Two years after non-fungible tokens (NFTs) captured the attention of artists, celebrities, and brands, debate still rages over their value.
But NFTs could be poised to make a comeback in 2024, argues Scott Duke Kominers, the Sarofim-Rock Professor of Business Administration at Harvard Business School.
Kominers, who coauthored the new book The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create with marketing expert and Web3 entrepreneur Steve Kaczynski, says despite all the open questions surrounding NFTs, companies can use them in new and innovative ways to open up markets and help build loyal communities of customers. In the following excerpt, the authors shed light on the value and potential of NFTs.
Could digital “tokens” possibly be worth hundreds or thousands or even millions of dollars? The tokens themselves are just bits of computer data; shouldn’t they be a dime a dozen (or perhaps even more appropriately, a penny a billion)?
The trick is precisely that these tokens aren’t a dime a dozen—they’re not random, arbitrary bits. Rather, each NFT is an individually distinct digital record, which can be linked to other assets or product features, and whose owner(s) can be consistently identified.
The term non-fungible token literally means what it says. Something is fungible when you can exchange one unit for another without a second thought. Dollar bills are fungible; so are grains of rice—for practical purposes, every one of them is just like any other. By contrast, each NFT is unique, just like in a litter of puppies. This makes them non-fungible—you generally wouldn’t trade your puppy for another one! (The word token in context basically just means a digital object that a given user or account can have control over.)
Some NFTs come in editions with multiple copies of the same asset, like with trading cards: Two copies of a Charizard card in identical condition are equivalent from the perspective of most collectors. But for our purposes, a Charizard card is still non-fungible—especially relative, to, say, a Pikachu card—because if you own one, you still own your copy of the card as a discrete asset, in a way we don’t normally think of individual ownership of specific dollar bills, for example, even though each bill technically has a serial number.
“Rather, each NFT is an individually distinct digital record, which can be linked to other assets or product features, and whose owner(s) can be consistently identified.”
Because each NFT (or copy thereof, in the case of editions) is individually distinct, the computer account that controls it can be consistently identified. This makes it possible to recognize an “owner” of an NFT in a way that was difficult or impossible in previous incarnations of digital goods: The owner is whoever controls the token. And NFTs can be linked to other assets or product features, extending the concept of digital ownership beyond just the token itself.
As we’ll describe in more detail soon, the way NFTs work is similar to the way that the text on a deed to a house turns a dime-a-dozen sheet of paper into a record of ownership for a potentially quite valuable asset—which of course makes the deed itself valuable, too. You certainly wouldn’t pay thousands of dollars for a random piece of paper, or likely even for a ticket to a local minor league baseball game (which is more or less a deed to a seat). But plenty of people would pay that much for the deed to a house.*
*Technically, people are generally paying for the title to the house (i.e., the right of ownership over it); the deed is just the document granting that ownership/title. We’ll often use the term “deed” slightly casually to cover both meanings in this text, because NFTs correspond more closely to deeds, but often meld both concepts.
And just like with deeds, by making it possible to clearly establish and verify ownership—and potentially exchange it—NFTs enable markets to emerge. NFTs have enabled trade in digital images and media files (such as those Ape images we mentioned), as well as new business models around everything from rewards programs to online education.
But NFTs go even further: Because they’re embedded in software, many NFTs can take on functions over and above simple ownership. Owning a house might also gain you access to the local Rotary Club and public schools. Imagine that but for brands: owning a Nike SWOOSH NFT can get you access to special Nike releases. Bored Ape NFT holders get free entry to “ApeFest,” the music festival we referenced earlier. Even the Vatican has issued NFTs that give holders exclusive access to historical artifacts and documents.*
*And of course, these sorts of benefits are typically carried over with the NFT if/when it’s transferred to a new holder.
“This technology has the power to revolutionize multibillion-dollar industries and small businesses alike, enhancing current revenue lines and creating entirely new ones.”
And just as neighborhoods often form a sense of community and collaboration, NFTs are enabling participatory brand-building of a form and scale that has never existed before. You’re not just along for the ride—you’re part of the action. Imagine if you could have a true stake in Star Wars and own a character in that universe. Or play a role in designing the next-generation Patagonia jacket. Or—in a very different context—contribute to a global network around your favorite social cause.
Moreover, like with the Bored Ape brand, while NFTs started out in the digital realm, they have quickly carried over to the physical world as well. This isn’t an accident: by design, NFTs share some value with their holders, and thus encourage them to invest in growing, sharing, and enhancing the brand everywhere, both online and IRL.
While writing this book, we tried to think of a title that properly encompassed what an NFT actually can “do.” We worked off the prompt, “What current products and services can NFTs augment or replace?” The simple answer was … pretty much everything. This technology has the power to revolutionize multibillion-dollar industries and small businesses alike, enhancing current revenue lines and creating entirely new ones. And we’re already starting to see completely novel NFT-native product categories—not just digital brands like the Bored Ape Yacht Club, but also new forms of digital credentials, subscriptions, and ownership records.
As we’ll unpack, NFTs start with the simplest of structures—just an ownership record in a digital database—but we can build functionality on top of them in a way that creates surprisingly flexible value. NFTs can turn images into event tickets, and event tickets into brand anchors. They will usher in the next generation of customer loyalty programs, creating structures that benefit both businesses and consumers in new ways. They’ll change the way we manage our work histories and health data. And they can transform simply owning a product into a close-knit community experience.
NFTs are the everything token.
Excerpted from The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create by Steve Kaczynski and Scott Duke Kominers, in agreement with Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright © Steve Kaczynski and Scott Duke Kominers, 2024.
Both Kaczynski and Kominers hold digital assets, including fungible and non-fungible tokens from some of the companies mentioned. They also advise companies and serve as experts on marketplace and incentive design, Web3 strategy, NFT brand-building, and other topics. Additionally, Kominers is a Research Partner at a16z crypto, which is an investor in crypto projects, including NFT projects and platforms (for general a16z disclosures, see https://www.a16z.com/disclosures/).