The Network Effect of NFTs
NFTs, or non-fungible tokens, are unique and non-interchangeable units of data stored on a digital blockchain, and in the context of the current day, they’re typically used to represent photos or videos (among other things). What is interesting about NFTs is that they use blockchain technology to establish a public proof of ownership. So while one might think owning a digital picture isn’t very valuable (after all, you can just take a screenshot of it), it turns out that the value has less to do with utility, and more to do with network effects. In the article “Tech for Future: Why NFTs Will Drive the Digital Economy,” Anshul Rustaggi talks about why NFTs derive value from network effects, depending on mass adoption, just like crypto currencies did back in 2015. Essentially, one must bet on how much “social status” NFTs will actually account for, and invest accordingly into the technology. Rustaggi explains how NFTs actually become “part of the owner’s digital identity” by showcasing a lot about the user, giving insight into their beliefs and views.
What Rustaggi explains in this article relates to the mathematical principles of network effects that we have learned about in class, especially about optimality. For example, we learned that in a network without market effects, everyone who values the good at more than its price buys it, and those who value it less don’t. However, with network effects, we see an externality; that is, if more people buy and use the good, then it becomes worth more to others. In the context of NFTs, it makes perfect sense that the more people that value and invest in them, the more they will be worth to people (similarly to Bitcoin). In my opinion, NFTs are a lot like the world of art collecting. For example, owning a famous piece of art doesn’t provide you with much “utility,” but art has come to be extremely valued in our society, so it says a lot about your social status to own such a piece; therefore, owning unique and original pieces of art is more valuable than just buying a replica. In the same way, one might argue that it is easy enough to take a screenshot of an NFT or “own” a replica of it on a computer, but knowing about network effects, it is clear that this is not the case. Instead, the value of owning the original piece goes up as more people start to invest in the market of NFTs, especially considering they use blockchain to establish public proof of ownership. Using knowledge about network effects and the history of other digital technologies that have relied on such effects, it is easy to make a prediction about the future success of NFTs, but any prediction of its success must assume (and be confident in) a societal adoption of the technology.
Link to article: https://economictimes.indiatimes.com/small-biz/security-tech/technology/tech-for-future-why-nfts-will-drive-the-digital-economy/articleshow/87017279.cms