Think of NFTs as the Birth of the Virtual Economy

By Tim Copeland

You already live in a virtual world, you just don’t know it yet.

You talk to your friends through your smartphone, you speak to your colleagues in Slack, you jump on video conferences over Zoom, you tweet at people you’ve never met, you record events in your Google calendar, you date through an app, and if you’re bored, you play games against other people online.

This isn’t all happening in a single virtual world, like Second Life, but it’s not that far off.

Humans are already closer to technology than we think. When Tesla CEO Elon Musk discussed his brain-machine interface company Neurolink on the Joe Rogan Experience podcast, he half-joked that humans are becoming cyborgs; when we leave our phones at home, we get missing limb syndrome. The problem Neurolink solves is how quickly we can transmit data to our gadgets, since typing is so slow. But the point Musk made is that we are already deeply intertwined with technology.

So the question is not “when will a virtual world arrive”—it’s already here. And while we don’t live in a Ready Player One universe yet, our lives are moving in that direction. The real question is: Which technology will push us closer down this path?

And this is where NFTs come in.

NFTs are an early form of digital ownership

Non-fungible tokens (NFTs) are unique, digital assets that can represent artwork, audio, video, or anything else in the digital or physical realm. They typically live on the Ethereum blockchain, where they can be transferred or sold to other people.

What’s important about NFTs is that each is unique. Twitter CEO Jack Dorsey sold an NFT that represents the first ever tweet—and only one exists. So, whoever owns that NFT has some sort of a claim to the tweet.

NFTs enable you to own something in a virtual world and know that nobody else has it. They introduce scarcity to a cyberspace where anything can be duplicated a million times over. They allow digital items, for the first time, to have real value in and of themselves.

And while it can be absurd to some to think that digital-only items can have real value, the more our lives become intertwined with the metaverse, the more we’ll acknowledge it. “People just like collecting interesting things and they’ll keep doing that. Whether they’re virtual or physical, it doesn’t matter,” Moe Levin, CEO of NFT hardware maker Qonos, told Decrypt.

This NFT sold for $69 million at Christie's. Image: Beeple

Right now, however, they’re certainly in some kind of market mania. Crypto artist Beeple recently sold a collection of NFTs for $69 million at Christie’s auction house. These rocketing prices have led to a gold rush of sorts, with artists, musicians, brands and celebrities auctioning off their own NFTs to their most ardent followers. While there’s plenty of value flowing around, as Beeple himself noted, they could be in a bubble poised to pop.

With this heightened attention has come plenty of criticism. On the technical front, NFTs are really just cryptographic signatures that point to a location on the Internet where the artwork or video lies. So, if the artwork is changed in that location, the NFT will change (regardless of what the NFT owner wants). Plus, while the NFT can’t be duplicated, the artwork can be reproduced identically online—casting questions about what value the NFT actually holds.

On the legal front, there is a big lack of clarity. In many cases, it’s unclear whether possessing the NFT actually gives you ownership of the linked artwork. And in some cases, when companies issue NFTs, like NBA Top Shot, they make it clear that the NFTs do not carry reproduction or commercialization rights, meaning the ownership is somewhat limited.

L’Atelier BNP Paribas CEO John Egan notes that this issue of digital ownership is something that governments will have to grapple with. He said, “The legal parameters of virtual asset ownership are totally unproven. There's no precedent really set. And I think it's going to be very difficult for people to establish that sort of provenance or that sort of ownership over virtual assets.”

So, NFTs face a host of problems. But these technical and legal challenges will either be fixed, or new technology will arise that solves them. They've let the concept of digital ownership out of Pandora’s box, and it’s here to stay.

Why NFTs are a step forward

The idea of digital items having value is not new.

On Reddit, receiving upvotes for your posts gives you Karma, which can help to elevate your status in the Reddit community. And plenty of games like Runescape and World of Warcraft have digital resources that can be spent within the game—sometimes people will even buy up other accounts that have big reserves. Most apps nowadays have some kind of in-game currency, like the K stars in Kim Kardashian’s app Hollywood.

What is new is owning this digital value without being reliant on a third party. In all of those previous examples, if the company shuts down, your in-game currency becomes worthless.

The fundamental difference here is that NFTs are decentralized. They run on a blockchain that is run by thousands of people around the world, where transactions remain as long as the blockchain lasts. But this means they exist on their own, and while any app or game can integrate them, it can’t possess them.

Decentralized digital ownership opens up a world of possibilities. You could have an in-game item that gets transferred between different games. You could have secret rooms in multiple virtual worlds that can only be accessed with a rare NFT. You can own land in a virtual world, tokenize it and sell portions of it to other people. Everything is on the table.

Alex Masmej, CEO of NFT-focused social network Showtime, told Decrypt, “I can think of more NFT use cases than [use cases for] cryptocurrencies: social media content, collectibles, physical item receipts, domain names, advertising slots, etc. If Facebook controls our virtual world, this is pretty dystopian. NFTs allow us to be economically free in our increasingly online world.”

Experimenting with digital ownership

With the birth of new technology comes an explosion of experimentation. Developers and investors are not only building out the blockchain technology underpinning NFTs, but countless projects are trying different ways of using them.

This started in 2017 when CryptoKitties really caught fire, before the term NFT was being widely used. The platform lets you collect and breed digital cats, each with their own characteristics. Ownership of each cat is represented by an NFT, stored in your digital wallet. CryptoKitties was so popular at the time that it clogged the Ethereum network, leading developer Dapper Labs to build out the separate Flow blockchain to host NBA Top Shot.

Dragon City, aimed at Chinese users, is the biggest space in Decentraland. Image: Decentraland.

Last year, Decentraland opened its doors. This is a virtual world where you buy parcels of land, each represented by an NFT. If you own that NFT, you can build whatever you want on the land. Some people have even built NFT galleries in the virtual world that showcase their art (and link to their marketplace page in case the visitor wants to buy it from them).

Some artists have been experimenting with the makeup of NFTs themselves. Beeple created an NFT that changed form depending on the outcome of the 2020 US election. The final version turned into a picture of a lifeless Trump—if he had won, it would have shown a crowned Trump storming through fire.

The Crossroads NFT if Trump won the election. Image: Beeple

Others have been looking at how NFTs can create revenue for their holders. EulerBeats, owned by Ethereum studio ConsenSys (which also funds an editorially independent Decrypt), created 27 LPs where the holder of each LP gets royalties each time someone creates a “print” of the LP, akin to buying a vinyl plate with a licensed music track on it.

And there’s excitement that NFTs are a way for content creators to earn income more directly from their fans. Through online marketplaces and auctions that anyone can take part in, they are able to find how much their art is really worth. “It’s actually allowing the creator economy access to proper price discovery through liquid markets and I think that is a really interesting thing,” said Rhian Lewis, author of The Cryptocurrency Revolution.

Of course, NFTs are not the only form of digital ownership. Cryptocurrencies too, while fungible—meaning each token is interchangeable, like for like—can also be used to store value in apps and games. Reddit’s cryptocurrency subreddit is experimenting with Ethereum-based tokens that are given out to community members for upvotes they receive. And these tokens can even be exchanged for cash, although that process is complicated. (At Decrypt, we’ve also launched a reader rewards token.)

What you can’t say about the crypto-NFT world is that it’s afraid to innovate. And with any new technology, there will be challenges to overcome. But the NFT boom has at the very least made it clear that digital ownership is achievable and real, it just needs work.

What the virtual economy will look like in the future is a blurry picture, but every day, it’s gradually getting sharper.

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