If you were given $69 million, what would you do with it? Probably buy Kim Kardashian’s house at California Hidden Hills, or adopt thousands of villages, or maybe you could consider buying digital art sold by Beeple?
Yes, you got me right, ‘Everydays – The First 5000 Days’ digital artwork was sold for $69 million through NFT!
NFT stands for Non-Fungible Token that has lately been a buzzword in mainstream media and almost every other person is talking about it. However, as much as NFTs are becoming more and more popular, there still seems to be a lack of understanding of what they actually are amongst the vast majority.
In this blog I will explain the term NFTs, its intersectionality with blockchain, and why do people buy it.
What are NFTs?
To understand NFTs, we must understand the term ‘fungible’ – a popular term among economists. Fungibility describes goods that can be substituted or exchanged, and it will still hold the same value.
Imagine we both have called for a pair of Nike shoes. They’re exactly identical with the same colour, size and model number. If we ask a third friend to differentiate, there’s no way he will get any points. They are identical and same.
Likewise, most currency is fungible. It is an interchangeable asset like gold or casino chips. Exchanging them in the same quantity and quality would not make a difference.
Non fungible in this scenario refers to goods that cannot be substituted. There’s a unique attribute or characteristic associated with the good that makes it unique from other goods.
Imagine you and I both have booked movie tickets. I have tickets to Avengers: Endgame and you have tickets to a bollywood movie Himmatwala. If you asked me to exchange the tickets, I wouldn’t even trade them for 100 bucks more. The point here is that these cannot be really substituted, they are largely non-fungible.
Check out this phenomenal image adapted from Rhett Dashwood portraying the difference between fungible and non-fungible assets.
Hence, an NFT is a token or a digital asset that can be traded but it is non-fungible. This token refers to a digital certificate that is stored on a distributed and secured database called blockchain.
Intersection between NFT and Blockchain
NFT has been invented with the help of Blockchain technology. You can imagine and consider NFT as a chunk of data that entails images, songs, gifs, memes etc, that is authorised, identified and approved as a different one. This token contains specific information that makes it unique from other NFTs and proves ownership of the digital asset, that is, the image, text, meme, gif, sound etc.
When a token or asset is considered as non-fungible, that means:
- It cannot be replicated since each NFT differs from others. It is unique in nature.
- Since NFTs are digital assets, they can be copied, downloaded and shared. However, the original NFT and the proof of its ownership is embedded on the blockchain. Nowhere else can a totally identical version of the NFT be found.
- NFTs are verifiable, that means past data is stored on the blockchain and it authenticates the original creator and owner.
Let’s understand this by considering this famous painting by Vincent Van Gogh ‘The Starry Night’
You might have seen this painting on Google or someone’s house or it may have randomly appeared somewhere.
But the funny thing is, the original painting is sitting somewhere in New York right now, and it’s almost worth $800 million.
Imagine getting a printout of this image and trying to sell it for a million dollars. Obviously you cannot do it because you don’t have its certificate of ownership since that is the only way to certify that it is an original painting by Van Gogh.
But let’s focus on something that I am sure has got all of us wondering: why do people buy an image worth $69 million, when they could simply download it from Google? Let’s decode the psychology behind this.
i) It’s not real money like Rupees and Dollars
CMeet CrytoPunk #7610 who has been minted on the blockchain and has unique visual characteristics among 10,000 other punks. Visa Inc. bought this digital avatar for $150,000. This is probably the price of a luxurious flat in a city. However, to be on the same page, dollars were not a part of the transaction, but ethereum was. Same thing? Not really
When trading NFTs, the Bitcoin or Ethereum coin acts as a Casino chip. Psychologically, it is easier to spend a casino chip than real money. This is why casino chips exist.
Casino chips and Bitcoin have many similarities. For instance, in a casino, the first thing we would do is exchange dollars for casino chips. The same procedure applies to NFT trading. One has to figure out a digital wallet on their browser and wire some ETH to start trading it. Paper currency won’t work.
When we gamble around with casino chips or ETH, we create an abstraction layer between the physical (paper currency) and digital (NFT) asset and the value it represents. We are less afraid to lose casino chips than real money, which also explains the phrase “all in” we hear commonly in casinos.
ii) The Scarcity Effect
Products that are limited are often valuable and having these in your possession shows others that you are unique and interesting. People are likely to engage in behaviour that makes them part of an exclusive group.
Researchers have indicated that people value something more only because it is scarce. Digital currencies and NFTs in particular are driven on the principle of scarcity. It is the first time in history that a series of digital assets can be created and owned. Each of these NFTs has its own traits, so potential buyers can easily determine the rarity of it. The rarer an NFT is, the better it is, and more people will be drawn towards it.
iii) Ownership and Possession
This drive of owning or possessing something makes the person innately feel to make what he owns better and own even more. Holding a status and being respected are always important for most people. Hence, spending a heavy amount on unique things as status symbols is a common behaviour.
For some NFT trading is just like owning the latest model of iPhone. What people gain is a sense of identity. It’s equal to social currency, a way of belonging.
Obviously, status is not the only notion behind this behaviour of trading and collecting NFTs. Completing the set and owning the whole set of unique artforms is also a strong drive for collectors.
iv) Top-down perception
Buying NFTs is definitely an investment and may also give the buyer some bragging points and cultural cache. But that’s not all. Psychologists have also found that it has something to do with our perception.
Two identical images may be differentiated pixel-by-pixel, but looking at one may feel very different from another. The reason behind this is that human perception is not fully determined by visual input (which is almost identical in this case). This also depends on our beliefs and knowledge about the image. This way our perceptual experience is the result of a two-way interaction between the visual input from the image and our knowledge about the image.
v) The Endowment Effect
According to this notion, people are more likely to retain a commodity they own than acquire the same commodity if they do not own it. Imagine you have a bottle of wine and one day you find out its value to be around $400.
Would you sell the bottle? Probably not unless you need the money urgently. However, would you buy a bottle of wine for the same amount? Probably not.
We tend to follow a similar pattern in NFT trading. When a person buys an NFT, they can set the price as high as they want. NFTs are usually highly priced because of the emotional attachment and endowment effect. When owners with limited collections apply the endowment effect and sell the NFTs at high prices, the floor level of collection in turn rises.
It is definitely hard and fascinating to imagine the thousand dollars someone would pay for a simple GIF or 3D art. However, more than longer term investments, NFTs seems to be an obscure concept around psychological gravitation.
In a digital era, digital notions and objects will have more significance than physical ones. Under the blockchain’s custody, the world can view the digital assets and not copy it because of the unique hash that is generated. Artists are slowly gravitating towards the NFT marketplace, creating, experimenting, and buying into the movement. Some of them are doing it out of pure catharsis while others out of curiosity. But the outcome is powerful since now we have a generation of fragmented creator space.
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