Both are examples of non-fungible tokens (NFTs). An NFT is a digital certificate of ownership containing the specifications of a digital item and a link to the location where it is stored. As the information and the link relate to one specific digital item such as an image, a tweet or a video clip, they cannot be exchanged for or replaced by another NFT, explains master’s student of International Business Rachel van der Krift. She is writing her thesis on the subject. Owning an NFT does not mean you own the item itself; it means you have the right to use it for personal purposes. “Use for commercial purposes is usually prohibited. The owner’s rights are often embedded in the specifications of the NFT. In reality, these rights tend to be similar to the rights you have when you purchase a similar item in the real world.”
Assistant professor of Finance Paulo Rodrigues illustrates this with an example: “A bitcoin is a bitcoin. Bitcoins are fungible tokens. They are interchangeable; it doesn’t matter which one you have.” Just like in the real world: “A ten euro note is a ten euro note.” But it’s a different story when it comes to things like art, explains Rodrigues. “You can’t simply exchange one Picasso painting for another.” Works of art differ in value – and if you have a painting hanging on your wall, everyone will know that you own it.
Ownership
Ownership is a complex concept where digital art is concerned. After all, anyone with an Internet connection can right-click an image and save it to their computer. But the digital certificate of ownership is stored on a blockchain, allowing everyone to see who the official owner of a digital item is.
This is how it works: a blockchain is a digital list of records shared across thousands of computers. Each block in the chain is a piece of information. The list is continuously updated so that everyone always has access to the information in the blocks. Because of this, it’s impossible to delete or modify a block without anyone else seeing it. The information in the blocks can range from “John has three bitcoins” and “Jane has two bitcoins” to “Malaysia-based tech entrepreneur Sina Estavi is the official owner of the first ever tweet”. That is to say, he owns a unique, signed copy of it. He paid 2.9 million dollars for the NFT. And an anonymous art collector bought the certificate of ownership to a digital collage by a graphic designer for more than 60 million euros.
FIFA
2021 was the year of the NFT. About 36 billion euros was spent on NFT purchases in 2021. These included digital art and tweets, but also football players in a big online fantasy football competition in which the owner of the best team wins. This is what piqued Tomann’s interest in NFTs, explains the master’s student. “Each season I bought the latest version of the football game FIFA, and each year I had to build a new team.” The euros he spent on tokens – money in the FIFA games – to buy players were lost the moment he bought the new season’s game. FIFA tokens can’t be exchanged for real money. On Twitter, he found an online competition in which the players are NFTs. You use real money to buy players, which you keep season after season. If you have Ronaldo on your team and he plays well for three matches, your score goes up, explains Tomann. “And so does the value of the player”, he adds. This has created a digital football player market. “A great player will easily cost you five thousand euros.”
Football players, video clips of NBA highlights, Wikipedia pages: you can convert any digital file into an NFT, says Van der Krift. Her plan is to put her thesis on NFTs on the blockchain and submit it as an NFT. She is studying the effect of NFTs on the physical art market. Van der Krift doesn’t own any NFTs herself, but she understands their popularity. “A lot of people spend a large part of the day in a digital world. I can imagine that they would like to spend their money on digital collections instead of physical ones. Or on a piece of land, furniture or clothing for their character in a game or a digital world.”
Unique digital trousers
One example of such a digital environment is The Sandbox. In this popular virtual gaming world, a plot of land or a unique edition of trousers for your character are linked to your account on the blockchain. This makes it your digital property. And, importantly: since it’s an NFT, it really belongs only to you. You won’t run into a character wearing the exact same pair of trousers (though they may own another edition) or find someone else’s house or garden on your piece of land.
NFTs are used for fun things like computer games and fantasy football competitions, but also for more serious purposes. “They are a new way of financing”, says Tomann. “There’s a DJ in the US who sells parts of his songs as NFTs. He makes money and fans share in the profits from the song as well as the artist’s success. The more successful the artist becomes, the more the value of the NFTs increases. This way, fans get to share in the success they help create.”
Lazy Lions
His own collection no longer consists of football players or pieces of music, but mainly of profile pic collectables. These are images, usually illustrations of animals, that people use as their profile pictures. There are Crypto Bulls, Bored Apes, Pudgy Pinguins and Cool Cats, to name but a few. Tomann owns one of the 10,080 Lazy Lions. The collection is limited, which makes Tomann part of a community, he says. “Owning an NFT profile pic collectable often comes with community benefits such as exclusive access to certain events, both physical and virtual. Tennis player Stanislas Wawrinka and football player Marcelo Brozovic also own Lazy Lions”, he says proudly.
This increases the value of his own lion. The cheapest Lazy Lion costs over 5000 dollars, Tomann says. “But prices fluctuate a lot because NFTs are purchased with ether, a very volatile cryptocurrency.” Tomann bought his lion for 200 dollars. Today, it’s worth at least 5000 dollars. This doesn’t mean that he could put it up for sale this afternoon and have the money tonight, though. He would have to look for the right buyer on an NFT marketplace like OpenSea. Then again, he probably wouldn’t have to spend a long time looking, given the current popularity of the illustrated lions. Also relevant: the designer receives a percentage of each transaction. “In other words, creating more lions doesn’t necessarily work in the artist’s favour. If the supply was larger, they would be less scarce, which in turn would lead to a decline in value.”
Speculative
This scarcity is what assistant professor of Finance Rodrigues objects to. “Since the dawn of humanity, we have been trying to prevent scarcity of resources such as food, water and housing. Now, people are artificially creating scarcity. For no reason. Just to make money.” Rodrigues himself has not invested in NFTs, nor does he plan to, he says. “The value of an NFT is highly dependent on how much it has been hyped on social media.” He thinks it’s too speculative and unpredictable. “But that’s just how I feel,” he emphasises. “Readers shouldn’t take this as investment advice.” The UM student investment club Sigma Investments is also staying far away from NFTs. They don’t invest in them “because it’s a highly speculative field of investment in which the risks are often greater than you’d want them to be”, says Sigma member and Econometrics student Cedric Pots.
Social media
Despite the value of his collection, Tomann is not yet tempted to take profits from his investments by selling them. He thinks their value may still increase. “I like to joke to my friends that I will either become a millionaire or watch all my money go down the drain.” Besides, “you get attached to your NFTs”. He even has a painting of his Lazy Lion hanging on his wall. NFTs are beginning to be integrated on social media, too. If you connect your Twitter account to your MetaMask wallet (a kind of cryptocurrency and NFT bank account) through an NFT marketplace, your NFT profile picture will get a hexagonal shape instead of the standard circle. It’s similar to the blue checkmark for celebrities on Instagram. “Other social media platforms will undoubtedly follow suit”, says Tomann.
Sunshine and rainbows
It all seems quite promising: a new market for digital artists, fun projects, large profits and interesting applications of technology for the future. But it’s not all sunshine and rainbows in the world of NFTs. For example, the British newspaper The Guardian recently published an article on fraud and theft in the NFT marketplace OpenSea. Scammers are using anonymous accounts to put other people’s work up for sale. “That’s why you have to do your research on the projects you want to invest in”, says Tomann. Not just to filter out scammers, but also “to see which projects have potential. How serious is the artist about it?” You can tell by the visibility and marketing of the project on social media, or by how much people are talking about it on Discord, an online group-chatting platform used by NFT enthusiasts. Tomann himself sometimes spent as much as 40 hours per week on doing this “research”, he estimates. “You lose your investment if you sink a lot of money into a project that isn’t being maintained, doesn’t come with community benefits or doesn’t get discussed on Discord.”
And Marleen Stikker, a Dutch “Internet pioneer” and founder of the digital community De Digitale Stad, recently wrote a critical opinion piece about the NFT market in NRC. If you own an NFT, you don’t own the digital item itself; you own the certificate of ownership. This, says Stikker, boils down to nothing more than the right of personal use. “So how is that certificate worth anything?” Stikker also calls it a “pyramid scheme”. At the bottom are “the teenagers and hobbyists engaging in the digital equivalent of trading football cards”. In the middle you have the traders speculating in a “peculiar market”, and at the top you’ll find the winners. They are the people raking in the cash: the early investors, the founders of the trading platforms, and the lucky ones selling hyped NFTs for a lot of money. “The Internet shouldn’t be a gambling den where ordinary people with an average understanding of technology and economics are left unprotected.”