Naval Ravikant (@naval), co-founder and former CEO of AngelList, tweeted a detailed thread elucidating Non-Fungible Tokens or NFTs.
An NFT is a unique, on-chain token representing the ownership of an off-chain asset where the token is backed by a social contract from its creator and a surrounding community.
When an off-chain asset is assigned a unique token, its ownership becomes programmable, verifiable, divisible, durable, universally addressable, composable, digitally secured, and easy to transfer.
Do NFTs Really Have A Scarcity?
Blockchain technology helps create scarcity for an asset, an aspect that is like the holy grail in the digital world. It's effortless to make exact digital copies of real-world assets, but blockchain technology helps establish copyright and prevent infringements.
On-chain assets are created to maintain a scarcity enforced by code and distributed consensus. Naval says that off-chain assets represented by NFTs are not provably scarce. The scarcity of the asset is only as strong as the social contract with the creator and the community's backing.
Naval further adds,
"For NFTs representing digital art and collectibles, the creator cannot enforce scarcity - it's up to a surrounding community to imbue the authorized NFT with scarcity and prestige within the context of that community."
NFTs' Value Interwoven With Community
An NFTs value depends exclusively on the community that backs it. This is the more unique a story, the more valuable an NFT. If an NFT creator breaks their promise or has picked the wrong underlying platform and community, the NFT could quickly be rendered worthless.
Bitcoin holders saturate the crypto with value, developers do the same for Ethereum, and collectors, admirers, and users give NFT its value. NFTs gain value only when within active and vibrant and growing communities. Naval states,
"If the community around an NFT is dying, the NFT is likely bleeding value. If the community is surging, the NFT is likely gaining value. NFTs are monetized memes.*"
NFTs that provide actual value can be backed with legal and code-based contracts. For example, a song token can provide the creator with a royalty stream; a ticket can provide access to an event; item tokens have in-game powers, and so on. NFTs with actual value can only be registered when a social contract between the creator and the community is created to transfer the value off-chain to on-chain.
As it is with art and tokens, only a select few assets will become focal points. With NFTs, communities that gather to celebrate art, build collections, and explore virtual worlds will provide a niche for it, making it as valuable as the community will.
Nevertheless, there will always be criticism as per Naval's tweet,
"Just as there are those who won't accept that mere consensus can create digital gold, and those who won't accept that mere smart contracts can create a decentralized Wall Street, there are those that won't accept that digitized social contracts will create valuable tokens."
Separate Regulations Required For NFTs
Blockchain applications were limited to finance so far, but with NFTs, creative applications share the limelight. Naval says it would do well for regulators to accept that blockchain applications will be the next generation of the Internet.
As such, NFTs require a separate category for regulations and cannot be pooled under financial regulations. This is a category error as NFTs tokenize everything. Naval ends his thread saying,
"We are going from a world where every protocol has a token, to where every (decentralized) application has a token, to where every valuable digital representation of an object or person has a token. Public blockchains will be the title registries for everything of value. Ultimately, NFTs will authenticate the world."
Whaleshark's Advice For Investors
Whaleshark, the founder of the Whale Vault and renowned NFT collector, released "The NFT Investors Playbook to Sanity" as a thread on Twitter inspired by his journey as a successful investor and collector. He states that his one large mistake early on was over prioritizing wealth.
He stresses the importance of being kind and giving more than you can take. The advice is there for the taking, or the reader can learn from their mistakes. Making mistakes is a part of the growth curve; making money is a definite possibility, but eventually, the truth will be apparent, according to Whaleshark.
Regarding what all NFTs one can invest in, Whaleshark says:
"Invest in things that can't be collected with money. When our time is up, we cannot take the money, the fame, the cars or our NFTs with us. Invest in health, knowledge, family and friends because these are things that money can't buy. I'd rather be happy than rich."
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.