The first crypto tokens that I can recall, going back to my days as a futurist in the early 2010s, is Bitcoin. What made Bitcoin special is that it was designed to be fungible. That is, each BTC is designed for the tokens to be interchangeable with ease — to hold the same unit of value, if you will.

Now you don’t have to be a futurist from way back to fully appreciate what makes these tokens special. On its own, Bitcoin created a revolution. Couple that with the world-domination of the Internet, and you have a bonafide dual revolution. Which brings me to the “non-fungible” token, a special type of cryptographic token that represents something unique (i.e. NFTs are not interchangeable).

The Psychology of Collecting

If you’re reading this, chances are that you’ve put some time already into the crypto space, to understand its features and intricacies. Given that, the psychology of collecting likely falls in line with your interest in this space, something we’ll explore while looking into the motivating factors behind why people devote great amounts of time, money, and energy to certain things.

Most collectors put money into collectibles that are rare and that have a deemed value for either a nice ROI or the appeal of scarcity. Real-world items like art, classic cars, coins (yes, the non-crypto kind), comics, jewelry, wine — I could come up with countless other examples. There are only so many available to own, which drives a perceived value.

Non-Fungibility Is Destiny

Like ERC20, ERC721 sets forth a standard set of attributes and functions in the form of a smart contract that must be met in order to be managed, owned, and traded.

The code that lays out the requirements for ERC-721

Similar to traditional collectibles, the value of a digital collectible is in its ability to be distinguished or, as I touched on previously, unique. Digital collectibles are created, identified, and transferred as a unique token, meaning that they can’t be divided. This results in the inability to represent one unique asset entirely. NFTs are crucial to identify as this protocol was established with the ERC721 standard. To summarize, the creation, ownership and identifiers are fully traceable and verifiable so that there only can be one owner of an NFT at any one time. The sale of these tokens can be traced and recorded on an immutable ledger.

A real-world use case of this at work: IBM recently announced a platform that will utilize NFTs, coupled with RFID technology, to monitor car sales. Taking it a step further, this platform may utilize the same technology applied toward auto registration. Taking it even further, and the possibilities seem endless. By tokenizing a real-world asset, you gain the ability of frictionless transfer.

(Crypto) Economics 101

Now here comes the fun part. Let’s dive deeper with an example we all can enjoy: alcohol, namely wine.

The story is one of legend. In the spring of 1976, just before the bicentennial of the American revolution, a renowned British wine seller gathered nine French wine experts for “The Judgment of Paris,” a blind tasting event that dramatically changed the perception — and demand — for wines thereafter. Pitting unlabeled whites and reds from California and France against each other, the unexpected, previously unheralded victor emerged: California.

Bottles of the two triumphant vintages, 1973 Chateau Montelena chardonnay and 1973 Stag’s Leap Wine Cellars cabernet sauvignon, now held in the Smithsonian collections

In the aftermath of this event came a surge in the popularity — and price — of California wines. Take, for example, if a vineyard produces 8,200 bottles of wine each year and then is named the number one wine in the world. Boom. Suddenly the world wants to own a bottle of it; however, only 8,200 bottles are available, right? Supply and demand kicks into overdrive, and the finite quantity gets bought quickly and becomes very scarce. The per-bottle price goes from $50 to $500 to $5,000 to $50,000 (or more)…well, you get the picture. The takeaway is that the vineyard can produce only a limited number of bottles of this particular wine, which people are willing to pay hundreds or thousands of dollars for because now they believe that, as the number of bottles available becomes more scarce, the price of it will rise.

Unlike our wine example, with crypto there can be an unlimited number of replications and no way to tell if the replication is the first, second or millionth — i.e. no way to certify it. Now you’ll see why this next part is vital.