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Hey, <<First Name>>!

Over breakfast last week I said to my wife, the artist, "Did you read about that guy who sold a digital artwork for 69 million dollars yesterday? This NFT thing is idiotic!"

And she goes, "Not idiotic. It's absurd."

And I have to agree with her assessment on this. Because in the last few weeks the world has developed a strange, new obsession.

People have been trading everything from tweets to songs as NFT or Non-fungible Tokens. Lindsay Lohan cashed in on the Daft Punk split by selling her NFT for $15k.

Some have gone as far as setting an original Banksy on fire and selling the video for $380,000 worth of Ethereum (a cryptocurrency like Bitcoin).

What is going on here? And how to make sense of it?

What the heck is a Non-Fungible Token and why does it matter that we know what it is?!

Let's start by looking at the term 'NFT'. The 'token' part of NFT is a catch-all term for units on a blockchain. It's the 'non-fungible' part of it that may be a mystery to you.

An asset is 'fungible' when it can be traded for the exact same amount e.g. if we both have one Euro, the value of that Euro is exactly the same.

Things that do not follow this rule are non-fungible.

Things like baseball cards, paintings and other rare or valuable collectables are non-fungible. If we both collected baseball cards, yours might be more valuable than mine depending on how much people value the player, even when there's no other physical difference between the cards.

NFTs allow digital objects to be registered on to a blockchain allowing their value and ownership to be recorded.

What makes this absurd, is that people are trading millions of dollars worth of digital artefacts that come with what's essentially a block-chain based passport.

A passport that's meant to signify ownership of an asset that has already been copied and shared millions of times before.

The advocates of NFTs are saying that we shouldn't worry about the copies so much. While every copy of a particular gif or jpeg is identical, there would only be one (or a limited number) of NFT versions of it. They argue that the original Mona Lisa is still priceless despite having millions of copies.

And NFT's aren't new either. They've been around since 2017.

But so far their influence has been limited to algorithmically generated pictures of fantastical but cute cats called CryptoKitties which could be bought and traded as NFTs.

Last year 9 million dollars worth of NFT goods were traded.

During the last few weeks, over 60 million dollars worth of NFT goods were sold.

So why the sudden obsession?

It's hard to make money as a digital artist or an original content creator and the current NFT boom is working in favour of digital art. But sceptics also see this as taking the worst bits of the high-end art market and making it thousand times less ecological.

You see, NFTs don't really have anything to do with the art itself. The numbers and letters in an NFT record don't include the artwork itself.

But just like Bitcoin, the energy cost of NFT is astronomical.

Thankfully, there are artists creating new NFTs that are carbon compensated.

To me, it seems that the sudden obsession isn't driven by digital artists alone. The latest surge is fueled by speculative traders and opportunist entrepreneurs. And people investing in them are banking on making a profit while the boom lasts.

For crypto-enthusiasts NFT's are another way to get everyone else (aka 'normals) to get involved in the crypto boom, pushing the prices of mainstream coins even further.

Why would someone buy an NFT?

Why would anyone ever pay exorbitant amounts for something? Humans have been collecting and trading rare or valuable things (baseball cards, sneakers, wine) since forever.

People have been doing the same online. But the ownership of digital artworks is different since digital collectables are too easy to copy – unlike physical art.

But along comes the blockchain and now we're able to 'own' our collections and even trade them.

The added advantage is that now collectors can flex their digital collections online to millions, something that isn't possible with physical collections.

As Chris Allick from Deutsch LA said, “The desire to own scarce objects is real". (Even if it is highly irrational.)

But this also brings a community aspect to NFTs. For example, some artists that create NFTs will give buyers exclusive access to a private channel on the chat platform Discourse that only purchasers of that artist’s NFTs have access to, thus forming an exclusive club.

Where are all the brands in this boom?

Taco Bell now has NFTacoBell, which consisted of five taco-inspired gif illustrations that were sold on Rarible.

Each gif had five copies for a total of 25 NFTs. Deutsch LA helped create the NFT collection, which ended up selling out within 30 minutes.

The original prices were set at $1, the price of a taco, but the reselling of the NFTs have increased some of the prices to more than $3,600.

With each resell Taco Bell earns 0.1% in royalties, which will be donated to the Taco Bell Foundation.

For brands, there's a market for people who are super fans and want to spend their money to feel closer to a company or a product.

If it took brands several months to jump on TikTok though, it'll be a while before we see increased brand activity – especially when this whole space smells of a bubble within a bubble.

But that's not holding some of the publishers back.

And this is where we get into the problems.

NFTs are traded in a decentralised currency, Ethereum in this case.

The creator of the NFT authenticates the token on any server, browser or platform, making it verifiable in a decentralized way.

Therefore, no single entity is responsible for hosting an NFT.

The current system of cryptocurrency is massively inefficient and unsustainable from an environmental perspective. This is because blockchain is designed to be computationally inefficient in order to be more secure.

Consider this: the average NFT has a footprint of around 340 kWh or 211 KgCO2.

That is equivalent to an EU resident's total electric power consumption for more than a month – including driving for 1,000 km and flying for 2 hours.

Besides having the potential to cause non-reversible harm to the planet, there are some other issues as well:
  1. Someone can try to create an NFT for a digital asset they did not create. That can lead to copyright issues.
  2. NFTs are stored on a blockchain an don't exist on a server. This leaves it open to the risk of being deleted in the absence of having no permanent storage solution.
We are in the midst of an intense gold rush right now.

After the initial hubbub settles down, the possibility of digital tradeable goods will stick around.

New tokens and technologies are popping up daily.

Currently one of the biggest things in this space is Facebook Diem, previously known as Facebook Libra. Now that they've passed regulatory hurdles, they're well on their way to launch their own blockchain and cryptocurrency.

This is another digital gold rush and certainly one of many. For some fortunes will be made and for others lost. 

Beyond the rush, there's something exciting at play. Decentralised finance, cryptocurrencies, smart contracts, and NFTs are all manifestations of a world going digital.

What we're witnessing is an explosion of seemingly absurd trends to exciting new problems that didn't need solving a decade ago.
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In case you missed:

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  3. Subscription models to retail media: How is ecommerce changing right now? //Econsultancy
     
  4. How Coupang is ‘out-Amazoning even Amazon,’ according to Goodwater Capital. //TechCrunch
     
  5. Why a German e-commerce company is acquiring Amazon brands. //Modern Retail

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“What really decides consumers to buy or not to buy is the content of your advertising, not its form.”
- David Ogilvy

Until next week,
Aliyar

PS. Are we connected on LinkedIn? No? Let's remedy that, shall we?
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Thanks for reading and sharing! BR, Aliyar.
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