Opinion: NFT prices have plummeted, but that doesn’t mean they’re going away

Sotheby’s has become the latest establishment name in art to dive into NFT (non-fungible tokens) through its collaboration with anonymous digital artist Pak and the marketplace NFT Nifty Gateway. The auction house sold The Fungible Collection, a “novel collection of digital art that redefines our understanding of value,” for more than $ 17 million.

Some pieces, such as “The Switch,” a monochromatic 3-D construction that the artist is going to change at some unspecified time in the future, received offers exceeding a million dollars. For the uninitiated, NFTs are tokenized versions of assets that can be traded on a blockchain, the digital ledger technology behind cryptocurrencies like bitcoin and ethereum. While one bitcoin is directly tradable with another, which means they are fungible, NFTs are the opposite because the underlying assets are unique in some way and cannot be traded in the same way. This uniqueness enabled Christie’s to sell digital artist Beeple’s NFT “Everydays” in March for $ 68 million. For those who don’t have that kind of money, NFTs are also used to trade collectibles like baseball cards and computer game items like swords and avatar masks. The excitement around NFTs fuels a similar narrative to other recent price hikes like GameStop and dogecoin, in that they are speculative bubbles sparked by stimulus controls in the US, lockdown boredom, and low interest rates. Look no further as celebrities like music star Grimes and YouTuber Logan Paul are launching their own flagship NFTs to ride the wave. Even Vignesh Sundaresan, the businessman who bought Beeple’s record-breaking artwork, considers investing in NFT to be “great risk” and “even crazier than investing in crypto.” But history also tells us to be careful to dismiss NFTs as a passing fad, as the importance of technological innovations often becomes clearer once the hype wears off. Many commentators dismissed the influx of tech companies around the dot-com bubble of the late 1990s and the first wave of massive enthusiasm for cryptocurrencies in 2017, only to be proven hopelessly wrong when Amazon and Bitcoin resurfaced. The NFTs themselves are actually well below their highs, with a 70% drop in the average price since February. Perhaps this is less of a bursting bubble than a gruesome token “takedown” now that the initial hype has started to die down. This phenomenon is well reflected in the publicity cycle of the American consultancy Gartner, which illustrates the typical progression of a new technology. With NFTs, we are probably coming off the “peak of inflated expectations” on a journey toward the same “productivity plateau” that Amazon reached a long time ago.

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This ties in with what Austrian economist Joseph Schumpeter said about why capitalism works. Schumpeter saw capitalism as an incessant shift from old to new, as newer and more innovative companies replace old ones; he called this “creative destruction.” In this sense, NFTs are the newcomers challenging the way we perceive and record asset ownership. And the tension between innovation and concern also contributes to the skepticism that always surrounds these new technologies. Whatever happens next, NFTs create opportunities for new business models that didn’t exist before. Artists can attach stipulations to an NFT that guarantees that they make a portion of the profit each time it is resold, meaning that they benefit if their work increases in value. It’s true that soccer teams have been using similar contractual clauses when selling to players for a while, but NFTs eliminate the need to track the progress of an asset and enforce those rights on every sale. New art platforms, such as Niio Art, are able to demonstrate in a really simple way that they own digital works. When clients borrow or buy art from the platform, they can display it on a screen knowing that there is no problem with copyright or originality because NFT and blockchain ensure that the property is authentic. NFTs give musicians the potential to provide enhanced media and special benefits to their fans. And with sports memorabilia, 50-80% of the items are believed to be fake. Putting these items in NFT with a clear transaction history back to the creator could overcome this counterfeiting problem. But beyond these fields, the potential of NFTs goes much further because they completely change the rules of ownership. Transactions in which ownership of something changes hands have generally relied on layers of intermediaries to establish trust in the transaction, exchange contracts, and ensure that money changes hands. None of this will be necessary in the future. Transactions recorded in blockchains are reliable because the information cannot be changed. Smart contracts can be used in place of attorneys and escrow accounts to automatically ensure that money and assets change hands and that both parties honor their agreements. NFTs convert assets into tokens so that they can move within this system. This has the potential to completely transform markets like property and vehicles, for example. NFTs could also be part of the solution to solving problems with land ownership. Only 30% of the world’s population has legally registered rights to their land and property. Those without clearly defined rights find it much more difficult to access finance and credit. Also, if we spend more of our lives in virtual worlds in the future, the things we buy there will likely be bought and sold as NFT as well. There will be many other developments in this decentralized economy that have not yet been imagined. What we can say is that it will be a much more transparent and direct type of market than we are used to. Those who think they are seeing a flash in the pan are unlikely to be ready when it arrives. James Bowden is Professor of Financial Technology at the University of Strathclyde in Glasgow, Scotland. Edward Thomas Jones is Professor of Economics at Bangor University in Bangor, Wales. This was first published by The Conversation: “NFTs are much bigger than an art fad; this is how they could change the world.”