Non-fungible tokens (NFTs): Possible speculative bubble with potential for sustainable innovation
By Lennart Ante
A new form of digital investment has hit the mainstream. Non-fungible tokens (NFTs) are following in the footsteps of cryptocurrencies, fetching large sums in digital auctions and sales. NFTs are unique certificates of authenticity on blockchains, usually issued by the creators of the underlying works (or assets). These assets can be digital or physical in nature. Fungible goods such as money or trade goods can be replaced or exchanged with goods of the same kind. On the other hand, if it is a non-fungible good, it cannot be exchanged for a similar good because the value goes beyond the actual material value. In terms of the analog world, this would involve, for example, works of artistic or historical significance or trading cards that have long been auctioned and traded in various marketplaces. In the digital world, on the other hand, trading and auctioning of goods was and is only possible to a limited extent, as the authenticity of the goods could not be clearly verified until now.
But what does this mean in concrete terms? The Internet allows users to copy any information they want. As a result, it is completely unclear when, for example, a digital work of art, a file or a post on a social network is the original or a copy. For this reason, it has been virtually impossible to unambiguously identify the authenticity of goods. This challenge is now being solved by the use of NFTs, as they offer the possibility of unambiguously declaring digital goods to be originals. They are digital certificates of authenticity that are both transferable and tradable. As a result, they are subject to fluctuations in value just like conventional (analog) works of art or collectibles.
But how does this work exactly and what role does the blockchain play? The blockchain technology acts as a trustworthy infrastructure for the generation, storage as well as transfer of the tokens. In this process, the NFTs as such are created via so-called smart contracts, which represent computer code on a blockchain and manage the life cycle of digital tokens in an automated manner (Ante 2021).
The NFT of this painting by artist Beeple sold for the equivalent of $69.3 million. It consists of 5,000 individual images.
To get an impression of the potential of NFTs, it is worth taking a look at the market in the past months of 2021. The market for NFTs has experienced exponential growth in the past months of the year. Considering the “values” sold for millions of euros, it is easy to assume that this could be a speculative bubble. As early as the first quarter of 2021, 333,000 NFTs worth $400 million were traded (NonFungible 2021). These were in particular NFTs of digital art, collectibles, music rights, in-game items or metaverses. The artist Beeple, who sold a purely digital art asset for the equivalent of $69.3 million in an auction at Christies auction house (Christie’s 2021), and Twitter CEO Jack Dorsey, who auctioned off the NFT of the first tweet ever (“just setting up my twttr”) for $2.9 million (Valuables 2021), received particular media attention. But that is far from the end in sight. Sports stars such as NFL quarterback Patrick Mahomes and UFC champion Khabib Nurmagomedov are selling NFT collections, and soccer clubs such as FC Bayern Munich and Paris Saint Germain are participating in digital “NFT trading cards.”
Although the rapid growth of the NFT market suggests a bubble, NFTs offer high innovation potential. Currently, digital property rights (still) lie with platforms and their operators. In perspective, NFTs can shift these property rights from the platform to the creators, which may result in a corresponding paradigm shift. As a result of enabling the trade of demanded goods and their subsequent monetization, the market for the creation of digital goods can be transformed. On the one hand, this enables creators to use a secondary market to distribute their digital goods and, on the other hand, to be remunerated for their (time) effort. They can participate directly in their creation, which was not necessarily the case before.
And how can NFTs be designed in concrete terms? In short, they are as varied and individual as their underlying works. In addition to a “simple” certificate of authenticity, NFTs can give creators a share in future sales proceeds, contain voting rights, or be divided into fractions that can in turn be traded for themselves. It would be conceivable, for example, for investors to purchase small quantities of a (digital) work of art and for museums, exhibitions or associations to finance themselves through this. And let’s be honest, who wouldn’t want to be the co-owner of da Vinci’s Mona Lisa?
The current gold rush mood and the possibly bursting speculative bubble of the NFT market do not necessarily make it easy for decision-makers in politics and administration to conduct a proper debate about its introduction and regulation. Nevertheless, they should not draw the conclusion from this that new technical and economic innovations should be thwarted from the outset against the backdrop of such risks. Instead, the players involved should take a comprehensive, independent and objective look at the opportunities and risks for the economy and society and promote the legally secure and sustainable adoption of NFTs. After all, this new technology has already proven one thing. It has the potential to give Germany not only a competitive advantage but also a pioneering position in digital transformation and the digital mapping of property, copyright and ownership.