Last October, Pablo Rodriguez-Fraile purchased a 10-second video artwork clip by the artist Beeple. He could have watched it for free.
Instead, he paid nearly $67,000.
Then, a few weeks ago, Rodriguez-Fraile sold it to another collector for $6.6 million.
Welcome to the world of the non-fungible token, or NFT.
What Are NFTs?
Let's break it down.
In simple terms, "non-fungible" basically means unique. A $20 bill is fungible -- if I trade mine for yours, we both still own the same thing -- but Van Gogh's Starry Night is one-of-a-kind. That painting is unique, and therefore non-fungible.
And in this case, a "token" is a type of blockchain virtual currency that represents a specific asset.
So in the case of the digital artwork owned by Rodriguez-Fraile, the non-fungible asset is the video. The token documents its uniqueness, authenticity, and history of ownership.
All of which might sound odd, especially when you consider that an NFT of Lebron James dunking -- a video clip you can easily find on YouTube -- recently sold for $208,000. Why pay anything for something you can watch for free?
The answer to that lies partly with utility, which we'll discuss in a moment.
But in this case, mostly in perception.
In 2017, Prince Bardr paid $450 million for da Vinci's Salvator Mundi. The painting's intrinsic (objective) value is maybe a few hundred or at most thousand dollars, depending on the value of the frame. After all, it's "just" paint on wood.
It's extrinsic (subjective) value -- what people feel it is worth -- is clearly much higher.
Which is the nature of collectibles and collecting. Scarcity matters. Authenticity matters. Transferability -- the easier to buy and sell, the better -- matters.
And that's where a NFT has an advantage. Make one of a thing, and scarcity is guaranteed. Use blockchain technology, and authenticity is assured.
As for transferability? Nothing is easier to transfer than a digital asset.
But there can be more to NFTs than meets the collectible eye.
The Real Value of NFTs
Imagine you're van Gogh. You're in an asylum when you paint Starry Night. You send it to Paris for your brother and his wife to sell. Maybe you make a little money on the sale (although you pass away by the time it actually changes hands).
That's all you, van Gogh, will ever get paid: No matter what it sells for in the future, in what is called the "secondary market," you've earned all you're ever going to earn.
And that, according to Ed Vetri, a longtime music business entrepreneur and executive and the founder of Fanaply, a startup that creates blockchain-based digital collectibles, is a major problem.
"It always bothered me," Vetri says, "that artists -- and rights holders in general -- get screwed in the secondary market." Concert tickets. Merchandise. Basically anything an artist -- any type of artist -- creates.
"I had always wanted to work with artists and build a product they could benefit from in the present and the future," Vetri says.
Then one day he noticed his daughter playing a video game where users paid for digital items, like clothing for their avatars to wear. That economy is contained within the game; stop playing the game and you lose the "investment" in those items.
For example, hundreds of millions of dollars in digital assets exist within the closed Minecraft game infrastructure. (Although there are ways to transfer certain items between game users, the process tends to be overly complicated.)
"Every mainstream movement originates with young people," Vetri says. "This time, it's digital and blockchain. So we create digital assets that contain a smart contract, a token built on the blockchain, that is tethered to the NFT and allows payment in perpetuity to the rights holder."
In simple terms, the new owner can sell a digital asset, but the original artist, and Fanaply, receive a percentage of that sale price; the artist for creating the asset and Fanaply for creating the infrastructure and technology, and facilitating the transaction.
The result certainly benefits the creator.
But also motivates the creator to build genuine -- in some cases, real-world -- value into the asset.
Say I'm a NASCAR driver. I could create a cool NFT that also allows the owner to get a pit pass. I scan my NFT at the gate and boom: I'm behind the scenes. The original asset has scarcity and authenticity as well as genuine utility.
And inherent transferability.
Or say you're the band 5 Seconds of Summer. You had to cancel your summer tour because of Covid. So you create a digital collectible for your fans.
The email announcing the NFT generates a 53 percent conversion rate. And now, since you know who owns each NFT, you can engage with them. You can send them to Spotify whenever you release a new single. You can give them a discount at your merchandise booths when you're once again able to tour. They can appear in a virtual audience during a streaming concert.
You can do all sorts of things to provide genuine, real-world value through a digital asset -- and build a more one-to-one relationship in the process.
To Vetri, that's the key to success in the emerging NFT industry.
One-of-a-kind items are certainly cool, and some may rapidly grow in value because of their perceived worth (as well as a heavy dose of speculative interest).
But the real potential lies in creating assets with actual value.
That way the technology is just the tool that verifies scarcity and authenticity, facilitates transferability, and provides an incentive for original rights holders (musicians, artists, athletes, brands, etc.) to create assets that are cool in the moment -- yet also provide long-term value and utility.
Then the value won't be only in the subjective eyes of the beholder -- or in the froth of an investment fad.
As Vetri says, "I've always told artists, 'You're not just releasing a record. You're building a career.' That's why I believe in this: Because the artist -- or, in larger terms, brand holder -- gets paid directly and forever, they have the incentive, motivation, and economic reward to build things with real value."
Which, if you think about it, is the same incentive every business has -- and hopes to provide.