Demystifying NFTs and the Coming Digital Revolution
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Demystifying NFTs and the Coming Digital Revolution

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Demystifying NFTs and the Coming Digital Revolution

Steve Kaczynski is a career marketer and entrepreneur with experience leading multiple disciplines at Fortune 500 and multinational companies.

Scott Duke Kominers is a Harvard Business School professor and research partner at a16z crypto, the crypto division of the venture capital firm Andreessen Horowitz.

Below, co-authors Steve and Scott share 5 key insights from their new book, The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create. Listen to the audio version—read by Steve and Scott—in the Next Big Idea App.

The Everything Token Steve Kaczynski Scott Duke Kominers Next Big Idea Club

1. NFTs and the blockchain are ushering in what many expect to be the next iteration of the internet, called Web3.

Technologists often refer to the early internet, when you could read webpages and consume content online, as Web 1. Social networks like Facebook, Twitter, and Instagram, where you can write and engage in a two-way conversation, are called Web 2.

Web 1 and Web 2 changed our lives in previously unimaginable ways—and Web3 has the potential to do the same, so everyone should pay attention. Web3 is a new iteration of the internet built on individual ownership of digital assets.

In Web 2—the Internet we’re using today—everyone’s data, pictures, and information are controlled by the platforms we interact with, like Facebook, Google, Twitter, and Amazon. Web3 creates a world where you have actual ownership and control of your own images, songs, and other data and can seamlessly transfer them across platforms. Instead of having individual copies of these files everywhere without a clear understanding of the origin, you have much greater control, owning these digital items just as you would any physical item you possess.

This sort of digital ownership generally comes in the form of non-fungible tokens or NFTs, which are the core topic of The Everything Token. NFTs provide a sort of “digital deed” giving a person ownership of a digital asset—perhaps a media file or a personal data record. In this sense, it’s non-fungible because it’s uniquely distinguishable from other digital records. And because you control that digital deed, you can grant any platform access to the associated assets.

Why does that matter?

2. Ownership enables markets.

One of my specialties at Harvard is market design, and markets cannot exist without property rights. Think about it. You can’t sell somebody else’s house or a car that belongs to a car dealership. You need the deeds or titles to prove you own each one.

Until Web3 and the advent of NFTs, it was nearly impossible to define ownership of a digital object, much less prove ownership of it to a third party. When we sell something physical like a piece of jewelry or a glockenspiel, we transfer ownership by transferring the object.

“This is what makes an NFT truly non-fungible—you can distinguish one from another with absolute certainty.”

But if someone sells you a digital image, what do they “transfer” exactly? They can send you a copy of the image over email, but that still leaves a copy on the seller’s computer. What’s to stop that person from selling an identical copy to somebody else in the future? That buyer won’t know that you’re the official owner unless he tells them, and the copy he would email them is indistinguishable from yours.

But now, a technology called the blockchain serves a digital ledger that records every person who has ever owned a given digital object. This is what makes an NFT truly non-fungible—you can distinguish one from another with absolute certainty. When you own it, anyone can see you are the clear owner. When you transfer or sell it to someone else, that’s recorded, too.

This allows people to freely buy, sell, and transfer digital goods they actually own. And that enables new markets to emerge. With NFTs, people can buy and sell everything from media files, game items, and newspaper or streaming subscriptions to bigger-ticket items like gym memberships or even houses. And all of this can go on without any specific platform in the middle as an intermediary.

So how will that disrupt multi-billion dollar industries?

3. NFTs are a powerful multi-purpose software.

Think about the last time you bought a ticket for an event—maybe a sports game or theater show. More likely than not, what you really got was a QR code in your email. If you wanted to resell that ticket (or alternatively, if you want to buy one from a third party), there’s a trust problem because there’s no way to know whether the same QR code is being sold to multiple people.

NFTs solve this problem by creating a unique digital asset that only one person can have control of at a time. The second it’s transferred to a buyer, the seller no longer has control of it, just like with a physical ticket.

That alone makes NFTs a strictly superior technology for digital ticketing, which on its own is a multi-billion dollar industry. Similar applications for managing ownership in categories like collectibles, customer loyalty, online credentials, and health data also represent billions of dollars in value—probably hundreds of billions. But that’s only the beginning. Because of the way NFT software works, they can become far more than just records of ownership.

“Ownership of an asset provides a way to form a community among brand enthusiasts and for those enthusiasts to establish a bidirectional connection with the brand itself.”

Normally, when you use a digital ticket, the interaction ends after the event. But with NFTs, the digital asset lives on and can be used, for example, to anchor a rewards program organized by the event owner or cross-verified by a local bar or restaurant to give discounts to event attendees.

And perhaps most importantly, NFT owners, by nature, comprise a network of individuals connected through their common interest in whatever it is they bought and own. An NFT can be used as an access pass to what are called “token-gated” online communities, where only the purchasers of a particular ticket, video game item, or collectible can convene. Suddenly, ownership of an asset provides a way to form a community among brand enthusiasts and for those enthusiasts to establish a bidirectional connection with the brand itself.

This opens up a world of possibilities for businesses, artists, and individuals.

4. NFTs will change the way businesses, both big and small, interact with customers—for the better.

We’re already seeing big brands like Starbucks, Nike, and the NBA use NFTs.

One of the simplest applications is to use NFTs to create a form of collectible, like digital sports cards—and the NBA has done that with a series of collectible and tradable video “moments.” They can also enable companies to do gated product releases, where those holding an NFT get preferred access to new products; brands like Adidas and The Hundreds have been doing this for years at this point, and TicketMaster has started implementing a similar system for ticket sales—a Web3 version of its “verified fan” access program.

NFTs can also facilitate loyalty rewards, where people who complete brand-positive actions receive digital assets, which in turn can correlate to higher loyalty benefits; Starbucks pioneered this approach last year with its Odyssey rewards program, and airlines like Lufthansa are piloting similar programs.

You may look at some of these applications and think, “Why do I need NFTs? Current solutions can do the same things.” And while each individual application might be able to be executed through a current software, nothing can do all of these things, and they can’t do them as securely or efficiently. Plus, while these sorts of applications all start out from “NFTs as simple ownership records,” they give customers a new way to form identity and community around the brand, especially in digital space.

In addition, uniquely to NFTs, these applications also offer the potential for third-party value creation. If you want to offer third-party benefits like discounts or special access to holders of a given NFT, you just have to identify them on the blockchain—and you can even send those benefits directly through a process called “airdropping,” which is akin to email or direct deposit.

“One of the simplest applications is to use NFTs to create a form of collectible, like digital sports cards.”

Thus, while large companies and NFT-native startups have paved the way in the early stages of Web3, businesses of all sizes are poised to use this software to their advantage. A local apparel store could give Adidas NFT holders a discount on merchandise. Or, a group of small businesses could create a shared, interoperable “Local Passport” NFT loyalty program that provides discounts or special access across the various businesses, encouraging patronage to each local shop.

These are just a few of the ways businesses can apply NFTs, but of course, the proliferation of NFTs and Web3 won’t happen all at once.

5. Like any early technology, NFT adoption will take time and has its challenges. But one day, this technology will be part of pretty much everything.

If you were building web pages in the mid-90s, you had to learn to code HTML. It was complicated, it took time, and if even a single character of code was wrong, the website could break. Google didn’t exist yet, so you needed to read a book about HTML or find someone to teach you. But now, with the creation of platforms like WordPress, Squarespace, and Wix, almost anybody can build a website in a couple of days.

Likewise, the internet, social media, and even cell phones were considered fads or niche products at one point. But now, many people can’t get through their daily lives without them.

NFTs and Web3 are still in the early phase, but the product applications and associated market is maturing quickly. As we were writing our book in 2022-2023, the cost and tech barriers of NFTs were prohibitive for many people. But that’s changing quickly. Even as 2023 was wrapping up, companies were deploying more consumer-friendly interfaces for creating, collecting, and managing NFTs—and meanwhile, major consumer brands like Nike were debuting mass-market NFT offerings.

Additionally, NFT-native brands were starting to become well-known in the broader market—the 2023 Macy’s Thanksgiving day parade even featured a balloon of a “Cool Cat” from an NFT brand of the same name.) As the friction to getting into Web3 lessens, more and more businesses will begin using NFTs.

To listen to the audio version read by co-authors Steve Kaczynski and Scott Duke Kominers, download the Next Big Idea App today:

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