NFTs are much bigger than artistic fad
James Bowden, Senior Lecturer in Financial Technology, University of Strathclyde, and Edward Thomas Jones, Senior Lecturer in Economics, Bangor University.
Sotheby’s has become the latest art establishment name to delve into NFTs (non-fungible tokens) thanks to its collaboration with anonymous digital artist Pak and the NFT Nifty Gateway Marketplace.
The auction house sold The Fungible Collection, a “new digital art collection redefining our understanding of value,” for more than $ 17 million.
Some pieces, like âThe Switch,â a monochrome 3D construction that will be modified by the artist at some point in the future, have received bids well over $ 1 million.
For the uninitiated, NFTs are tokenized versions of assets that can be traded on a blockchain, the digital ledger technology behind crypto-assets such as Bitcoin (BTC) and Ethereum (ETH). While one bitcoin is directly interchangeable with another, meaning that they are fungible, NFTs are the opposite because the underlying assets are unique in one way or another and cannot be traded like against.
This peculiarity enabled Christie’s to sell digital artist Beeple’s NFT âEverydaysâ in March for $ 68 million. For those who don’t have that kind of money, NFTs are also used to trade collectibles like baseball cards and computer games like swords and avatar skins.
The enthusiasm around NFTs fuels a narrative similar to other recent price spikes such as GameStop and Dogecoin, in that they are speculative bubbles caused by stimulus checks in the United States, a nuisance of foreclosure and low interest rates.
Look no further than celebrities like music star Grimes and YouTuber Logan Paul releasing their own flagship NFTs to ride the wave. Even Vignesh Sundaresan, the entrepreneur who bought Beeple’s record-breaking artwork, sees investing in NFTs as “huge risk” and “even crazier than investing in crypto.”
But history also tells us to be careful not to dismiss NFTs as a passing fad, as the importance of technological innovations often becomes clearer once the hype wears off. Many commentators have dismissed the influx of tech companies around the dot-com bubble of the late 1990s and the first wave of mass cryptocurrency enthusiasm in 2017, only to turn out to be totally wrong when Amazon and Bitcoin are reappeared.
NFTs themselves are actually well below their highs, with the average price down 70% since February. Perhaps this is less about bursting a bubble and more about “wiping out” gadget tokens now that the initial hype has started to die down.
This phenomenon is well captured in the cycle of hype for US consulting firm Gartner, which illustrates the typical progression of a new technology. With NFTs, we’re probably coming out of the âpeak of inflated expectationsâ on a journey to the same âproductivity plateauâ that Amazon hit long ago.
Gartner Hype Cycle
This ties in with what Austrian economist Joseph Schumpeter said about why capitalism works. Schumpeter saw capitalism as a relentless conversion from old to new, with the newest and most innovative companies replacing those that came before – he called this âcreative destructionâ.
With this in mind, NFTs are the new entrants challenging the way we perceive and record asset ownership. And the tension between innovation and incumbent status also contributes to the skepticism that still surrounds these new technologies.
What happens next
NFTs create opportunities for new business models that did not exist before. Artists can attach stipulations to an NFT that guarantees they get a portion of the proceeds every time it is resold, meaning they benefit if their work appreciates in value. Granted, football teams have used similar contract terms for some time when selling on players, but NFTs remove the need to track the progress of an asset and apply those rights to every sale.
New artistic platforms, such as Niio Art, are able to demonstrate in a very simple way that they own digital works. When customers borrow or purchase art on the platform, they can view it on a screen knowing that there is no copyright or originality issue because the NFT and the blockchain guarantee the authenticity of the property.
NFTs give musicians the potential to provide enhanced media and special benefits to their fans. And with sports memorabilia, between 50% and 80% of items are considered fake. Delivering these items in NFTs with a clear transaction history to the creator could solve this counterfeit problem.
But beyond these areas, the potential of NFTs goes much further because they completely change the rules of ownership. Transactions in which the ownership of something changes hands have typically depended on layers of middlemen to build trust in the transaction, exchange contracts, and ensure that the money changes hands.
None of this will be necessary in the future. Transactions recorded on blockchains are reliable because the information cannot be changed. Smart contracts can be used in place of attorneys and escrow accounts to automatically ensure that money and assets change hands and both parties honor their agreements. NFTs convert assets into tokens so they can move around in this system.
This has the potential to completely transform markets like real estate and vehicles, for example. NFTs could also be part of the solution to solving land ownership issues. Only 30% of the world’s population have legally registered rights to their land and property. Those without clearly defined rights find it much more difficult to access finance and credit. Additionally, if more of our lives have been spent in virtual worlds in the future, the things we buy there will likely also be bought and sold as NFTs.
There will be many other developments in this decentralized economy that have not yet been imagined. What we can say is that it will be a much more transparent and direct type of market than what we are used to. Those who think they see a flash in the pan are unlikely to be prepared when it arrives.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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