NFTs: What they are, and why they're worth millions

Experts weigh in on whether this class of tokens—which already has use cases in the consumer world—will translate to the enterprise and have staying power.

NFT token concept

Image: Cristian Storto Fotografia/iStock/Getty Images Plus

Non-fungible tokens are a fancy way of saying a digital asset is unique. NFTs have been catching a lot of buzz lately, mainly in the art and music worlds, and experts are divided about whether they are a passing phase.

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"A digital token allows someone to put it out in the marketplace and sell it or pieces of it, Wester said. NFTs have no physical representation. "But in terms of a blockchain, it's something in a digital wallet that represents that token, which would be secured and stored [there], and no one else would be able to access it."

NFTs have made a splash recently ever since the artist Beeple generated buzz for selling an NFT of his digital artwork at a Christie's auction for more than $69 million. Although anyone can download this digital artwork, thanks to NFT, the new owners have bragging rights to its digital verification on the blockchain, meaning they own the authentic original version from the artist.

It isn't the artwork that is being recorded on the blockchain; it's the owner of the token, Wester said.

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"A lot of things in the digital world are really hard to prove and that's what tokenization is supposed to solve when it comes to artwork," he said.

But Wester believes there are "better use cases for NFTs in terms of assets you'd want to prove ownership of," such as patents and collectibles. Even though the latter applies to offline objects, if someone can connect a token back to an artifact like a baseball card, "I think that's a better use," he said.

It's important to note that NFTs are different from bitcoin in that they are not currencies, said Jude Lee, a software architect at Digital.com, a review site that helps small business owners make the right buying choices.

"They represent something that may have financial value, but they cannot trade as like-kind," Lee said. "NFTs represent unique things, whereas one bitcoin equals the value of another bitcoin. One NFT does not equal another NFT, hence the name non-fungible."

Will NFTs have staying power?

Collectibles are an area that will see a lot of NFT activity, Wester said. "A lot of that has to do with shipping and receiving and holding and storing." That's because you may have a physical item you don't want to ship so it can be tokenized, and the token represents "the digital version of a certificate of ownership."

In the artwork example, a token is good because a piece of it can be sold—especially if it appreciates in value. "That's the kind of thing you can now do once you tokenize a real-world asset," Wester said. "If you own a portion of this [artwork], you've made it very liquid."

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Ariel Zetlin-Jones, an economics professor at Carnegie Mellon University, is more skeptical about NFTs in the post-pandemic world.

"I have trouble understanding the value proposition [of an NFT] being any different from owning a token. There is nothing unique about owning an NFT—anyone can get an exact replica of artwork," Zetlin-Jones said. "The unique thing is you own the special serial code," on what is presumed to be signed by the artist.

NFTs are also generating attention right now because of digital rights management, Wester said. More awareness of cryptocurrencies like bitcoin has also brought NFTs to the forefront now, he said.  

"There's a better understanding of how an NFT is a more efficient mechanism for keeping track of and buying and selling artwork and music," he said. Cryptocurrencies are also gaining momentum as a new asset class to invest in, "and there is recognition that the same technology that is responsible for cryptocurrencies can be applied to other areas," Wester said. "That's what non-fungible tokens are. 

NFT marketplaces

More NFT marketplaces are cropping up as a vehicle to buy and sell these tokens. Even though it's appealing to own a digital asset, people also want the ability to cash out, like in the case of the artwork appreciating in value. NFT marketplaces fill the need to buy and sell these tokens with the goal of making the user experience easier, Wester said.

"That's the evolution of the whole space—to provide that application layer where consumers or companies can begin to start experiencing and participating in" NFTs, he said.

But Zetlin-Jones said the cost has to be weighed when going through an online marketplace to buy and sell NFTs, just like the eBays of the world. "In all of those exchanges the dealer takes a cut," he said. "So is there value of NFTs as a way to trade collectibles? It's a question of the [cost of] the transaction."

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On Ethereum, for example, "we need the message that is sending the token in the blockchain that supports the Ethereum network and has to be recorded," Zetlin-Jones said. "The agent who records that message, known as a miner, has to be paid."

One important difference between Ethereum and eBay is that when someone buys a product on the latter if it doesn't show up or is not what the person ordered, they can ask for a refund, he said.

"There's no comparable refund device on Ethereum," Zetlin-Jones said, noting that the Beeple token sold on Ethereum. "In most cases, you don't know who is selling the NFT."

Enterprise use cases

While NFTs right now mainly play in the consumer space, "there is a very large movement to apply NFTs to enterprise applications, especially in things like intellectual properties" and the aforementioned patents. "That's something I think will have much bigger application over time," Wester said.

There are companies with massive patent portfolios that in many cases are not doing much for them from a financial standpoint, he said. Those assets can be tokenized, licensed, bought or sold. A tokenized license is "creating a more efficient way of making [a patent] liquid and sellable and tradeable."

This "addresses a real need enterprises have been trying to figure out," which is how do they monetize some of the assets on their balance sheet? Wester said. "From an enterprise standpoint, I think that will have very big implications. Especially now that we know how to do it."

The bottom line

Wester anticipates seeing NFTs being applied to enterprise assets in the next one to two years. In five to 10 years, he predicts they will be used as a standard business practice. "What will push [NFTs] forward is the idea that once you begin to tokenize some of these assets you begin to realize real value and liquidity."

Lee envisions NFTs expanding to represent ownership in real estate and company equity.

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In the meantime, the concept is still very new. There are a lot of areas that aren't well understood yet, like how to build the tokens and what is required from a tech stack point of view, as well as the best blockchain to use, Wester said.

"There's a whole lot of tech questions about building these tokens" as well as the marketplaces, what the protocols should be and the risk, security and governance, he said. Organizations also must address how they will ensure what they have tokenized is valid in the real world.

While the patent world is relatively straightforward, the idea of tokenizing a patent portfolio is not, Wester said.

Zetlin-Jones isn't sure if NFTs are a good investment. "To me, they seem like a new form of hobby collectibles." But he believes they will stick around for a while.

Ultimately, the value of an NFT is in the eye of the beholder. "For whatever reason, people put a value on it," Zetlin-Jones said, "and that value can fluctuate with people's willingness to acquire it."

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