[Originally published March 2021]

NFTs = Non-Fungible Tokens

Fungibility

First, what exactly does “fungible” even mean? Fungibility is “the property of a good or commodity whose individual units are essentially interchangeable,” which implies equal value between each instance of the asset.

Currency as an asset class is inherently fungible. Say you have a $20 bill. This $20 can be exchanged for some combination of bills and coins that represent a total value of $20: two $10 bills, eighty quarters, another random $20 bill, or even a hodgepodge of different currencies that in aggregate are valued at $20. Because there is no “special” value ascribed to that particular bill in your wallet, this makes currencies as an asset class inherently fungible. (Of course, there are instances where things like limited edition coins or bills with misprints are ascribed value above face by collectors due to its scarcity).

Turning to non-fungible items, they can be physical, like Monet’s “Impression”, or digital, like Twitter handles (@theevanchen - shameless plug). Among assets like the above items (other works by Monet, other Twitter handles), they are not interchangeable, nor do they all command equal value.

However, fungibility isn’t binary—an object’s fungibility changes depending on how it's framed. A limited-edition sweater release from an influential figure would be considered non-fungible relative to any other sweater you could buy, but becomes more fungible when among the 999 other sweaters in that 1000 unit drop. A Super Bowl ticket right at midfield would be non-fungible compared to any other ticket to another football game, slightly more fungible when compared to a Super Bowl seat in a different section, and essentially fungible when compared to the 5 seats around it.

While understanding fungibility from the perspective of value is helpful, it’s important to note that, though correlated, fungibility and value should not be conflated. Fungibility is defined by scarcity (replaceability), whereas value is determined by a myriad of factors like demand, usefulness, and subjective perception. Fungibility is an intrinsic, internal property of an item; value arises from an ascribed, external appraisal of that item.

What is a Non-Fungible Token? What does blockchain have to do with it?

In short, an NFT is a digital representation (token) of something that’s non-fungible; blockchain ensures its scarcity and proves ownership. [If interested, you can read more on how blockchain does that here.]

But blockchain does more than that for NFTs. Much like any other asset (ie. cars), NFTs need underlying rules and infrastructure to actually be used. Blockchain provides:

-Standardization: Cars need basic components like gas and brake pedals to speed up and slow down. NFTs need basic properties like ownership, ability to transfer, and access control.

-Interoperability: Cars would only be useful if you had infrastructure to drive to and from other cities. NFTs would only be useful if there are protocols to transfer to and from disparate ecosystems/platforms.

-Programmability: Cars are not all one size and can do more than just drive on roads. NFTs need complex mechanics to allow various design and use case opportunities (ideas on that later).

Why would someone want an NFT?

Social status + Signaling

Simply put, owning things that others do not—and in NFTs’ case can not—has always been a wealth signal.

Scientifically, there are two facets to social status, objective social status (OSS) and subjective social status (SSS). OSS is measured by owning tangible things or being associated with something of high perceived respect (ie. education, occupation), whereas SSS is based on admiration and influence over large groups (ie. high follower to following ratio). Owning non-fungibles contributes to both. Aside from the obvious OSS uplift from owning things that are scarce, SSS uplift can come from others seeing you had recognized value in something early on that is significantly more valuable now (ie. Jason Calacanis + Uber). NFTs rapidly expand the number of digital non-fungibles that can be owned. Further, with how nascent NFTs still are, the upside to SSS uplift becomes significant.

Investing

Even if you're convinced social proof is no reason to buy non-fungibles, value accretion over time could provide enough of an incentive financially. Fine art and wine are easy examples, but this frame works even for the common retail investor buying shares of, say, Apple. Compared to shares of all other companies in the S&P 500, a single share of AAPL is relatively non-fungible as it’s not quite interchangeable with a single share of MSFT, nor does it command the same value. However, buying these shares is dependent on a belief that they will have higher value over time (ignoring shorts). For NFTs, buying digital art is like buying a share in an artist whose work you believe will become far more valuable in the future; buying low-ID or rare CryptoKitties comes with a—speculative or otherwise—belief it can be sold at a higher price in the future or breed rarer cats that could also be sold.

Disclaimer: I am not a financial advisor, please do your own diligence before investing

“I like the stock”

Aside from social or financial incentives, increasing NFT popularity can bring more creators into the space, increasing the likelihood you’ll simply find something you love.

How could NFTs be used?

Much of the discussion above outlines what the supply of NFTs look like, but demand for NFTs needs to surpass the current small group of power users and early adopters. Here are some ideas I have (more so feature sets than net new products):

Consumer - Social Media 2.0

Users: Wouldn’t it be cool if you could prove you stood in line for hours to get the first release of the newest iPhone? Got that Supreme drop that sold out in minutes? Went to Fyre Festival? By adding a digital component to non-fungible physical or experiential items we already covet, it expands the reach of social proof mentioned earlier. Layer on precedence and other metadata and it becomes even more interesting—“I have the 17th iPhone 12 sold worldwide”, “I got backstage passes", etc.

Thus, rather than waiting for people to come by your house to see the cools things you bought or waiting for a conversation about music festivals to come up for you to talk about your EDC experience, you can (1) immediately display NFTs of those items and experiences online and (2) have a collectible portfolio of NFTs that define who you are at a glance without needing to scroll through your feed or share any pictures/videos for that matter.

-Don’t just post pictures of your travels, collect NFTs from artists of each country you’ve been to

-Don’t just tweet about your love for NFTs, buy some and show them off on your profile

Creators: On the tail of creator-centric platforms like Patreon and the recent release of Twitter Super Follows, NFTs can help creators monetize and expand reach. Rather than setting a $ fee per month, instead sell NFTs at the same price for access to the exclusive content. Then, patrons who display a creator’s NFT on their profile can help that creator garner additional interest from that patron’s own followers.

Consumer - Dating apps

By having an area in your profile to show off all the different NFTs you own, instead of just saying you like a certain artist on Spotify, feature an NFT released by that artist. Instead of saying you like Rick & Morty, display a piece of digital art with Pickle Rick. Profiles in the existing stack could be curated based on similar or tangential proven interests rather than just randomized.

Are you interested in a specific activity for a date? Want to go for a hike this weekend? Maybe a wine tasting? Swipe through a targeted stack of profiles that have a specific proven interest (people with NFTs related to hiking trails, national parks, wineries, etc.)

Enterprise - NFT + IOT

In line with the Social Media 2.0 example above, companies adding a digital component to their physical products creates numerous use cases that are beneficial on an enterprise level as well. Companies can easily find their super-users, who would have associated NFTs on their profile for social proof.

Marketing becomes significantly more targeted when you know customers like something and have acted on it before with a purchase—individual companies can take power back from ad behemoths like Facebook and Google who abstract away potential customers into broad buckets.

Loss prevention and fraud protection on both corporate and individual levels can be reduced—if some valuable products are stolen or fake, requiring digital IDs associated with those items in the name of recording ownership transfer on the blockchain can be a strong theft deterrent.

Secondary markets can be also be directly monitored for companies to see how their products are valued after the initial sale (ie. shoes being flipped, ticket scalping). By adding unit precedence (1st, 2nd, etc.), fungibility becomes stratified by making units comparable and earlier instances more valuable (ie. 1st edition comic book -> 1st print, 1st edition comic book).

Enterprise - Movie/TV Show Royalties –> secondary monetization of visual media

Similar to how the NBA Top Shot provides officially licensed digital collectibles of great moments, movie/TV studios could sell clips of their shows for super fans. Instead of just selling Friends shirts, why not take one more step and sell ownership of specific clips? This becomes especially appealing for buyers if, amidst the numerous memes shared online today, licensing rights and royalties can be collected for usage. Imagine the royalties on a prevalent meme like Michael Scott’s “No, God, please, no!” clip from The Office or just the social proof from owning that clip.

Additional thoughts + open-ended questions

In the age of trends like #deleteinstagram, documentaries like The Social Dilemma, and tech moguls curbing their children’s social media exposure, there exists a growing sentiment that being constantly barraged with unrealistic versions of others is unhealthy. NFTs would only accelerate and expand that barrage. Further, because NFTs are fundamentally scarce, they essentially become status symbols that adds another wedge in the wealth gap.

Is Ethereum 2.0 the right standard for NFTs?

How can additional demand be generated right now?

What needs to be done to incentivize more people to buy NFTs to bring it mainstream?

Should there be governmental oversight to protect unknowing consumers (it does run counter to decentralization)?

Is there a way to structure NFTs to minimize its negative externalities?