NFTs and Collaborative Economies

It’s hard to browse the news these days without running into at least one headline related to non-fungible tokens, or NFTs. As is often the case with anything related to blockchain and crypto currencies, these tend to focus on the large amounts of money tied to some of these transactions, which in turn elicits thoughts and comments about bubbles, hypes, and scams.

To be fair, it’s hard not to focus on these numbers and wonder what is going on. Beyond some better-known artists selling their digital art, a number of projects in the intersection of arts, collectibles, and gaming routinely make headlines as people collect and sell digital artifacts to the tune of US$2 billion in the first half of this year and over US$2.5 billion in August alone. All of this in a market that barely existed a couple years ago.

And while you could be excused for wondering how a JPEG file may be worth as much as your house, or, for those more passionate about the promise of a decentralized web, focusing on how an NFT sale via a traditional auction house is basically business as usual, by doing so you would be missing the real story: how the mass adoption of these technologies has the potential to unlock massive value, create new jobs, and foster more inclusive ownership economies.

In my prior articles about decentralized finance and Web 3, I touched upon the basics of blockchain technology and the decentralized web, the technology that underpins digital currencies, as well as the amazing potential of decentralized financial services. These, however, mostly revolved around fungible assets, meaning those that are completely interchangeable with other assets of the same kind. And while a robust infrastructure for these types of assets and related financial services is a key condition to unlock the value of a decentralized web, a large portion of the value in our economy is represented by non-fungible, unique assets. These include traditional “real assets” and also, increasingly, other types of new digital products. NFTs allow for the tokenization of these assets, bringing them into the decentralized paradigm. Within it, ownership can be clearly established, traced, fractionalized and transferred and specialized, open-to-all, secondary markets where participants can help define and participate in economic incentives can exist, all without the need for expensive intermediaries.

By virtue of this, NFTs further enable the digitization and massification of age-old traditional markets such as real estate, art, and, yet again, music licensing, promising to increase their size and efficiency and generating billions in additional value. But as exciting as this is, it’s these technologies’ role in the creation of new, digitally-native economies that is most exciting. To illustrate this, consider some examples from the world of blockchain gaming:

• Zed.run is an online horse-racing platform where every original “genesis” horse is a unique NFT that can be owned by players. There will be a limited supply of genesis horses, although players can “breed” new ones between them. The possible economic interactions within the game include winning crypto currency via racing, breeding and, of course, the ability to sell your horse. Although in its infancy, the platform has already created a sizable community of players and an entire economy that revolves around the game, producing millions in returns not just for the platform owners, but also for all NFT owners/players.
• Similarly, Axie Infinity is a gaming ecosystem where users can own and breed “Axies,” battle with others, and earn cryptocurrency doing so. Recently, it has been credited with helping Filipinos cope with pandemic-related unemployment by generating income, which in some cases is comparable or better than their prior wages.

Developments in gaming are a particularly telling example of the power of new NFT economies because a sort of one-sided digital market has already been established there. That is, marketplaces surrounding in-game articles and characters already exist and gamers routinely spend money building up profiles and collections that improve gameplay. Still, their “ownership” of what are very valuable in-game assets typically does not allow them to profit from their work and investment. Similar one-sided relationships exist across the internet where platforms like Facebook, Twitter, and YouTube benefit from user data and from their original content in exchange for access to the platform and, in some cases, a comparatively small share of advertising revenue.

The advent of NFTs will completely reinvent the way these models work, essentially allowing any creator or community with internet access to develop a collaborative economy, where the specifics of what products, services, and assets are valuable to its members and the economic incentives tied to them are determined by the community itself, offering new opportunities for asset ownership and wealth generation. In a region like Latin America, plagued by subemployment and informality, the continued advancement of these technologies can be transformational to many, something that may (hopefully) help you stomach the next headline about the multimillion-dollar sale of a pixelated character. After all, things are worth what people pay for them.