What Makes an NFT Valuable?
Non-fungible tokens (NFT) are all the craze at the moment. In March this year, Jack Dorsey, the founder of Twitter, sold an NFT of his first tweet for $2.9 million. Here is a picture of the tweet. You can look at it, even screengrab it, save it on your hard drive, and look at it anytime you want. It will cost you nothing. Why would someone pay that sum of money to own it?
The valuable characteristic of an NFT is that it can't be replicated. That might sound strange since there is a replication of @Jack's first tweet next to this text. So, where does the value come from? It might be helpful to ask this question – if you visited the Louvre in France and took a photograph of the Mona Lisa, would that be a replication of the original art. The answer is no. The Mona Lisa represents the very definition of a non-fungible. It is paint on a canvas, and there is only one. You can find many pictures of the Mona Lisa online; why even go to the Louvre? You could print a copy, frame it, and hang it on the wall in your house. Every day you could stare at the picture and enjoy the beauty. Who needs the original?
What happens when your friends come to your house and see the framed Mona Lisa print on the wall above your bed? They are going to think that you're weird. First, they will all know that it is a print copy and not the original. Second, that part about it being over the bed, well, let's leave that for another day. If, however, you said, "it's the original", and you could prove it, then that would send a signal to your friends that would put you in a whole different league. Just for a moment, suspend what you are thinking and pretend to be in another dimension where the Mona Lisa was for sale. Being able to demonstrate and show off that you own valuable artwork is a social signal of wealth and status. The fact that it is one of a kind creates scarcity. More importantly, there is a collective social agreement that the artwork is valuable.
Back to the Jack Dorsey tweet. There is a collective social agreement that the first tweet sent by the company's founder is valuable. Had Twitter gone bankrupt in its first year and disappeared off the face of the earth, perhaps then the tweet would never have accrued any value. In the same way, the Mona Lisa is valuable because Leonardo de Vinci painted it. De Vinci is famous for so much more than just the Mona Lisa. There is a great deal of evidence of de Vinci's brilliance which contributes to the value of the Mona Lisa.
An NFT is a certified unique "something" attached to a token traded on a market. The uniqueness of the "something" creates scarcity. The market creates the collective social "agreement" about the value. Does everyone in the market agree on the value? NO! The market is inefficient, creating the opportunity for mispricing and, therefore, risk and reward. NFT markets are generally illiquid, and there are millions of "artworks" that never trade. But there are pockets of well-known artists and beautiful, unique artworks in digital form that are sought after, just like paint and canvas artwork. A buyer of this digital art wants to show it off to their friends as proof of their status or belonging. Whether the shiny object is tangible or digital, the ego doesn't care, as long as it is seen.
Airbnb unlocked value in unused rooms. Uber unlocked the value of an empty passenger seat. NFTs will unlock value in digital creativity. We haven't begun to see the innovation that will develop on the back of this technology. What an exciting prospect!
Justin Spencer-Young