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Are NFTs a Fad or Are They Here to Stay?

By Motley Fool Staff - Apr 5, 2021 at 8:33AM

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Is this new investment trend for real?

Non-fungible tokens, or NFTs, are a type of asset that most people hadn't heard of just a few months ago. With several of these digital assets selling for million-dollar price tags, is this a sustainable investment trend, or is it a short-term fad? In this Fool Live video clip, recorded on March 18, our own Chief Growth Officer, Anand Chokkavelu, asks cryptocurrency expert Nic Carter what he thinks about the long-term power of NFTs. 

Anand Chokkavelu: A non-fungible token is as opposed to a fungible token like Bitcoin (BTC 1.17%) where everything is a digital asset put on the blockchain and sold. You can think of it as artwork, we'll get to that example in a second, trading cards like NBA Topshot, Jack Dorsey, he's been auctioning off his first tweet on Twitter (TWTR -5.55%). Probably the headline everyone's read now is, People selling his digital art work, a jpeg basically, for $69 million through Christie's, a legitimate auction house, and that's a lot of money. I guess the question for you is, as we hear about these NFTs, which certainly even a month ago, we weren't hearing about, do you see them more like Beanie Babies where it's more of a fad? Or do you see it like Bitcoin, which I assume you think will be around decades from now?

Nic Carter: Yeah, it's a great question. Technically, I would say the notion of putting serial codes into a public blockchain context, and then making them freely transmissible on chain, that idea of basically putting a strong property rights proper around some digital property, some digital content, which is unique or uniquely addressable, that has existed since about 2016 in the crypto space. You look at colored coins on top of bitcoin, that was the idea behind that. The counterparty protocol, the Omni protocol, and then NFTs themselves, that's the more Ethereum (ETH 0.10%) incantation to refer to the concept before, I think people call them uniquely addressable assets. We saw them in 2017, and then of course, they've had a resurgence this year. So it sounds strictly speaking, a novel concept. In fact, it's been around for five years, I would say. There's definitely something there. I don't think the concept is going to fade away because really, all it means is, let me take some data and encode it into a natively blockchain-based context such that I can financialize that data and render it innately tradable and transferable. That's pretty useful. Of course, you do have liabilities, you have to have an issuer that says, the serial code matches this piece of content, or this song, or this video, or this art work. You actually do have that external dependency. So it's not natively digital like bitcoin is, but it's a hybrid. But I think the idea is very strong, especially if you have a tight linkage between the underwriter of the content, the person that's creating it, and wrapping it, and putting it on chain, and the actual IP that's being put inside that wrapper. If we don't have that linkage, then you're going to have problems because you're trying to take something which is dubiously owned, like let's say I'm trying to put a meme in an NFT, Pepe the frog or something, there's no real owner of that. Of course, you have the artist that created it, but it's this cultural phenomenon, so who can be said to own it? I can't really claim ownership over that thing, but then I'm putting in a strong property rights contacts. So I'm wrapping something that's dubiously owned in a blockchain context that creates very strong assertions as to ownership, and so you've got conflicts there. I think it only really works in the Top Shots context, where you have the NBA has anointed a specific platform, and they are saying, yes, this is our intellectual property. You can't own it. We're not going to give you the rights to the IP so that you can go and resell them, but you can have the bragging rights to uniquely own this edition of this highlight, basically. That's a very strong concept. The fact that it's on a public blockchain means that you can then trade it and financialize it, and there's an open API, that's the whole notion of blockchain, anyone can read and write to the chain, which gives you really interesting interoperability potential. So yeah, I think the core concept behind an NFT is very powerful, and likely to stick around. Of course, there's a lot of confusion as to what it's really for and a huge amount of misspent activity and speculative activity that's reminiscent of the Weimar Republic kind of thing, and we see that in every asset class, not least to which we see it at NFTs too.

Anand Chokkavelu: So if NFTs are going to be around and growing over time, but it's hard to pick the winners, a question I have and I'm a lot of people have is, Ethereum is the cryptocurrency and blockchain behind a lot of the NFTs, it's already the number two cryptocurrency by market cap behind Bitcoin, do you think Ethereum is a picks and shovels play for NFTs? In other words, not picking the winner, but it grows in usage as this grows? Is that a viable thing or are there flaws in that theory, too simple?

Nic Carter: Well, honestly, in the crypto space, you just try not to over-intellectualize things, because I've seen a lot of people that talk themselves out of positions and a bit early regretted that in years past. Ethereum does have the most traction when it comes to NFTs, and then decentralized finance and things like that. In prior years, I might have told you, no, there's no direct causal connection between the usage of Ethereum, the platform, and then Ether, the price of Ether, the native currency there. But actually, that's changing a little bit. This year, the Ethereum leadership, or community, or whatever you want to call it, decided to put in a change to Ethereum such that when there's very high levels of fees, some of those fees get burned, and basically, reduce the outstanding supply of Ether, the currency of the network. So what that does is that creates a causal linkage between usage of the platform and users pay tremendously high fees to use Ethereum. I made a few transaction yesterday and paid $80 in fees, which I thought was extortionate. Anyway, users will pay the highest number of fees that have been paid in a day has been $150 million on February 23, this year. Some of those fees will get routed into burning Ether, which tend to amount to a stock buyback. You can think of it like that. Now there is a bit more of a connection between the utility of the protocol and the actual underlying value of the asset, Ether, which that connection did not exist in prior years. So that's why my answer has changed. If you do want exposure to the usage of Ethereum and you think that's likely to increase, Ether is a way to play that.

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