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NFT’s and Blockchain in 2 Minutes

January 25, 2022 by in "Two Minute Takeaway"

NFT and Blockchain Basics . . . 

Put the technology aside for a second and focus on the purpose of NFT’s and blockchain.  NFT’s and blockchain exist for one purpose: to provide a reliable record of ownership. 

The modern economy has many systems that record ownership of important assets.  The banking system records who owns money.  The broker/dealer system records who owns securities.  Recorders of Deeds in every county memorialize who owns real estate, etc.  These systems assure participants that transactions settle properly, and the systems therefore facilitate active markets in the assets.  Got it?

But these systems are not perfect: they are relatively inaccessible and do not cover many types of property.  If you want to see when/how a seller acquired real estate in Thailand, you have to hire an agent to conduct a deed search in Thailand.  If you want to confirm that a seller of a valuable piece of artwork acquired the piece directly from the artist, there is no easy way to do that.  There are similar obstacles to transacting in corporate obligations that are not publicly traded.  Enter NFT’s and blockchain.

How does it work?  “NFT” stands for “non-fungible token.”  That is a cryptic name for what essentially is a unique password assigned to a piece of property.  This password or “token” is listed on the “blockchain.”  The “blockchain” is a highly secure network of distributed computers that can be accessed anywhere in the world.  All transactions affecting the NFT are then forever recorded in the blockchain.

NFT’s and blockchain therefore hold the promise of creating a reliable and accessible record of transactions in any type of property.  The blockchain can show the chain of ownership of a “tokenized” work of art from the original artist, through all intermediate owners, to the final owner.  This record is readily accessible via the Internet and thieves, counterfeiters, and fraudsters cannot insert themselves into the chain.  For assets with opaque, decentralized markets, this can be a game changer.

Are NFT’s Valuable?  NFT’s are passwords and therefore have no value themselves.  However, they can unlock the value of various types of property.  Fully realized, the NFT and blockchain system can facilitate immediate transactions in full or fractional shares in art, copyright, real estate, corporate contractual obligations, and many other rights or interests previously having illiquid markets.  If buyers can purchase these assets with lower transaction costs and increased confidence, buyers will tend to pay more for the assets. 

In this regard, recent stories about buyers paying outrageous sums for NFT’s associated with obscure digital art are extremely suspect.  If there wasn’t a market for memes or trending YouTube clips (see “Charlie Bit my Finger” stories), merely tokenizing those assets won’t create value where previously there was none.  If somebody advises you to buy an “NFT”, therefore, hold on to your wallet.  If there is true value there, that person would be advising you to buy the underlying asset and the NFT would be icing on the cake.  An NFT may make it easier to sell the asset later, but the value always originates with the underlying asset. 

That’s it.  Two minutes.  I hope it helped.. . .