Non-fungible tokens (NFTs) - the internet of assets

What are non-fungible tokens (NFT)?

NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like your furniture, a piece of rock or a piece of art. There is the uniqueness part of it but NFTs bestows special rights to that item. These special rights are to represent ownership of these items. They let us tokenise things like art, collectibles, cars and even real estate. They can only have one official owner at a time and secured by the blockchain. This means that no one can modify the record of ownership or copy/paste a new NFT into existence (but this does not prevent people from doing so!).

Fungible items, on the other hand, can be exchanged because their value defines them rather than their unique properties. For example, Ethereum (ETH) tokens or US dollars are fungible because 1 ETH / 1 USD is exchangeable for another 1 ETH / 1 USD.

How do NFTs work?

To be clear, NFTs are different from crypto tokens, such as ETH or Bitcoin (BTC). Each individual token is completely unique and is not divisible. NFTs give the ability to assign or claim ownership of any unique piece of digital data, trackable by using the blockchain as a public ledger.

An NFT is minted (tech speak for “created”) as a representation of digital or non-digital assets. These include digital art (music, videos, pictures, gifs, etc) and real world items (art, cars, legal documents, tickets to events, etc). In summary, if you own an NFT, you can easily prove that you own it and cannot be manipulated. You can sell it or hold onto it “forever” as it is secured by the blockchain (hopefully a secure one like Ethereum). If you create an NFT, you can easily prove you are the creator, determine the scarcity, earn royalties every time it’s sold and sell it on any NFT market or directly peer-to-peer.

The reason why NFTs are gaining so much traction

We believe that this blockchain enabled technology is putting power back to the creators/artists, community and the man-inthe-street.

Individual creator/artist - When they previously sold a piece of art or a digital item, that one transaction would be their only source of monetary transaction. Smart contracts in blockchains now enable the original creator/artist to incorporate a royalty fee for every subsequent sale of that item.
Community - The power of megatech social media platforms where they exert control will wane. If you have friends who tried to rise to the place of an “influencer” in these communities, you would hear stories of how they pay these platforms in time and money even though it’s their content. NFT blockchain platforms are designed to be governed by the community of users. While many have just started out and could be currently majority owned by crypto funds that have seeded the platform, we see this diminishing over time.
Man-in-the-street - Investing into collectibles and art has been a high barrier to entry. With NFTs, tokenisation has enabled their entry into rare art. For example, Picasso’s Fillette au béret painting has been tokenised into the blockchain by Sygnum bank 3 (not listed) (in collaboration with Artemundi) in July 2021. This marks the first time the ownership rights in a Picasso, or any artwork, are being registered onto the public blockchain by a regulated bank. This enables investors to purchase and trade “shares” in the artwork called Art Security Tokens (ASTs) in denominations of CHF5,000.

Where can I buy/transact NFTs?

Firstly, investors need to have an e-wallet loaded with some digital currencies like Ethereum, Polygon tokens, Binance coins or Solana tokens. They can then transact NFTs by connecting their e-wallets via dedicated online platforms. OpenSea, Rarible and SuperRare are the three largest online Ethereum based marketplaces for NFT items. As such, they only accept ether as the method of payment. Auction houses like Christie’s and Sotheby’s also host auctions for the high-profile NFT items and are responsible for the headline grabbing quantums paid like Beeple’s USD69m “Everydays: the First 5,000 Days”. Auction houses accept both fiat and cryptos as payment. Upcoming competitors to Ethereum based NFTs are Polygon, Binance and Solana where “gwei or gas fees” (tech speak for transaction fees) are multiple times lower than Ethereum based NFTs, at least until Ethereum ports over to a POS network.

Investment conclusion

The rapid rise in NFTs is a side effect of the megatrend of digitalisation, decentralisation and giving power back to the people. Given the emerging status of NFTs as a collectible and asset format, there are companies that investors can build an exposure to.

The most immediate beneficiaries are companies whose main business is selling content or branded goods. This can be an immediate boost to revenue. NFTs can also drive accelerated transactions in the secondary market resulting in higher royalties for these companies (if the royalty element is embedded in smart contracts). These companies include video game, toy & games and branded goods. The second tier beneficiaries are platforms that enable the creation, minting, staking, and trading of NFTs in the secondary market. These could be social media, gaming and even traditional brokerage companies.

Companies that are negatively affected by this NFT theme are generally the intermediaries/middle men that have disconnected the content creators with their consumers. The most obvious entities at risks are the mega tech walled gardens where their giant ecosystems have forced both consumers and creators to congregate and effectively sign away their copyrights and allow their data to be monetised via ad targeting. These megatech companies clearly see the risks of decentralisation that will pressure revenues. We see that they are trying to hedge their position by creating their own crypto asset, e-wallets and even creating their own metaverse (like Facebook).