Farez.FM Podcast Ep 5: Why are Non Fungible Tokens so disruptive? Also NFT.NYC fun!
Farez.FM Podcast Ep 5: Why are Non Fungible Tokens so disruptive? Also NFT.NYC fun!
from Chanel bags & baseball cards to concert tickets and venture capital.
Introduction
Hello friends, welcome to episode 5 of the Farez For Me podcast which I will now abbreviate to Farez.FM. See what I did there? I’m really creative. I’m your host Farez Vadsaria, @farezv on the internet.
What the podcast is about
On this podcast, I talk about Web 3 concepts and news in the tech, music, cryptocurrency, gaming & general pop culture space in about 15 minutes.
On today’s episode
We’ll explore what Non Fungible Tokens are. NFTs have taken the world by a storm and are quite disruptive when applied to the right business models.
Concept Explanation
Before we dive in, let’s understand the concept of fungibility. If I gave you a $100 bill as a loan, you owe me a hundred dollars. If you gave me a different $100 bill right back, we’d be even. Unless I specifically want that original $100 due to some inherent value in the bill, the print date or the way it looks or the serial number, our two $100 bills going back and forth are fungible.
Meaning they’re the same. Even though they’re two different bills with unique serial numbers. Barring collector coins and certain old currencies from different countries as they may have historic value, most currencies work this way, in the normal way we use them. They’re interchangeable.
Cryptocurrencies or tokens are also interchangeable. If I send you 1 bitcoin and you send me another bitcoin right back, we’re even as bitcoin is fungible.
Certain blockchains enable the creation of Non Fungible Tokens, or NFTs. For the sake of our conversation here, Ethereum’s NFTs and Solana’s NFTs are on different blockchains with their respective underlying implementation differences, but they conceptually work the same. On this episode we don’t care about the underlying blockchain NFT implementations, just the concept of non fungibility.
NFTs are digital assets that are unique and cannot be replaced by another identical asset. This is in contrast to fungible tokens, which are interchangeable and can be replaced by any other token of the same type. Ethereum's blockchain allows for the creation of NFTs because it supports smart contracts, which enable the implementation of complex rules and logic.
NFTs are unique in that they have traits associated with them, in the case of most NFT projects which are based around animals (such as Bored/Mutant Ape Yacht Club) or humanoid entities (Psychedelics Anonymous or Rebels), these traits might include clothing, masks, necklaces etc. The version 1 of NFTs included traits that are SET in place however, there are multiple market places out there working on interchangeable trait based NFTs.
If you’ve played video games such as Team Fortress 2 or Counter Strike where players have certain cosmetic items such as knives, gun skins and hats; we’ll then you’ve already interacted with NFT esque functionality, except in those video games, those items weren’t powered by blockchains. So item ownership within video games very neatly fit the NFT use case.
Other than video games, NFTs will disrupt several business models because they can be used to represent ownership of real-world assets. For example, NFTs could be used to represent ownership of a piece of art, a collectible, or a ticket to an event. This would enable individuals to sell and trade ownership of these assets without the need for a central authority. As a result, NFTs have the potential to disrupt many industries that rely on central intermediaries.
Examples of NFTs taking over traditional business models
Think of a real estate transaction where there’s a buyer and a seller. In today’s landscape of real estate, there are multiple entities involved in the process of a house sale. And they go through multiple steps before the sale of the house is considered complete.
The buyer has a real estate agent, the seller has one too. Sometimes they’re the same person, but often times they’re not.
Once a buyer makes an offer, the two real estate agents discuss the numbers and upon agreement a legal contract is drawn up.
The buyer then puts money in escrow, a separate company which ensures that the buyer is serious about buying the house. This amount is like a non-trivial deposit on the house to ensure the buyer isn’t just going around making several offers with no intention to buy the house.
Once escrow clears, the buyer applies for or usually has an approval for a mortgage where they put down some percentage, usually 5-20% of the house’s value toward the sale and the rest is put by the bank willing to make a mortgage loan to the buyer based on their credit history, existing debts and income level.
This money then goes to the seller. If the seller has a mortgage, this money is first used to pay the seller’s bank and then the rest goes to the seller’s bank account.
The buyer and seller’s real estate agents each take a small cut from this transaction. Usually 1-3% of the final price of the house.
Then a registration company transfers the title or deed of the house and any land associated with it, over from the seller to the buyer’s name.
Once the buyer receives the deed, the house transaction is considered complete.
I might’ve missed a step or two but overall, most real estate is sold in this way. If you notice, the one key component that determines house ownership is the title or the deed. Whomever’s name is on the deed owns that house and the land that it’s built on.
Now imagine if a smart contract waived all these steps using NFTs and fungible tokens like Ethereum or Bitcoin and combined them into a single step, or at most 2-3 steps.
Buyer makes an offer on the house to the seller.
Money goes from buyer’s wallet, to seller’s
The deed or title of the house, in the form of a Non Fungible Token, transfers over from the seller’s wallet to the buyer’s. And that’s it.
All powered by the underlying blockchain, no middle intermediaries taking any cuts. Perhaps a small percentage of the transaction goes to the blockchain for processing the transaction. This would be much smaller than all the aforementioned middle entities such as real estate agents, escrow and registration/title companies etc. taking non trivial amounts of fees for over-seeing the real estate sale.
See how freaking disruptive this is?
Authenticity Certificates
Now let’s apply this to authenticity certificates. When you buy an expensive artifact, whether it’s a Chanel bag, an antique guitar, a painting or jewelry, it comes with a certificate of authenticity.
It’s a document with your name and the serial number of the product specifying that you’ve purchased the original and not a fake. This document proves your ownership and authenticity of the product. This could be replaced with a digital certificate, in the form of an NFT.
Event Tickets
If you’ve gone to an iconic concert, the tickets you purchased for that event could be an NFT.
The great thing about NFTs is that they have value on the secondary market. You could decide to sell those concert tickets a few months or years later as people may be interested in owning a piece of that experience. Especially if they missed out on going to the actual concert.
Non fungible tokens and their underlying blockchains, make this possible.
They provide cryptographic ownership of digital assets and the uniqueness of those assets make them non-fungible.
Myths and Use Cases
Let’s address some common myths around this topic. People say they can right click save as or screenshot your NFT and now they own it. Well to those people I say, I can stand outside your house and take a photo of it and claim it’s mine, but it doesn’t make it mine. Only my name on the deed or title does.
So while people can claim to own your NFT, it’s very easy to prove ownership. If you have Twitter Blue for instance, Twitter’s premium service where you pay $3/month and get to edit tweets and create an NFT profile photo, it’s very easy to verify if your account owns the underlying NFT.
Pretty soon, other social media platforms will implement NFT based profile pictures and they may or may not charge a premium to use that feature, the way Twitter does.
Sure there’s imposters claiming to own your NFT, just like there’s imposters who claim to own authentic Chanel bags and Gibson guitars and Beverly Hills mansions, but do they own it really?
People are smart and they eventually figure out who the true owner is. Besides, most NFT communities and projects gather around utility that a particular NFT provides.
The most version 1 implementation of utility is events and gatherings where you have to prove ownership of the NFT in order to enter. Exclusive events can’t be entered with a copy/pasted screenshot of an NFT.
These events are networking opportunities and spaces where other NFT projects showcase their work and often provide a white list to the existing holders of blue chip projects to enter their projects, which if you’re unfamiliar is a list where you get to mint that new project.
For instance, I was in New York City last week for an entire week going to various NFT events based on the NFTs I had, which included Psychedelics Anonymous’s PA House; a space with multiple events with DJs, networking and talks given by existing holders and popular Web3 personalities such as Nicole Behnam and Kmoney.
I also went to the BubbleWorld party at a rooftop bar called Mr. Purple where I saw Future perform. By owning their BubbleWorld Founder’s Pass NFT.
So while these are early implementations of Non Fungible Tokens, I’m excited to see which business models are disrupted through this novel technology.
We may soon live in a world where all digital goods are considered Non Fungible and powered by blockchains.
Another couple of use cases are really intriguing when it comes to NFTs.
Investor Flip
A massively powerful implementation of NFTs is the concept of a flipped investor. In traditional venture capitalism, you the company founder first raise money through VCs who stake some non-trivial ownership in your company to help you fund the building of your minimum viable product.
Once you’re profitable, or have a liquidity event, such as an Initial Public Offering or sale via acquisition, those VCs first take their cut.
Instead of VCs, you could imagine your customers funding your product almost in a kickstarter like fashion using NFTs. They own a small piece of your company for providing you the initial funding.
Record Label Flip
In the music industry, a record label signs an up and coming artist up front with an advance fee and takes royalties on their work as they create music under their label.
With NFTs, your listeners could directly fund your work and remove the need for exploitative record label executives who only want to profit off your work as opposed to truly support it.
Remember, NFTs have a value on the secondary market. Anyone who at first invested in these VC or record label scenarios in your startup or band, can sell their stake at a fair market price.
These more mature implementations of Non Fungible Tokens require careful planning and some regulation which is lacking in this space.
Outro
That’s episode 5 of Farez.FM. Thank you for listening. As always, I’m grateful for your time. Feel free to leave me questions, comments on farezv.com or voice messages on Anchor. Catch you on the next episode!