NFTs: Tool For Market Design

"Everydays" refers to a series of daily digital art pieces created by artist Mike Winkelmann, who is more commonly known as Beeple. These works were created and shared online every day for over 13 years, from May 1, 2007, to the present day.

Recently, Beeple has sold a collection of 5,000 of his "Everydays" pieces as an NFT (non-fungible token) for a record-breaking $69 million at a Christie's auction. NFTs are unique digital tokens that use blockchain technology to verify the ownership and authenticity of digital assets, including artwork.

Put differently: Someone paid almost $70 million for a picture on the internet.

Nfts have been spoofed by Saturday Night Live and embraced by high-profile celebrities like rapper Snoop Dogg and NBA superstar Stephen Curry. There are now hundreds of millions of dollars of NFT sales each week through public marketplaces like Foundation, OpenSea, and Nifty Gateway, as well as custom-built applications like NBA Top Shot and VeVe.

Yet at the same time, many people wonder how tokens on the internet worth money at all could be — especially when many of them just represent “ownership” of an online image or animation that you could, in principle, download a copy of for free.

The emergence of NFTs has caused a lot of excitement and buzz, but also a fair amount of skepticism and concern.

On the one hand, NFTs offer a new way for artists to monetize their digital creations, and for collectors to own unique and verified digital assets. This has opened up new possibilities for creators who previously struggled to make money from their digital art and has created a new market for buyers who are looking for alternative investments.

On the other hand, there are concerns about the environmental impact of NFTs, which use a lot of energy to produce and verify. Some critics have also raised questions about the actual value of NFTs, which are essentially just a digital signature of ownership and can be easily replicated or copied. Additionally, some people have criticized the hype around NFTs as a speculative bubble that is unsustainable in the long term.

NFTs as a Tool for Market Design

NFTs have fundamentally changed the market for digital assets. Historically there was no way to separate the “owner” of a digital artwork from someone who just saved a copy to their desktop. Markets can’t operate without clear property rights: Before someone can buy a good, it must be clear who has the right to sell it, and once someone does buy, you need to be able to transfer ownership from the seller to the buyer. NFTs solve this problem by giving parties something they can agree represents ownership. In doing so, they make it possible to build markets around new types of transactions — buying and selling products that could never be sold before, or enabling transactions to happen in innovative ways that are more efficient and valuable.

As the name “non-fungible token” suggests, each NFT is a unique, one-of-a-kind digital item. They’re stored on public-facing digital ledgers called blockchains, which means it’s possible to prove who owns a given NFT at any moment in time and trace the history of prior ownership. Moreover, it’s easy to transfer NFTs from one person to another — just as a bank might move money across accounts — and it’s very hard to counterfeit them. Because NFT ownership is easy to certify and transfer, we can use them to create markets in a variety of different goods.

But NFTs don’t just provide a kind of digital “deed.” Because blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders.

In this sense, NFTs can function like membership cards or tickets, providing access to events, exclusive merchandise, and special discounts — as well as serving as digital keys to online spaces where holders can engage with each other. Moreover, because the blockchain is public, it’s even possible to send additional products directly to anyone who owns a given token. All of this gives NFT holders value over and above simple ownership — and provides creators with a vector to build a highly engaged community around their brands.

Thus, owning an NFT effectively makes you an investor, a member of a club, a brand shareholder, and a participant in a loyalty program all at once. At the same time, NFTs’ programmability supports new business and profit models — for example, NFTs have enabled a new type of royalty contract, whereby each time a work is resold, a share of the transaction goes back to the original creator.

This all means that NFT-based markets can emerge and gain traction quickly, especially relative to other crypto products. This is both because the NFTs themselves have standalone value — you might buy an art NFT simply because you like it — and because NFTs just need to establish value among a community of potential owners (which can be relatively small), whereas cryptocurrencies need wide acceptance to become useful as a store of value and/or medium of exchange.

The Advent of NFT Ecosystems

The best-known examples are the digital art market described above, and digital collectibles platforms like Dapper Labs' NBA Top Shot, where users can collect and trade NFTs of exciting basketball games - videos called "Moments" that are quasi-digital trading cards. Top Shot has included game-like challenges and other reasons for owning the cards beyond just collector value and has even hinted that Moments owners could eventually receive real-world benefits from the NBA.

More recently, however, a model of actively building an ecosystem around NFT properties has emerged, leading to new types of organizations developed entirely in the NFT space. These products start with an NFT series but develop a roadmap whereby NFT owners gain access to a growing number of products, activities, and experiences. Revenue from initial and subsequent NFT sales flows back into the brand to support increasingly ambitious projects, which in turn increase the value of the NFTs themselves.

The Bored Ape Yacht Club (BAYC) is a collection of unique digital art pieces, created as NFTs on the Ethereum blockchain. The collection features 10,000 different "Bored Ape" digital images, each with its own distinct traits and characteristics. The Bored Ape Yacht Club was created by the anonymous online group, Bored Ape Club, which describes itself as "a group of like-minded individuals who share a passion for digital art and the power of the blockchain."

Membership in the Bored Ape Yacht Club is granted to owners of the Bored Ape NFTs. Membership grants access to a private community, as well as exclusive merchandise, events, and experiences. The Bored Ape Club has also established a Bored Ape Kennel Club, which is a collection of rare Bored Ape images that are paired with unique virtual dogs.

The Bored Ape Yacht Club has gained a significant following, with the value of the NFTs increasing significantly since their launch in April 2021. The Bored Ape Club has also established partnerships with brands and celebrities, including Nike and the rapper Jay-Z.

The success of the Bored Ape Yacht Club has been attributed to the community and social aspect of the project, as well as the high quality and unique nature of the artwork. The project has demonstrated the potential of NFTs to create new markets for digital art and to foster new communities and experiences around digital assets. All these benefits make owning the associated NFTs more valuable — and almost paradoxically, this increase in the value of ownership comes in a form that helps separate the value of ownership from the purely financial opportunity of reselling.

Concluding NFTs projects could be a new reality implementation, since works of art (music, images, gifs, draws, sculptures, etc) until important documents such as a house purchase and sale contract or clothes digital property for example.

This could be the solution in an increasingly digital world, giving total confidence to both those who sell and those who buy, and in the case of artists, benefiting them through a fair and decentralized retribution of their profits from the sale of their intellectual property. It’s no coincidence that so many of the first NFT projects revolve around digital rights management, as this is one of the most direct applications of the technology.

Important to remember that NFTs must leverage a community of users and to maintain ongoing community engagement, NFT project teams need to generate confidence that they can continue executing.