Thread by @naval

Demystifying NFTs:

(A thread)

An NFT is a unique, on-chain token representing ownership of an off-chain asset.

The token is backed by a social contract from its creator and a surrounding community.

By assigning a unique token to a thing, its ownership (not the thing itself!) becomes programmable, verifiable, divisible, durable, universally addressable, composable, digitally secured, and easy to transfer.

Bitcoin and other completely on-chain assets are provably scarce - scarcity is enforced by code and distributed consensus.

Off-chain assets represented by NFTs are not provably scarce.

The promise of scarcity is a slender thread, only as strong as the social contract with the creator and interwoven with the backing of the community.

An NFT’s creator may break their promise, or be unable to enforce it, or may have picked the wrong underlying platform and community - rendering the NFT worthless.

For NFTs representing digital art and collectibles, the creator cannot enforce scarcity - it’s up to a surrounding community to imbue the authorized NFT with scarcity and prestige within the context of that community.

Just as HODLers imbue Bitcoin with value, and developers infuse Ethereum with value, collectors, admirers, and users imbue NFTs with value.

NFTs gain value when displayed, used, and promoted within vibrant and growing communities.

If the community around an NFT is dying, the NFT is likely bleeding value.

If the community is surging, the NFT is likely gaining value.

NFTs are monetized memes.*

“Actual-value NFTs” can draw upon legal and code-based contracts - a song token can provide a royalty stream, a ticket token can provide access, a metaverse token can grant land titles, an item token can have in-game powers, an ISA token can provide a cut of creator earnings.

Even “actual-value NFTs” require a social contract with the creator and community to transfer the value from the off-chain contracts onto the chain where the NFT is registered.

Just as there are those who won’t accept that mere consensus can create digital gold, and those who won’t accept that mere smart contracts can create a decentralized Wall Street, there are those that won’t accept that digitized social contracts will create valuable tokens.

As with most art and most tokens, most NFTs will have very little value.

But a select few NFTs will become focal points for communities who gather to celebrate art, build collections, and explore virtual worlds.

With NFTs, blockchains make the jump from finance into creative applications.

Regulators would do well to recognize that blockchains are the next generation of the Internet, and applying financial regulations to NFTs is a category error.

NFTs tokenize all the things.

We are going from a world where every protocol has a token, to where every (decentralized) application has a token, to where every valuable digital representation of an object or person has a token.

Public blockchains will be the title registries for everything of value.

Ultimately, NFTs will authenticate the world.**

Credits:
* - @tyler
** - @cameron