NFTs: Bubble or Revolutionary Technology?

February 9, 2023
Andy Zhou
February 9, 2023
NFTs: Bubble or Revolutionary Technology?

What is an NFT anyway?

In a digital world where files can be copied with just a few clicks, how can we create a unique digital object that can serve as a collectible? This is a problem that has befallen artists ever since the internet came of age. Most people know about masterpiece artworks like the Mona Lisa, and understand why they are valuable. There is only one copy of the Mona Lisa, it’s rare. 

But with digital artwork, anyone can make a copy that is entirely identical to the original and claim that it is theirs. Without a way to verify who created the original, this disincentivizes artists to make digital art as they cannot ensure the protection of their intellectual property. To solve this problem, we have NFTs.

Word of the Day: Fungibility

We need to define what it means for something to be fungible. Fungibility describes the ability for one to trade one unit from a given category of objects for another unit of an object from the same category and be indifferent between those two objects. 

This definition is not easy to understand so let’s break it down in plain English. In practice, what this means is that for instance, if one had a $1 USD bill, then they can trade that bill for any other $1 USD bill and be indifferent between the two. So, the money that we use today is “fungible”, because in general, people do not have a preference for one bill over another provided that the denomination and type of currency are the same. 

Conversely, something that is non-fungible just means the opposite of that. Non-fungible means that an object is not replaceable by another identical item. This would apply to something that is one of a kind, perhaps a rare first-edition book. While that book might still be in print, finding a first edition copy in the same condition is not easy, meaning that the book is non-fungible.

The idea of a non-fungible token is to create a digital token on a decentralized blockchain that is tied to a specific piece of art or any object that can either exist physically or digitally. This token can then represent ownership of that artwork or object. Since these tokens are “non-fungible” they cannot be replicated. Therefore, the artist can ensure that only one corresponding NFT (or a limited number of NFTs as part of a set) exists for every piece of art that they make.

‘NFT’ is a terrible name

The term “NFT” is a terrible name. It’s an acronym that stands for something that sounds very technical and doesn’t adequately explain what it is. Perhaps a better name for NFTs would be “trustless certificates”. 

When researching NFTs, a common question that many people ask is, "why would someone pay millions of dollars for some JPEGs?”.

The answer is that in fact, the picture is not the thing that is being sold, what is being sold is the certificate that proves ownership of that picture.

In 2019, a piece of artwork made by Italian artist Maurizio Cattelan, titled “The Comedian” sold for around $120,000 USD at auction. The artwork is very simple and consists of a real banana that is duct-taped to the wall. Given that it's a real banana, eventually, the banana will degrade to a point where the duct tape will no longer be able to hold it up to the wall, and thus the passage of time will cause the sculpture to destroy itself. So it might seem silly that someone would pay $120,000 USD for something that will be gone in a short amount of time. However, along with the artwork came a certificate with detailed instructions, which allows for the buyer of the artwork to recreate the sculpture with brand new duct tape and a fresh banana at will, and further, have that be considered the original artwork.

Therefore, the real value was never in the artwork itself but rather in the certificate, which demonstrated the ownership of the artwork and the rights to the reproduction of the artwork. 

Extrapolating on this concept, if we use a decentralized blockchain to store these certificates, anyone can look at the artwork that is attached to that certificate instantly and know for certain that it is the real deal. An NFT negates the need for a centralized middleman such as an auction house, or appraiser to verify the authenticity of the certificate. If this is the case, then that is what we call a “trustless” certificate. 


Most NFTs today live on the Ethereum blockchain, although there are NFTs on other platforms, such as Solana, Polygon, and Cardano, which are also gaining in popularity. 

The standard used to create NFTs on the Ethereum blockchain is called ERC-721. Keep in mind that this is a different standard compared to fungible tokens like stablecoins and other tokens of crypto projects that exist on Ethereum, which are classified under the ERC-20 standard. Users need to be aware of this difference as most exchanges and crypto trading platforms do not support holding ERC-721 tokens, so sending an ERC-721 to an exchange or crypto trading platform may result in permanent loss. 

Why NFTs?

NFTs have become extremely popular in recent years, with the price of some, like the ones from a collection called the Bored Ape Yacht Club, fetching prices in the millions of dollars worth of Ether (ETH) at auction. All this begs the question, “why?”

As in, “why are NFTs fetching such high prices? And is this the biggest bubble since the Dutch Tulip Mania?” To answer this question, we must take a deeper dive into the world of NFTs.

Democratizing art

One of the biggest benefits that NFTs bring is the ability to democratize the art industry. Currently, the world of art is largely controlled by a small group of auction houses and high-net-worth individuals. Auction houses like Sotheby’s and Christie’s represent the lion’s share of high-value art that is being sold and traded around the world today. 

With NFTs and blockchain technology, the world of art ownership is open to everyone. One does not need to register with an auction house or schmooze with a small group of powerful people to try and get their art listed and sold. NFTs have the potential to remove the gatekeepers of the art world. All you need to access the blockchain is an internet-connected device and your choice out of a slew of free and open-source web3 wallets. 

Other Uses for NFTs

Are there any other uses for NFTs other than art? Many projects are indeed trying to explore the uses of NFTs that involve theft prevention and helping out with supply chains.

For instance, what if NFTs were linked with luxury items such as expensive watches? If every Rolex was sold with a corresponding NFT, which recorded the serial number of that Rolex, this could reduce theft and unlawful resale. If that NFT-bound Rolex was stolen, the thief would have a much harder time selling it since any buyer can ask the thief to produce the corresponding NFT, which they wouldn’t be able to. If a buyer purchases a Rolex without the corresponding NFT and the watch turns out to be stolen, they would be at risk of getting the watch confiscated by the police, or suffer other penalties. The original owner can use their NFT to mark their Rolex as stolen, which would alert authorities (and anyone using the blockchain the NFT sits on) to keep an eye out for that particular Rolex. All these measures would heavily devalue the price of stolen goods as it makes buying and selling stolen items much harder. 

Drawbacks of NFTs

With all the benefits that NFTs promise to bring, there are drawbacks associated with using NFTs as well. 

One big hurdle facing the NFT space is the lack of privity regarding the ownership of something that an NFT is tied to. In simpler terms, an NFT is often not recognized by the government or regulatory authorities as a deed to a property or asset. This means that although it is technically achievable to turn the deed of a house into an NFT, the actual ownership of the property is still determined by the legal system. An NFT will most likely not be considered a valid contract or title deed by the courts. When it comes to artwork or intellectual property, a similar principle applies where ownership through an NFT will most likely not be recognized by the legal system.

This can make it difficult for businesses and individuals to get involved in the NFT space as it is hard for them to fully understand the legal implications of NFTs.

While NFTs offer a unique and innovative way to represent digital ownership and assets, they are not without their challenges and drawbacks. It is important to carefully consider these issues before investing in NFTs and to be aware of the potential risks and uncertainties associated with this technology.

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Andy Zhou

Content Creator at Newton. Andy has 5 years+ of experience in equities research. Andy is the author of "Hyperbitcoinization: A Story About a Revolution" as well the host of the "The Bitcoin Advocate" podcast.

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