by Vakeesan Mahalingam

NFTs are currently the new trending buzzword for mainstream media when discussing blockchain related technology, but not many have discussed exactly what it is, how it derives its value and what are the actual life changing use cases.

First, let’s start by defining it. NFT stands for Non-Fungible Token, which is the term used to describe a unique digital asset that has its ownership tracked on a blockchain. Fungible means mutually interchangeable, or replaceable. Non-fungible in this case, basically just means each token is unique and cannot be interchanged or replaced identically by another.

For example, let’s say you have a $20 bill in your pocket, and I have a $20 bill in my pocket. These are ‘fungible’ (interchangeable). The $20 bill I have has the same value and holds the same utility as the $20 bill you hold. Now, let’s say you had a diamond ring on your finger, and I had a diamond ring on mine, these are ‘non-fungible’ (not interchangeable) because each ring has different properties and is unique. The two rings do not replace one another.

Next, to understand the value proposition of NFTs, one needs to think about what the future state of the world will look like 25 or 50 years from now. In the future, the lines between the physical world and virtual world will be blurred as we progress toward the idea of a Metaverse.

NFTs benefit from this trend, as we continue to virtualize critical aspects of our daily lives. They key idea here is that NFTs are more than just digital art. There are many varying use cases for NFTs that are still being developed.

For example, there are projects underway that are looking to digitize and decentralize a claim on physical assets, like real estate, through digital deeds and wills using NFTs. Others are focused on event ticketing platforms using NFTs, or securitizing illiquid assets like private placements. There are many industries ripe for disruption where NFTs can help create a new modernized system.

On the creative side, NFTs are a way to make digital files ownable, similar to financial assets, but in the form of digital art, music, and collectibles where one can build and embed inherent properties into the token itself like royalty structures, or self-destruction features. Blockchains provide an immutable proof of ownership for these assets.

I believe we are in the early stages of market euphoria around NFTs. People are rushing to buy these trendy digital collectibles without understanding the basic properties of what makes NFTs valuable or understanding the potential of the technology for real-world applications that will unlock Blockchain Business Value or BBV.

There are three main pillars to consider when thinking about the potential value of NFTs:

(1) UTILITY

The first pillar is Utility, where we consider the use, purpose, and benefits of an NFT. An example this would be in the space of digital identification. A digital ID, using NFTs, could be used to verify an individual quickly using a blockchain network that holds biometric and retina data, allowing you eventually to travel the world with a digital passport.

(2) STATUS (CLOUT)

The second pillar is Status, where we consider the high social status, influence, fame, or power that comes to holders of a specific NFT. It may be exclusive, rare, hard to obtain, and highly sought after. An example of this would be the digital art created by Beeple titled ‘The First 5000 days’ that sold at the Christies auction for ~ $70 million as a 1/1 rare piece of fine digital art that the artist spent 5,000 hours creating.

(3) COMMUNITY

The third pillar is Community, which provides an audience, who can adopt the NFT into systems of the future and  validate ‘Proof of Fandom’ –  i.e. being able to create a p2p marketplace between buyers and sellers after the initial purchase, which signals that a community of fans has developed). Trust by a large community, gives NFTs the function of store of value and room to appreciate as the community grows. One example is NBA Topshot, which is a new digital form of basketball trading cards. The digital .gif moments offered on NBA Topshot, was built on a pre-existing global community of basketball fans, card collectors, and Esports fans. The fans have come together to create a marketplace that determines intrinsic value based on basic supply and demand principles, and provides ‘Proof of Fandom’.

We are in the early innings of the true potential of NFTs and its ability to unlock value for blockchain technology. A lot of the NFTs that exist today may become worthless, but new use cases will arise. Analyzing through the lens of the three pillars should help one determine the likely success of current and future NFTs.

To learn more, please read my deep dive on LinkedIn.

Vakeesan Mahalingam, CFA CBP is a former Portfolio Manager at Kintaro Capital and has been an early adopter of cryptocurrencies since 2017. He is currently a Trader and Entrepreneur looking for his next major career move.

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This article is re-published from the April 2021 issue of “Street Talk”, TiF’s flagship publication. Interested in writing for us? Click here for our submission guidelines.