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Non-fungible… Sounds like a special instruction for a mushroom pizza!

31 May 2021 Gareth Stokes

The first time you hear the word non-fungible you either dismiss it as a special instruction for a mushroom pizza or go diving for your favourite smart device to Google yet another definition. In the former case, you could easily imagine saying: “One large mushroom pizza to go … and make it non-fungible!”. In the latter you will have a new definition to share with your mates at the next braai. The Merriam-Webster does not carry a standalone definition of non-fungible, but explains fungible as “something, such as money or a commodity, of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account”. So where does non-fungible fit into the works?

Is this about Bitcoin or cryptocurrencies?

The non-fungible descriptor being bandied about by 21st Century retail investors, especially those in the generation X and younger demographic, is closely associated with the world of digital assets. “Ooh, this must have something to do with Bitcoin or cryptocurrencies,” you scream. Patience. Yes and no; but we will get there in a minute. The non-fungible we are interrogating makes up part of the name of a new type of digital asset called a non-fungible token. Website Wikipedia.org offers this useful definition: “A non-fungible token is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable”. So, non-fungible is kind of like a synonym for one-of a kind. 

The present day non-fungible token (NFT) frenzy was born out of the ongoing search for use cases for blockchain and the myriad cryptocurrencies and platforms that have sprung from the technology. A comprehensive discussion on cryptocurrencies versus platforms would fill a separate article and we will not go into detail here. Essentially a platform serves as a base from which other developers can launch blockchain-based solutions or ventures, whereas a cryptocurrency is the coin a particular platform creates to facilitate transactions on the platform. Example: Ethereum is a platform that uses Ether, a cryptocurrency, to facilitate transactions. But we digress… 

It did not take long for early entrants to the crypto asset world to see the value in using blockchain technology to identify and track the creators and beneficial owners of a wide array of digital assets. If you can use global computing power to uniquely identify and track every transaction for a cryptocurrency like ADA, Bitcoin or Ether, they argue, then why not use it to create a record of creation and ownership for digital artwork. And artwork, in the NFT context, is the most subjective term in the universe. 

Turning your dog Spot into $1 million

Overnight we entered a world where Jane or Joe Average could, with a few mouse clicks and by burning through a few fractions of their preferred crypto coin, publish a digital image, sound clip or video file complete with a digital identity / certificate of ownership. In the old days you might have uploaded a picture of you dog, Spot, to Facebook; nowadays you can turn the same picture into a non-fungible token and offer it for resale. The image remains the same but now contains digital information that identifies you as the creator and current owner of the image and allows you to offer the image for re-sale. One of the fantastic features of NFTs is that you can specify how many instances of the artwork to create as well as indicate a royalty fee that will be paid to you, the original creator, every time the work is re-sold. 

This all sounds rather silly, and in the case of Spot you will probably spend more on creating the NFT than you will ever make back; but early adopters of the technology have had a field day. In March 2021, a major auction house ‘fetched’ US$69.3 million for a digital artwork titled ‘Everydays: the first 5000 Days’. Launched on the Ethereum platform, it was described as the first piece of purely NFT artwork to be offered by a major auction house. Another artwork, titled ‘The Harmony’, sold for US$10.3 million in April of the same year. The artist, in this case, created a single version of the digital image which can only be decoded and viewed by the NFT owner. There are seemingly no constraints insofar the type of digital property you can issue as NFTs. 

From the man with the Midas tweet

Twitter.com founder, Jack Dorsey, recently sold a digital copy of his first-ever Twitter post for US$2.9 million. A growing number of entertainment and sporting companies are exploring unique ways to expand their existing legacy properties into lucrative NFT-based empires. Examples include collectible sports card franchises; magazines; online video game companies and owners of sporting events such as the NBA. Now, instead of holding a physical baseball card, you can simply purchase the original one-of-kind digital card. Yes, people might copy and recreate the image; but you would be the only person with digitally verified ownership. 

Online gaming communities are meanwhile exploring ways to integrate NFTs into their games, allowing users to buy, own and sell virtual assets while playing. Basically, if you can imagine it digitally, you can probably monetise it using an NFT, provided there is a market for it. The point of today’s article is that you cannot afford to dismiss emerging asset classes on the basis you do not understand them. In the past we proved ownership by taking physical delivery of our art and collectibles; nowadays NFTs serve as proof of ownership of digital art and collectibles. And the question becomes: Why should the first ever digital artwork by the fictional character $Hash-Ma-Millions not fetch a few million dollars? I believe that non-fungible tokens will gradually infiltrate society and eventually establish as mainstream ‘proof of ownership’ devices in multiple industries. The prices being achieved for ‘cats with pop-tart bodies’ and so-called Crypto-punks are best explained as the frenzied explorations, by often irrational speculators, of an exciting, emerging trend. 

You meant fungus, not fungible, you fool!

Returning to the ‘special instruction for mushroom pizza’ opening, it appears the fungible I was initially musing over was meant to be fungus. As in: Fungus blurs into mushroom and morphs to mushroom pizza. Fungible, or fungibility, is actually an economics-linked phrase that has been around for decades. Once again, we turn to Wikipedia.org for a quick definition of fungibility as “the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part”. Gold is a fungible because it can be divided infinitely into lower weight and the properties of a fine ounce of gold are indistinguishable from a kilogram bar. The US Dollar and everybody’s favourite, Bitcoin, are fungible too. 

The great irony is that if you or I head out into the Interweb we will need have to use fungible tokens like Bitcoin, Ether or US Dollars to buy non-fungible tokens. And my last word on the matter: Look out; perhaps soon I will publish articles such as this as NFTs in an attempt to create a world first $1 million article.

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