Exploring the ambiguous value proposition of non-fungible tokens

Digital currencies such as Bitcoin are valuable assets in themselves, but NFT is not; it is just a symbol of ownership.

Many people did not expect that NFT (non-fungible token) would become so popular all of a sudden. Not only more and more ordinary people began to buy NFT tokens on some professional trading platforms, but even world-renowned auction houses such as Sotheby's began to enter this field.

However, despite the excitement of this emerging industry and the hype in various media, not many people truly understand what NFT is, especially when you ask some so-called professionals what NFT is, it is difficult to provide a convincing answer except a blank stare.

In the most basic sense, NFT is a digital token that represents ownership of an underlying asset. We know that there are many identical copies of Leonardo da Vinci's masterpiece "Mona Lisa", and in the digital realm, if you want to authenticate the original version of "Mona Lisa", NFT should be a better way.

In the real world, it is very troublesome for us to authenticate the authenticity of original works. For example, if we want to verify the Mona Lisa, we must provide evidence of the authenticity of every stroke of paint on the canvas (that is, prove that each stroke of paint comes from Leonardo da Vinci himself).

In contrast, NFT is a digital ownership token. Purchasing an NFT does not affect the special access rights to the underlying digital artifact. (ChainDD Note: Just like the Louvre owns the original Mona Lisa, but everyone can view the painting, NFT ownership and access rights are also separate.)

So why are people rushing to buy NFTs? For example, Sina Estavi spent $2.9 million just to buy the NFT of Twitter founder Jack Dorsey's first tweet in history, but the problem is that he did not obtain any form of exclusive rights for himself by purchasing the NFT.

On the other hand, Sina Estavi does own the NFT of the first tweet in history, but it doesn’t seem to require permission from all of us, just like we can now buy a ticket to the Louvre and go to admire the Mona Lisa.

So, what is the point of investing in NFTs?

Before answering this question, we need to temporarily bypass blockchain and some different applications related to blockchain. This is because whenever we mention "blockchain", we will unconsciously think of Bitcoin.

However, the actual application of distributed ledger technology actually goes far beyond the application of decentralized cryptocurrencies, and the decentralized nature of cryptocurrencies is actually first manifested in the form of NFTs. A decentralized distributed ledger allows people who do not know each other and have never met each other to conduct transactions in a purely digital environment without the involvement of a trusted third-party intermediary.

When NFTs are applied to other business contexts, this core functionality of the blockchain allows us to redesign many traditional legal and business structures that we have used for centuries.

Take the bill of lading, for example. Since the 14th century, the process of shipping goods from a shipper to a consignee has required the exchange of certain documents, without which business could not be conducted. At the same time, such documents serve as proof of ownership of the goods, as well as the shipment and receipt of the goods.

Even in the 21st century, cargo cannot be received at the destination port unless the consignee presents a physical copy of the corresponding bill of lading. Since the authenticity of the shipment must be proven in the form of original documents, it is hard to imagine that the development of a $5 billion global freight industry is to transport these documents around the world.

But now, that has changed — companies like Maersk and China Ocean Shipping (Group) Company have begun experimenting with electronic bills of lading on distributed ledgers, which can be used as certificates of ownership of goods and transportation documents.

Over time, the blockchain they build will also integrate IoT devices into workflows, automatically triggering payments or other obligations once a consignment reaches a precise destination, without human intervention.

So, we can actually think of NFT as another blockchain application that aims to solve a very specific problem rather than just digital currency.

In fact, digital artists had this idea as early as 2014, creating and distributing millions of purely digital artworks, which were then uploaded to microblogging sites such as Tumblr. Many of these works began to be widely reposted in the community, but these works were basically unsigned and had no background information such as the author. Frankly speaking, these artists were very loyal to the spirit of the times and did not really expect to be compensated for these works.

However, New York University professor Kevin McCoy and technology expert Anil Dash believe that this approach is inappropriate. They believe that artists should claim ownership of their own works. In other words, if there is no other reason, the ownership of the works created by artists should belong to themselves.

So, Anil Dash and Kevin McCoy designed a solution: generate a token that represents ownership of a digital asset and then attach the token to a freely tradable blockchain, thereby creating a strong digital ownership track.

It is worth mentioning that Anil Dash and Kevin McCoy could be called the first people to design an NFT prototype, but because this solution was not perfect and the technological limitations at the time made it impossible to attach actual digital artifacts to the blockchain, the tokens they created could only be loosely linked to the underlying assets and were only used as digital representations of actual artifacts.

But even today, most NFTs only provide a connection to the underlying asset, or at best a compressed digital representation. This means that even if you spend millions of dollars on an NFT, access to the underlying digital asset may still depend on whether the site hosting the digital asset is still up and running.

This fact illustrates one of the most fundamental differences between NFTs and cryptocurrencies: Bitcoin and other cryptocurrencies are valuable assets in their own right, but NFTs are not digital assets, they are just a symbol of ownership. Even though buying an NFT may mean having a claim to the underlying asset, your tokens cannot be used to exercise any rights associated with ownership. For example, you cannot prevent others from accessing the underlying assets or from using them for rent-seeking arbitrage.

Of course, we are not saying that NFTs are worthless. In a free market, people are free to explore value within their own scope, but the value we are currently exploring happens to be in the digital tokens of implicit ownership. NFTs have attracted more and more attention from the crypto community, and more and more people want to explore value in this field. As long as this enthusiasm continues, we still need to delve into the vague value proposition of NFTs.