NFT Q&A with UTS Professor, Marco Navone

We recently spoke to Professor Marco Navone, Senior Lecturer in Finance, University of Technology, for the feature What’s next for the explosively controversial and popular NFT? Here we share his full and in-depth thoughts on a broad range of issues when it comes to NFTs, the economics behind them, what’s driving their demand, and what might come next as the initial rush starts to fade.

What is your position or thoughts on NFTs generally?

At their core, NFTs are a technology to create artificial scarcity in an online environment. Now that our life moves more and more online, they can be a useful tool to provide incentives, for example to artists. Imagine you find yourself in need of a virtual painting to beautify your virtual office (or your Zoom background). How much would you pay the artist if you knew that the painting could be infinitely replicated? Very little… and this in turn would not give great incentives to the artist.

Interestingly, one of the main selling points of the metaverse is exactly the possibility of escaping scarcity: once an object is created online, IT CAN be infinitely replicated and used by many people, so why should we create artificial limitations? This is where much of the intellectual pushback on the use of NFT comes from.

Finally, it is also worth mentioning that these are the very first days of NFTS and everyone is trying out new applications. Some of them are going to fail for sure… for example, we see now major pushback towards videogame companies using NFTs to monetize their games by selling unique virtual objects. This is not, in my opinion, a good application of the technology: you do not need an NFT to sell in-game items (even unique ones), you can just “code them” into the game without having to use an expensive blockchain. Most games are closed systems, so there is no portability across games, etc.

Where do you see the NFT space in the next one, five, then 10 years?

The long-term development (let’s say 10 years) is, in my opinion, tied to the development of AR/VR technology. Online goods, and their property rights, become more relevant the more we can interact with them in our daily life. If I had to make a wild guess (not a serious prediction…) I would say that the single most relevant event for the long-term development of NFTs will be the release of the Apple AR/VR goggles next year (and all the disruption that will follow). 

In the shorter run (one to three years) I see a period of clarification and stabilization with the emergence of the successful use-cases and the disappearance of many bad ones. If you want a reference point, few years ago every major stock market was looking at blockchain as a possible tool to record transactions. All those efforts have largely disappeared as people started experimenting and realized that running a true decentralized system is both slow and expensive (compared to a traditional centralized clearing system). 

In the same way, today, we see NFTs used to sell collectibles, artwork, and concert tickets…

Do you think NFTs are in an economic/financial bubble?

The textbook definition of a financial bubble is when it is impossible to reconcile the market price with the fundamental value of an asset. Here the problem is that many people do not really understand what the “asset” is or how it can be used.  I think many buyers now are not aware of the specific nature of the rights that they acquire when they buy and NFT. Many others do not know how to use the virtual object they have acquired. 

More than “bubble” I would talk about a “fad”. In the sense that people are buying NFTs (especially of the “collectible” kind) without any rational estimation of their fundamental value.

Would this bubble be all NFT projects, or only some? What would cause the bubble to burst?

Funnily enough I am less worried about big ticket items, such as Beeple’s electronic painting or Tarantino pages from his original scripts, than about all the “rabble” at the lower end of the market. Beeple’s NFT is basically a world famous electronic art installation and Tarantino’s scripts are a piece of cinema history memorabilia. We know what these “things” are, we have been buying and selling them for a long time. Prices can fluctuate, but we know what are the value drivers. 

At the other end of the market we have a myriad of NFTs based on well-known memes, randomly generated images and virtual objects tied to a specific online environment (game or platform). Here your guess is as good as mine. I have no clue where the value of these tokens comes from…

If you ask me what could “burst the bubble”, I would answer that I do not see a “bursting” in the traditional sense. Bitcoin has repeatedly lost more than 40 per cent from its previous high, and the market has so-far recovered. For these memetic assets, the interest of the public seems to be pretty resilient with respect to a drastic drop in price. This is especially true for NFTs where we are looking at a multitude of “non fungible” assets, so you will never have to deal with a “crashing” of a traded market price. Some tokens will lose value, other will go up… 

What could be more concerning is a change in the media narrative due to a “scandal”. By scandal I mean the exposure of a big “pump and dump” operation created to capitalize on the fad, or of a money laundering ring based on the use of NFTs. Since we are in the FAD phase where most of the demand is motivated by some irrational Fear Of Missing Out (FOMO), a change in narrative could pull the rug from under the feet of the long tail of the market populated by small-ticket items of unknown origin.

Some say NFTs are “worthless”, what would an NFT need to provide to have “worth”? For example, some NFTs provide the owner with real world benefits or products, is that enough?

If we focus on collectible NFTs we can see them in relation to a painting. When you buy a painting you have the so-called “aesthetic dividend” (the pleasure to look at the painting in your home, and the bragging rights from showing it to your friends) and you have the re-sale value. The same applies for an NFT. Do you derive any pleasure by showing your token in some sort of virtual environment (being it an electronic frame hanging from a real wall or your Zoom background or Virtual office)? This is why I think that the adoption of AR/VR will be the main value driver of NFT value in the long term…  

As per the resale value, the issue is how many people share your same appreciation for this token, and here is why I am not concerned about the re-sale value of a Tarantino NFT, but I am concerned by a NFT based on some random meme that has not stood the test of time yet. Better memes are born every day, and the old ones may be forgotten quickly.

What would your suggestion be to someone who is the owner of an NFT?

First of all I would ask them if they understand what they have bought. Have they read the small print of how the specific smart contract works?  Second I would ask if they have any use in mind for the token, if they can derive any “pleasure” from it, for example by “hanging it on a wall” (physically or metaphorically). If the answer to either of these questions is no, I would suggest to start quietly exploring the market and see if they can offload the token asap.

What’s the one, or most important, thing NFT projects should do to “turn their reputation around”? Is this even possible?

Weirdly enough, I do not think that NFTs as  a whole need to be rehabilitated. Investors need to understand that “NFT” is just a technology and does not define the nature of the object itself, in the same way a wooden frame does not define a painting. It would be crazy to say that all paintings with a wooden frame are good, or bad, or a reasonable investment at a given price…

What hopefully we will observe is the emergence of the Sotheby’s and Christie’s of the NFT markets: well recognised players who stake their reputation (and business model) on certifying the quality of an NFT (authenticity, “cleanliness” of the smart contract, respect of some standard features, etc.).

I understand some may see this as antithetic to the ethos of a decentralized system, but it seems to me to be the shortest path to the creation of a trustworthy environment.