In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Andrew Ward about Non-Fungible Tokens, or NFTs, which have been much in the news lately thanks to some jaw-dropping, multimillion dollar sales at auction.
Dr. Ward holds the Charlot and Dennis E. Singleton ‘66 chair and is chair of the Department of Management in Lehigh's College of Business. He also teaches courses on societal shifts and the way that the world is changing. His website, thegreatdivides.com, examines how societal megatrends will cause future disruption.
He spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an edited excerpt from that conversation. Read the complete podcast transcript.
Jack Croft: First, to set this up, at Sotheby's auction house in early September, a set of 101 non-fungible tokens, or NFTs as we'll call them the rest of the way here, representing images of computer-generated cartoon apes sold for a whopping $24.4 million. The set was just a small part of the limited 10,000 NFT collection known as the Bored Ape Yacht Club. How do we begin to make sense of this? I guess the best place to start is, what is an NFT?
Andrew Ward: Well, as you said, NFT stands for non-fungible token, and so really the first thing to understand is what is meant by fungible or non-fungible. So fungibility is whether something is completely substitutable for something else. We often think of this in terms of form and function. However, people often think that something has to be identical in form to be fungible. That's not actually true. For example, think of money—the U.S. dollar, right? This is completely fungible despite having multiple forms. I might have five $1 bills in my wallet. You might have a $5 bill. We both have exactly the same value and would be willing to trade without any friction.
If you needed five $1s for a vending machine, I'd be quite happy to trade with you. And it doesn't have to even be in a physical form. You might just need two $1 bills for that vending machine, and I could give them to you and you could Venmo me $2. That's still the same value to me, even in a totally non-material or digital form.
So money is totally fungible. It doesn't need to have the same form, it just needs to be identical in function. Whereas on the other side, something is non-fungible [if] it has a different value in its function, even if not necessarily in form. For instance, you can buy an NFT of a play in the NBA, and it's one of the popular NFTs that are around now. And even though you could watch that same play as many times as you want to on YouTube, there's a different function in owning the NFT—in that case, very similar to collectible trading cards, baseball cards as many people collect, which then can be owned and traded with other collectors, for example.
Croft: Can you explain how NFTs fit into the world of blockchain and their relationship to cryptocurrencies?
Ward: NFTs are housed on blockchains. The blockchain is what records and verifies your ownership of a particular digital sort of NFT. And an NFT is just like any form of physical property, but it's not physical, it's purely in digital form. And so you need to be able to establish who owns that NFT at any given point in time. So a blockchain is the secure way in which those are recorded, verifies ownership, and therefore facilitates the transactions or the trading of those NFTs.
Cryptocurrencies are actually completely fungible tokens. These non-fungible tokens are these unique forms, like a piece of art or something, but a cryptocurrency is another form of token, a digital token, but those are completely fungible. So a bitcoin is a bitcoin is a bitcoin, and the differences between them—the fact that they have different serial numbers—doesn’t matter. They're just something that is also tradable, also kept on a blockchain that records and verifies ownership, but is something that people will always trade on a one-for-one basis. Your bitcoin is the same as my bitcoin. We can trade them back and forth and it doesn't matter.
Croft: Now, if I wanted to buy an NFT, how would I go about that?
Ward: The first thing you'd need is a wallet, and a digital wallet is like a bank for your digital assets. So just as there are many different physical banks out there, there are also many different wallets out there. And so there's these companies that have set these wallets up. Examples: MetaMask, or Coinbase, or Bitski, or Trust Wallet. There's lots of these around. Some have very obscure names, but there are some that are being set up from perhaps more familiar names like PayPal or Robinhood. And probably not far down the road, you'll also start seeing these digital wallets from even more familiar names, like regular banks like Wells Fargo, JP Morgan, places like that. And so these digital wallets are basically spaces or wallets where you can keep these intangible, these digital forms that you have, whether that's bitcoins or whether that's non-fungible tokens.
Croft: And once you have a wallet and somewhere to store these digital assets?
Ward: Then there are different marketplaces. So marketplaces like OpenSea, Sotheby's auction houses have sort of become places where you can buy some of these NFTs. But there are also other organizations. For example, the US Open tennis tournament had some NFTs on their website that you could buy of various moments in US Open history. And the NBA has its own site, Top Shot, which is where you can buy highlights from NBA games and things like that. Then you buy them through these sites and it transfers the digital key to your wallet, and they get stored in your individual wallet.
Croft: There doesn't seem to be a consensus yet on whether NFTs represent a sound investment strategy. Is it a trend that will pass or a bubble? And maybe the question a lot of people would have is, would you invest in an NFT at this stage?
Ward: Well, I think we're definitely moving upwards on the hype cycle for NFTs. And so as a result, no doubt there'll be some people who make a lot of money. But I think a lot of those will be these creators of this art or content generated such as the NBA as we've already seen. You could also see content creators like The Walt Disney Company, for example, getting in on the action and being very successful. But to make money as a collector, you need, I think, either deep expertise or great luck. As this market explodes, it will certainly take the dispersion of outcomes to extremes as well. And just think about other art and collectible markets: 99% of art that artists sell actually has little to no value on the secondary market, but a very small percentage—the Renoirs, the Monets, the Picassos, the Hockneys, the Koons of the world—do extraordinarily well, both for the artist and in particular, the collector. And I think the same is true in other collectible marketplaces.
I would treat this market like the regular art market: Only buy something that you're going to enjoy having and looking at for your own pleasure, that you get the value out of for the money you spend and not as an investment to fund your retirement or your kid's college education, because that's more of a crapshoot than many other markets. But at the same time, NFTs are going through this hype cycle. You are going to see these massive booms and massive bursts that come with it, and so some people are going to be winners, some people are going to be losers in it. And so, yeah, if you don't have the expertise and you're not really lucky, then I would just do it for fun, rather than the expectation that you're going to make a lot of money out of it.