Digital collectibles & the NFT revolution

Part 1 of 2. See Part 2 here.

Non-Fungible Tokens have caused a surge in the digital art market. JP Morgan analysts estimate that the average monthly sales of NFT art in 2021 is nearly $2 billion.?

This growth is astounding, to put it mildly, and many of us are still trying to wrap our heads around why this much volume is flooding into the market.

To understand the phenomenon, it helps to know the technology.

What is an NFT?

Non-fungible tokens are blockchain-based digital assets (tokens) that hold unique information (non-fungible).

This means that each token is distinct, so no two NFTs can be exchanged for equivalent value. By comparison, fiat coins, gold, or bitcoin, are all “fungible” and can be interchanged.?

A bar of gold, for example, is equal in value and can be exchanged for any other bar of gold. The same can be said for two bitcoins or two Philippine pesos. This is not the case with NFTs.

Non-fungibility allows NFTs to establish exclusivity where none previously existed.

Consider an image on the internet, for example. How would I sell that image if anyone else with access to the web could simply take a screenshot or download a copy? Ownership of that image would be impossible to define, since basically anyone could claim it, making it infinitely available. If supply is infinite, a product becomes free, and therefore impossible to sell. So, in our example, “ownership” of this image would mean nothing.

In come NFTs. In addition to being non-fungible, NFTs cannot be replicated or tampered with. This allows them to solve the issue of infinite supply.

An NFT can act as a virtual title of ownership, designating that a digital asset, like the image in our example, is uniquely owned by the holder of the token. So although anyone in the world could have a copy of my image, only one person could own the NFT because it’s one of a kind. Therefore, it’s now possible to sell the ownership of the image as an NFT, since it has a limited supply of one.

Note that the digital asset, the image in this case, is not really what is being traded. Rather, the NFT is the valuable component. The NFT does not change the fact that anyone can still take a screenshot or share the image in question. However, it does allow the concept of ownership to be “tokenized,” or represented as a token. Tokenization makes it possible to distinguish the ownership of otherwise infinitely available assets.

Commodifying the non-commodifiable

This applies not only to images, but tweets, GIFs, videos, and more. Really, the ownership of almost anything can be represented as an NFT.

Because of this, the emergence of NFTs has suddenly enabled the sale of digital art, which was previously very difficult to commoditize. The market for NFT art has grown so big that OpenSea, the NFT marketplace start-up that launched in 2017, is now valued at $13.3 billion.?

In fact, renowned auction house Christie’s sold a single NFT piece for $69 million. The piece, entitled “Everydays - The First 5000 Days,” is a collage of 5000 images by artist Mike Winkelmann (better known as Beeple), whose work remains some of the most highly valued NFT art to date.

Among the most popular NFTs trading today are collectibles, such as the Bored Ape Yacht Club collection, composed of 10,000 unique cartoon apes. Each ape is priced upwards of 71 Ethereum, with some selling for as high as 333 Eth ($800,000 today).

Demand for the apes has only been intensified by celebrity involvement, with the likes of Jimmy Fallon and Paris Hilton announcing their exclusive membership to the Club. A massive subculture has since grown around the collection, fueled by an exclusivity that has driven prices even higher.

Amidst the hype, artists from rapper Eminem to rock band Kings of Leon are now trying to capitalize on the trend by releasing their own NFT collections.

NFTs have opened the floodgates to a new form of assets, and money is pouring in at an alarming rate. But does the novelty of the digital art trade justify the attention and capital it has attracted? Why is everyone ape-ing in?

New tech, same old habits.

Some experts, such as Gary Vaynerchuck, creator of the NFT collection “Veefriends,” which has generated revenues in the millions of dollars, theorize that the interest around NFT art stems from humanity’s need to communicate social status through expensive assets. This is otherwise known as social signaling.

Evidence of social signaling can be seen as far back in the archeological record as ancient Egypt and throughout the middle east, long before the common era. Whether in the form of jewelry, art, clothing, or cars, highly valued assets have been used in every age to distinguish the owner.

Today, we often see this signaling expressed through pop culture icons. Whether it’s a shirt bearing a popular brand, a bumper sticker of a sports team mascot, or a tattoo inspired by a tv show, these symbols saturate nearly every form of consumption and are used to distinguish identity.?

In the digital age, this tendency has even migrated into virtual spaces. Amongst the younger generation, it’s common practice to purchase digital assets representing famous cultural figures, like a “skin,” or digital avatar. People have been running around Fortnite servers as Keanu Reeves for almost a full decade.

Those on the outside often wonder why anyone would spend hard-earned cash on a collection of pixels. The answer: social signaling.?

That same impulse that has driven the luxury goods economies for centuries has now migrated to digital, and it is the same impulse that fuels the popularity of collections like Bored Apes. So the buzz around NFT collections is not something new- it’s a behavior as old as humans.

That's all very interesting, but do NFTs have utility beyond social signaling? Surely the unique characteristics of the technology can be applied to many more use cases. Stay tuned for Part 2, which offers a glimpse into the future of NFTs.