The ambiguous value proposition of non-fungible tokens

At its most basic, an NFT is a digital token that represents ownership in an underlying asset. Think of it as a way for Leonardo da Vinci to certify the original Mona Lisa in a sea of identical copies. Except, unlike the Mona Lisa that carries evidence of its authenticity in every ridge of paint on its canvas—each a brushstroke applied by da Vinci himself—NFTs are tokens of ownership, whose acquisition confers no special access right to the underlying digital artefact.

So why are people falling over themselves to buy NFTs? Why, for instance, did Sina Estavi pay $2.9 million for an NFT of Jack Dorsey’s first tweet, even though he didn’t, just, by buying that NFT, secure for himself any sort of exclusive rights to it. It’s not as if, now that he owns the NFT, we will all need his permission before we can view it in the same way that we need to buy tickets to see the Mona Lisa in the Louvre. So what exactly is the point of investing in NFTs?

Before answering that question, let’s take a quick detour around the blockchain and some of its diverse applications. Whenever we mention ‘blockchain’, our minds immediately go to Bitcoin. However, distributed ledger technology has applications that extend far beyond the decentralized cryptocurrency through which it first became manifest. A decentralized, distributed ledger makes it possible for unknown, unseen people to transact with each other in purely digital environments without the need for a trusted third-party intermediation. This core feature of the blockchain, when applied in other commercial contexts, allows us to redesign many of the legal and commercial constructs we’ve relied on for centuries.

Take bills of lading, for example. Since the 1300s, the process of transporting goods from a consignor to a consignee has revolved around the exchange of this specific document that serves, at the same time, as title to goods as well as evidence of their shipment and receipt. Even today, goods cannot be received at their port of destination unless the consignee presents a physical copy of the corresponding bill of lading. And since they have to be produced in original, there is a $5 billion industry that just revolves around couriering these documents to different parts of the world. But things have already begun to change. Companies like Maersk and Cosco are experimenting with electronic bills of lading on a distributed ledger that will serve as certificates of title and evidence of shipping. In time, the blockchains they establish will incorporate Internet of Things devices into their workflows so that the precise location of the consignment will automatically trigger payments or other obligations without a need for human intervention.

Think of NFT as just another blockchain application, one that has been designed to solve a very specific problem. In 2014 when it was first conceived, digital artists were creating and distributing millions of purely digital artworks, uploading them onto microblogging sites like Tumblr, from where they were widely re-blogged without attribution or context. None of these artists, true to the spirit of the time, really expected compensation for their efforts—but Anil Dash and Kevin McCoy wanted to make it possible for them to assert ownership over their creations if they wished—so that, if nothing else, the works they created could be attributed to them.

The solution they devised involved generating a token to represent ownership of the digital asset and then subsequently attaching that token to the blockchain where it could be bought and sold freely, creating a strong digital trail of ownership. But they would have been the first to admit that their prototype was, as solutions go, far from perfect. Due to technical limitations, it was not possible to attach the actual digital artefact to the blockchain. As a result, the token they created was only loosely linked to the underlying asset, serving as a mere representation of the actual artefact. Even today, most NFTs just provide a link to the underlying asset or, at best, a compressed representation of it. Which means that even after you’ve spent millions on an NFT, your access to the underlying digital asset could still depend on whether the website that hosts it is still active.

This single fact underscores one of the most fundamental differences between NFTs and cryptocurrencies. Unlike Bitcoin and the like—which are valuable assets in themselves—NFTs are not digital assets. They are just tokens that symbolize ownership. Even though your purchase of an NFT might imply that you can claim ownership over the underlying asset, your token cannot be used to exercise any of the rights commonly associated with ownership—such as preventing someone from accessing it or seeking rent for its use.

This is not to suggest that NFTs are worthless. In a free market, people are free to find value wherever they see it—even if that happens to be in a digital token of implicit title. The increasingly frenetic market in NFTs should be all the evidence anyone needs of the community’s interest in them.

As long as this enthusiasm persists, who are we to question it?

Rahul Matthan is a partner at Trilegal and also has a podcast by the name Ex Machina. His Twitter handle is @matthan