NFTs: What they are, and what they could be

NFT on phone held in hand

Photo by Marco Verch under Creative Commons 2.0


What comes to mind when someone mentions a non-fungible token (NFT)? Some sort of mushroom? A new kind of stock option? A way to pay bus fare?

In dictionaries, a token is roughly defined as something that serves as a visible or tangible representation of an object, a quality, a feeling, etc. So what’s a non-fungible token? The same thing – except it’s unique. Farmer School information systems and analytics professor and Dinesh & Ila Paliwal Innovation Chair Arthur Carvalho likes to explain the idea with some familiar items.

“Let's look at traditional baseball cards. If I have a baseball card for a certain player and you have a card for a different player, they don't necessarily have the same value. So if I give you my card and you give me yours, we are not necessarily as good or as bad as before, because one card can be rare and the other one can be more common. So they're not fungible. They're not immediately interchangeable,” he said.

“On the other hand, let's say you have one share of Microsoft stock, I have another one. If I give you my token and you give me yours, we are equally fine. It's fungible, it is exchangeable,” Carvalho said.

This new form of NFT is based on blockchain technology. “When I create a token, there are things I have to specify. What's my token name? What does that token represent?” Carvalho said. “There's a bunch of parameters I have to define, and that's a piece of code. When you think about NFTs, it's literally a piece of code that you have to deploy to put on a blockchain.”

The process of creating an NFT, known as minting, has a cost that depends on which blockchain is used and the “gas price” for that blockchain, which fluctuates based on demand and timing. Ethereum is currently the most popular NFT blockchain, but there are others less-known blockchains that can mint NFTs for fractions of a penny. After it’s minted, the NFT can be marketed on platforms built for that purpose, such as Foundation and OpenSea.

The NFT started becoming a public buzzword when people began selling them as digital art. Photographers began selling NFTs of their images, while digital artists did the same with their unique creations. One artist's NFT sold for nearly $92 million. Brands caught on – Budweiser sold 1,936 digital image NFTs of beer cans, while Sony Pictures minted NFTs for the latest Spiderman movie. An NFT can actually represent anything digital, not just artwork – Twitter founder Jack Dorsey sold an NFT of his first tweet for almost $3 million last year. But in a world where virtually any image or video can be right-click saved to a viewer’s own computer, what is an NFT buyer actually buying?

“What they buy is the bragging rights. They can go around to people and brag and say, ‘Hey, you can download, that's fine. But I am the owner.’ And that ownership information is stored on a blockchain network, distributed all over the place,” Carvalho said, noting that purchasing an NFT doesn’t always convey the author’s copyright or use rights to the buyer. “Buying the most popular NFTs is a club for very wealthy people.”

But Carvalho notes that while NFTs may seem strange and perhaps a little elitist right now, there are possible futures for the tokens beyond digital art. “Let’s say that you write a song, and you want to release that song, but you need money, you have to raise capital somehow for one reason or another. Now you can sell partial rights related to that song and can attach royalties to this NFT,” he said. “Then, whenever someone plays that song on the radio or on Spotify and the songwriter makes some money automatically, the NFT owner or owners get a share as well.”

And since ownership is transferable, thanks to the information stored on the blockchain, someone who has an NFT that grants them a portion of the royalties for the song could sell the NFT to someone else, who would then get the royalties.

“That’s the most exciting part of NFTs -- NFT with royalties. Whenever we transact with that specific NFT, whoever owns that NFT can actually make money. So then we can extend that idea to so many other things,” Carvalho said, mentioning college athletes, movies, gaming, even housing.

“What if we can tokenize houses? Instead of buying my entire house, I buy a fraction of the house, paying 20%. And as the majority owner, I get the rights to live in my house and I commit to you and others who buy tokens representing fractions of that house that I will take good care of the house so that the price will hopefully go up. And now we have the possibility for markets -- it opens the possibility for trades and markets,” Carvalho said. “Now you can take a piece of my house and sell it to someone or exchange for a piece of your house, or take a piece of my house and exchange it for an NFT of whatever else. We can have these massive markets of tokens buying tokens that have some representation in real life.”

Carvalho noted that regulations would need to be updated significantly for these ideas to fully come to fruition, and that blockchain and cryptocurrency is often under fire for the amount of electricity used to create and maintain networks.

“Tokens – fungible or not – can generate a digital twin of a physical entity. The ease to transact in the digital world creates endless opportunities, from new markets to business models,” Carvalho said. But having strong regulatory frameworks is a prerequisite for that to happen successfully. Otherwise, the current Wild West situation may drive users away as scams abound.”