I'm new enough to the world of NFTs -- and that world is shifting so rapidly -- that I'm certain my authority over the subject is woefully inadequate. But as the consumer-facing nature of the blockchain is also only recently beginning to bloom, I'd say it doesn't take much yet to get a reasonable education. With that in mind, the following is my take on why NFTs may represent a more fundamental economic shift than what I had originally imagined them to be.

NFTs: Beanie Babies of the Future

Or, at least, that's where I started. At first blush and through the nuance-crushing filter of typical media reporting, the idea seems like nothing more than digital ownership of an "asset" with no marginal cost of replication. And that sounds insane. Pictures of apes are trading for tens of thousands of dollars, and the most charitable notion I could come up with was that this is a phenomenon likely to appeal only to the intersection of "collectors" and "technophile early-adopters."

And anecdotally, that bit still seems to be true. That friend of yours who spends too much money on speculative nonsense obviously bought a Topps baseball highlight NFT for thousands of dollars because, like, they're gaining so much value! And somewhere in the back of your mind, some recollection of Beanie Babies and tulip bulbs are throwing off warning signs.

Why do you need your baseball card on the blockchain? And why would you want to "own" something digital like a sports highlight? I mean, I can see it online just as easily as you can.

The Stock Market for Everything

Then again, though, there are some fundamental mechanisms at play here that, regardless of this particular implementation, may actually become pretty ground-breaking. NFTs are just another implementation of the distributed ledger system, but rather than tracking ownership of "currency" like Bitcoin or Ethereum (which can be used to buy things, at least in theory), NFTs track ownership of something more abstract: anything at all.

As it turns out, "fractional ownership" akin to the stock market is maybe a better analogy than digital Beanie Babies. Combined with smart contracts to, say, pay out dividends according to ownership, NFTs may replicate (and multiply) the individualized access to the stock market that Robinhood's arrival on the scene had. But in this case, we're securitizing not companies but ... well, just kind of anything at all.

Art

For example, suppose you're an art lover, or else suppose that you just want to cash in on the massive relative growth rate art investing allows for those who can afford to get into it. But suppose that you don't have the means to fork over a small fortune to get started. Enter: Masterworks. They'll "mint" this Banksy and let you buy an NFT representing a fraction. The NFT (in this case, backed by a real-life piece of art rather than a digital copy) appreciates as the value of the piece appreciates.

(For a stranger example, RTFKT started out doing something similar for sneaker collectors until they realized their users would be happy to fractionally own digital sneakers rather than the sneakers themselves. This is still bizarre to me, but Nike seemed to think it was worth $300 million or so.)

Fractional Ownership and Dividends

This is a more fun example, in my opinion. A musical artist who writes and records a song can mint an NFT of their song. But rather than treat it as a collectible, suppose they treat it as we do stock in a company: they retain ownership over some fraction, then set the remainder up for sale with the expectation that any proceeds from the song in advertisements, movies, or television pay dividends out to other fractional owners.

This does something particularly interesting to incentives: people who believe the song will catch on are incentivized to buy in; and people who buy in are incentivized to ensure it catches on by sharing it. The old world of tight-knit network-driven record studios is replaced (at first and in this optimistic hypothetical, at least) with something more grassroots and distributed.

There's no reason to restrict that structure to music, of course.

Trustlessness and (Anti-)Regulation

Between this future vision of NFTs and the stock market are two main differences: (a) trust-less decentralization and (b) regulatory framework, and the two are highly interrelated. Each distributed ledger system sits on one of a few decentralized, "trust-less" algorithms that have all kinds of depths and pros and cons, but each with decentralization as a primary characteristic. And because what we're talking about is ownership of an "asset" rather than something as well understood as a company, it can be difficult to know who and how to regulate.

Betting

The word "regulatory" appears 73 times in Draftkings 10-K filing with the SEC, and every mention has risk in mind. If federal or state regulators don't like what they're up to, there are real monetary consequences.

But suppose DraftKingsNFT were an app conceived, coded, NFT-ized, and distributed on the blockchain? Someone built DraftKingsNFT, but rather than recognize the proceeds under some well-known and well-trodden corporate structure, they just took a big chunk of the initial NFT or crypto offering. Now it's out there in the world, unmanaged, and super popular. Who does the US target for regulation if the app development wasn't illegal? Tough to know who to go after.

(Choose your favorite recently-popular-and-newly-regulated app and run the thought experiment through -- especially those that seem to create enterprise value by bending ever so slightly around existing labor laws like Uber and Lyft. This idea is at the heart of Decentralized Autonomous Organizations.)

Responsibility for regulation is also pretty underspecified, at least in the US.

Taxation

Thus far it seems that NFTs, like cryptocurrencies, will be taxed as assets via capital gains. That sets a pretty interesting set of incentives out, too: rather than pay employees to be taxed under ordinary income, perhaps a savvy employer grants and repurchases NFTs. Or maybe options end up on the blockchain as a way to lower the bar to constructing employee incentive programs. There's already a fairly healthy secondary market for fractional ownership in private companies, but a one-click option could lower the bar for participation pretty dramatically.

Distributed Government?

In fact -- and now we're really getting into speculative territory -- any number of the functions of government might find themselves on the distributed ledger, particularly those that don't require geographic collocation or resemble insurance. As far as I can tell, smart contracts are not yet that smart; but it's only a matter of time before some of the more complex dealings become codified and distributed. The speed of interaction alone is enough of an incentive to create a multitude of micro-contracts once they meet a threshold of sophistication and low bound for risk, and the challenges of regulation and enforcement could be a multiplier.

Implications

NFTs' arrival is almost certain to herald some new wave of democratized securities that will make even the most abstract nonsense tradable. That's probably great news if you're an artist or an entrepreneur as the wave introduces new complexities and opportunities for market efficiencies to appear, at which point we should expect some level of fracturing and subsequent re-organization and re-aggregation. It seems likely that the effect of Web 3.0 NFTs on some industries will be as big as the introduction of Web 1.0.

The users are already there, or else getting there quick. Opensea (which is the marketplace for NFTs today) is on a tear and just got a $13 billion valuation.

That said, all the usual pitfalls are still present: NFTs are almost certainly in some massive bubble (again, much like Web 1.0 in 2000). And the complexity lends itself to huge information asymmetries, so scams are everywhere, and yet more economic re-organization is probably in our future.

At least for now, it seems like the way to participate in the medium- to long-term of the wave may have little to do with collectibles and much more to do with new blockchain-backed contenders using the tech's fundamentals to challenge incumbents.