directly to his Twitter profile. Here, satisfying the highest cryptographic standards, the address where the NFT resides is linked to the message @peruggia_v. This message could just as well read "I, name X, address Y, Ebay username Z, hereby confirm that both jersey and token are in my possession", but it also works wonderfully without a clear name, which many collectors like to keep to themselves.

This use of NFTs is often referred to as digital twin and, as mentioned at the beginning, is extremely useful in the context of "easy to forge - hard to verify".







What else is needed for NFTs to finally hit the mainstream?

In short: platform overarching utility! Currently, the NFT ecosystem is still highly fragmented, although most platforms are technically interoperable. An open standard that extends across NFT trading floors into gaming worlds (e.g., Fortnite skins), social media (e.g., Instagram and Twitter profiles), online stores (Ebay, Amazon), and perhaps even job portals (LinkedIn) will make NFTs an integral part of everyday digital life.







Some last words

NFTs are on everyone's lips. The hype may be out of proportion, but the concept is beyond exciting and definitely come to stay. Whether in the art market, the gaming industry, or the sports market, NFTs offer exciting opportunities in the digital economy.