NFT 101: The 3 Pillars of Truth
Tired of seeing the headlines and all the BS out there about NFTs that mainstream media’s been pumping for clicks? Then keep reading!
I decided to create something easy to digest that will actually make you smarter and well informed about the potential of NFTs, not just the media hype!
My only intent is that I hope some of you get value out of this and end up with a better understanding of NFTs. If you do, please share and like!
NOT SEEN ON TV. This is my honest truth about NFTs, the future use cases that will change and impact our daily lives, and the core pillars of what an NFT is.
TO START: I need you to forget everything you THINK you know about NFTs. Forget what you saw on the news, forget what your Uber driver told you, a coworker told you, your friends told you, forget what you saw on Reddit, Instagram, TV, TikTok, Buzzfeed, and let’s start with a clean slate.
THE GOAL: To make you more knowledgeable about NFTs in the next 10 minutes than 80% of the people talking about NFTs in traditional media.
What is an NFT and why should I give a sh*t?
NFT stands for Non-Fungible Token, which is the term used to describe a unique digital asset that has its ownership tracked on a blockchain. Fungible means mutually interchangeable, or replaceable. Non-fungible in this case, basically just means each token is unique and cannot be interchanged or replaced identically by another.
For example, let’s say you have a $20 bill in your pocket, and I have a $20 bill in my pocket. These are ‘fungible (interchangeable). The $20 bill I have has the same value and holds the same utility as the $20 bill you have. Now, let’s say you had a diamond ring on your finger, and I had a diamond ring on mine, these are non-fungible (not interchangeable) because each ring has different properties and is unique. The two rings do not replace one another, That’s it.
The media, blogs, and self-proclaimed “experts” constantly use digital art to describe NFTs because it’s easily understandable at scale to a wide audience. The rarity and prestige of owning a Mona Lisa or a Banksy through digital ownership allow people to wrap their head around the basic concept of non-fungibility, as it relates to real physical assets, but when it comes to digital art, many people don’t quite understand how the ‘rarity’ factor kicks in.
In order to understand the value proposition here, you need to think about the future. What will the world look like in the next 20 years? 50 years? 100 years?
You’re on the right track if you’re thinking of a world where we blur the lines between the physical world and the virtual world, or what many call a metaverse.
In this future, NFTs will play a critical role in all aspects of your daily life.
NFTs encompass a broad set of assets from virtual land and digital identification to a claim on physical assets, like real estate, through digital deeds and wills.
On the creative side, NFTs are a way to make digital files ownable, similar to financial assets, but in the form of digital art, music, and collectibles where you can build and embed inherent properties into the token itself like royalty structures, or self-destruction features, for example.
The blockchain, where these NFTs are stored, removes the dependence on 3rd parties to verify existence and ownership.
The basic properties of an NFT are not a new concept.
If you’ve ever played any sort of video game online, like World of Warcraft, Call of Duty, or Fortnite, you’ve essentially been exposed to NFTs before they gave it a name. Rare digital items in the gaming world are all variations of NFTs.
That being said, we are in the prime of a hype cycle right now where there’s lots of FOMO going around in the market as people rush to buy these digital collectibles without truly understanding the basic properties of what makes NFTs valuable or what the potential of NFTs are for real-world applications that will unlock Blockchain Business Value, or what I call BBV. Remember the term BBV, you will see it appear more and more as blockchain starts transforming industries.
THE 3 FUNDAMENTAL PILLARS OF AN NFT:
There are three main pillars to consider when analyzing NFTs, NFT appreciation, and adoption, in my opinion:
(1) UTILITY
What can I use the NFT for? What purpose does it serve? How is it beneficial to my life?
An example would be digital identification in the form of an NFT. Imagine having a digital ID that was globally verifiable on a blockchain that has biometric and retina data, all while being accessible at your fingertips on your smartphone.
CIVIC has been working on blockchain-based digital ID as an NFT since 2016 (Way before we starting calling it an NFT)
(2) STATUS (CLOUT)
Does the NFT provide a higher social status, influence, or power? Is it a rare highly sought-after item that is exclusive, rare, and hard to obtain?
An example of this would be the digital art created by Beeple titled ‘The First 5000 days’ that sold at the Christies auction for ~ $70 million as a 1/1 rare piece of fine digital art that the artist spent 5,000 hours creating. (Check out the actual artwork using the link above)
(3) COMMUNITY DEVELOPMENT
Does this NFT have a large community of users:
- to adopt the NFT into new world systems of the future
- to validate ‘Proof of Fandom’ — i.e. be able to create a p2p marketplace between buyers and sellers after the initial purchase? Is there a large following of people that give the NFT appreciating value?
One simple example would be NBA Topshot by Dapper labs. This is the new era of trading cards in the digital age. The main reason why these nicely wrapped basketball .gif moments have any perceived value is because there is a pre-existing global community of basketball fans, basketball card collectors, and Esports NBA 2K fans, that have come together to create a marketplace that determines value based on basic supply and demand principles.
All other sports will follow suit because this is new innovation in the classic trading card collectible space.
“From my own experience, I’ve found that when a NFT exhibits at least 2 of the 3 pillars, it’s typically an NFT that has foreseeable value”
The Current Stage of NFTs:
We are in a hype cycle similar to the initial coin offering (ICO) bubble of 2017–2018 where thousands of new crypto projects were created as ‘get rich quick schemes’ and ultimately never delivered, abandoned, or shut down altogether. That’s what it feels like today with the hype around artistic and collectibles-focused NFTs.
There are very few NFTs that exist today that will actually hold any value or appreciate over time into the future. Much like the ICO days, the hype cycle is creating unsustainable temporary demand for things that won’t be there 5 years from now when we move into the next layer of NFTs. The technology is still young and constantly iterating at this stage with new standards being developed.
People are jumping into NFTs like it’s the next ‘gold rush’ when there are very few that will survive, based on the 3 pillars I mentioned above.
Why is a Fyre Fest cheese sandwich .jpeg supposed to be worth anything in the future? Is this important enough to make national news in the National Post? How does this NFT relate back to the 3 pillars I just read about?
Start asking yourself these questions.
The point is that the media is back to the good old BS headline days, where they’re actually part of the problem we see today in the NFT space. Don’t let their agenda of getting clicks, likes, shares, retweets, and all the marketing metrics be the compass that misguides you.
People lost a lot of money in the ICO Boom in 2017–2018, including myself, so take my word for it, todays’ NFT boom is no different. There will be winners and losers but it’s risky, so don’t quit your day job or invest your entire nest egg into a .gif or .jpeg just yet…especially if you have no idea what you’re doing, don’t know anything about the crypto space, and don’t fully understand how to tell good investments from bad ones.
The hype around the creative side (digital art, music, and collectibles) of NFTs today focuses mainly on the media-based narrative that creates buzz, is cool to talk about, and gets likes, clicks, and makes great headlines. It’s a data and analytics game for mainstream media these days, and they are doing a great job creating FOMO. When people see Elon Musk, Mark Cuban, Brady, Post Malone, and all these other celebrities essentially creating crap out of thin air and selling it as NFT’s, they’re just testing the market more than anything, to better understand the tech and the demand. Don’t be the guinea pig. Musk does it for kicks to see what people are willing to pay during the hype cycle, and he’s laughing behind closed doors. Don’t be the fool that bought some crap for big money and is left holding the bag.
Always refer back to the 3 pillars when in doubt — Utility, Status, Community (USC). This will help you judge a good investment from a bad one, and help you better understand the current NFT market if you are looking to invest.
NFT standards are in their infancy and in the very early development stages. These standards will mature over time and in the next 5 years, we’ll see the new wave of NFT features and functionality.
The Future of NFTs:
Tokenizing digital art and collectibles are not where the true potential for humanity lies.
The actual real-world application for NFTs will be world-changing.
Imagine owning your own data and identity in the form of a digital token that you carry with you on your phone at your fingertips, with your built-in medical history, school records, driving history, and so forth in a single verifiable NFT stored on the blockchain. This is the future!!!
There will be platforms that enable individuals and companies to create NFTs with embedded programmable royalties so musicians, arts, sports teams, can all continue to get paid in reseller markets for the life of the asset.
There will be platforms that take NFTS, turn them back into fungible tokens, and turn those back into new forms of NFTS.
There will be tokenized wills used for estate planning. Tokenized Birth Certificates, Tokenized Death certificates with self-destruct features when you pass away.
Tokenized securities for financial instruments, real estate, illiquid assets, all adopted on a mass global scale, ultimately bringing the investment world into the future
There will be digital subscription platforms, where royalties are embedded into NFTs for content creators to make money in resale markets.
NFTs that are tied to real-world assets. Imagine tokenizing the Mona Lisa and distributing ownership to thousands of people so the community can collectively own it, or tokenizing ownership of gold, so physical gold doesn’t have to leave the vault and these NFTs would represent each bar of gold.
Platforms that issue NFT based ticket sales (Imagine Ticketmaster or Stubhub with NFTs where the original issuing body still gets paid royalties no matter how many times the ticket changes hands before the actual event. (i.e. season ticket holders reselling, scalpers reselling)
I could go on for days about the different use cases for the real-life applications of NFTs that help unlock actual Blockchain Business Value (BBV) and help propel us into the world of the future, but I’ll leave it for another time.
KEY TAKEAWAYS:
The key takeaway I want to leave you with is to just understand the 3 important pillars of an NFT before you invest or get caught up in this hype cycle we’re currently in so at least you have an understanding of what gives an NFT any value. Also, understand that we are in the early innings of NFT potential and the real value is yet to come.
A lot of the NFTs that exist today will be worthless a year from now, so make sure you use the 3 pillars as your guide if you’re looking to get involved early.
Trying to understand the potential of NFTs and only knowing the digital art/collectible craze, is like trying to learn how to drive a manual car a.k.a “drive stick” and only knowing about 1st gear. The potential is actually far greater.
The use cases are limitless. One day, almost everything that exists today will become some form of a fungible token (FT) or non-fungible token (NFT) as we move more towards digital and virtual worlds.
Progress is inevitable.
