[COLUMNIST] The logic behind NFT's rise and fall

ISN'T it enticing to learn that the most expensive digital art ever sold is a series of digital arts by The Merge which was sold in December 2021 for an outrageous amount of US$91.8 million? That is over RM408 million. However, the NFTs market had recently seen its worst over the past few months. To those who are still new to the topic, here’s a layman’s explanation on what it is.

So, what exactly is a Non-Fungible Token (NFT)?

The word fungible when searched in the Cambridge Dictionary is something that is easily tradable for something of the same type or value. Non-fungible, on the other hand, is the total opposite. NFT is the right to a digital asset with a distinct identifier recorded on the blockchain, which is unmodifiable. Ethereum is the most commonly used blockchain for minting NFTs at the moment. Only one person holds the official ownership of an NFT at a time.

Simply put, NFT is your digital artwork imprinted with a digital certificate (“token”) of ownership, making it eminently non-interchangeable. Although you own the right to it, that digital artwork of yours is free to be downloaded, shared and copied across the internet.

However, you have the right to destroy, sell or exchange the NFT. Once your digital artwork is converted into NFT in the form of GIF, JPEG, or PNG, you are now entitled to call it a digital asset as that particular artwork of yours might be worth more than a mansion next to KLCC. NFTs are ranging from the typical media such as music, photo, video, meme, to sound, collectible, and even real estate. Alex Ramírez-Mallis, 36, from New York City managed to sell an NFT of the sound of his fart which he recorded during quarantine for US$85, that is RM378.

So what made NFTs so valuable?

Think of it as the Mona Lisa which is currently valued more than US$900 million (value is based on an online article by Heather Carrick for National World). However, there is still a possibility that a highly trained thief could break into the Louvre to steal it.

Or someone extraordinarily talented might be able to forge it. With NFTs, there is no possible way for this to happen as the identity of the NFTs are so unique that it just cannot be duplicated or forged. This makes investing in NFTs safer than in artworks.

The reason is also because people are constantly talking about it and the rest are interested to know what the hype is all about. The reason for this hype backed by research is the commodification theory by Karl Marx dated back in the 1970s.

The word commodification means turning an object, idea or behaviour into something tradable with another thing with equivalent value namely a sale transaction involving currency or trading a collectible card for another collectible card. The process of commodification is all about putting a price on something that wasn't as valuable before. Or in some cases, wasn’t even meant to be on sale, i.e., the sound of fart.

An example of commodification is Supreme selling Supreme x Oreo for 26 times more than the regular price of Oreo Red Velvet which taste exactly the same. Commodification illuminates the power behavioural psychology has on the market. NFT has led to the commodification of fandom, turning ardent fans into true-blue buyers; commodification of memes, selling an NFT of Kabosu’s meme, a Shiba Inu which became the Dogecoin mascot, for US$4 million; and commodification of heritage and culture, creating NFTs of traditional food which include AEON Malaysia x Afi Sulaiman Kuih Raya Kita NFT Series and Chapfan by Wan Tsau. A recent study by Joshua T. White, Sean Wilkoff and Serhat Yildiz in 2022 about the correlation of NFTs news reporting and its speculative market concluded that, “Journalists play an important investor protection role by producing informative content on new and risky assets,”.

In the study, they found that the media reduces information frictions and allows participants to make informed decisions by educating investors on the risks of emerging technologies and that in speculative markets, the media often focuses on extreme growth and returns, thereby enhancing the salience of this information.

Both traditional and new media including social media platforms play an important role in the NFTs ecosystem by intensifying the hype and downplaying it, indirectly influencing its market activity. Those who read an article about Grimes selling her NFTs for US$6 million (RM26.7 million) would be attracted to hop onto the bandwagon. It is a digital activity with a real world outcome. It will continue to be real as long as people continue to participate in the process.

The NFTs trade saw an exponential growth in participation between 2019 to 2021 with buyer wallets and 4,000 seller wallets back in 2019 to over 774,000 buyer wallets and 376,000 seller wallets in 2021. The NFT sales transaction tremendously increased between 2017 to 2021 starting at US$150,000 in 2017, $5.3 million in 2019, to $12 billion in 2021. A report by NBC news showed that the number of NFTs active traders has plummeted from 1 million accounts at the start of 2022 to 491,000 in July 2022.

Again, it all goes back to the power of the media. In March 2021, the CEO of Twitter, Jack Dorsey sold an NFT of his first tweet, “just setting up my twttr” composed in 2006 to a Malaysian-based businessman, Sina Estavi for US$2.9 million (RM12.9 million). When Estavi tried to sell the NFT back on OpenSea in April this year, the highest bid only went as far as US$14,000 (RM62,356).

The story was all over the internet. The tone of news coverage for NFTs has also skewed towards the negative side in the recent months, from the Squid Game scam to the underpriced Bored Ape Yacht Club NFT. Could this be one of the reasons for NFTs downfall?

Aina Syafirah Hud is not an NFT industry expert. She is a postgraduate student of Mass Communication at Universiti Teknologi Mara (UiTM), Malaysia with 12 years of experience in Public Relations and is writing from a Mass Communication perspective.

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.