[Video] Alpha Chats: Non-Fungible Tokens

On Wednesday, June 9, James Milne, Head of Product at AlphaCert sat down with Stephen Huppert, Independent Consultant and Advisor, to discuss the emerging and popular trend of non-fungible tokens.

In this episode, James and Stephen chat on what a non-fungible token is, its purpose, its environmental impact and its investment potential.

James Milne:

Hi, everybody. I’m James Milne, the Head of Product for AlphaCert Labs. I’m here with Stephen Huppert, an industry thought leader, and today we’re going to be discussing NFTs, or non-fungible tokens.

What are non-fungible tokens?

James Milne:

It’s a new application of technology built on blockchains, and it really is allowing users to own a piece of digital art or a digital asset and attach a price to that and sell that and trade that with others for profit, or to have the ownership of that digital asset. It’s something that’s been entering into popularity on the back of Bitcoin and other blockchain technologies, and it’s a really interesting space, which we’re going to discuss today.

James Milne:

So Stephen, NFTs, what do you think about these new digital assets that are taking over the internet?

Stephen Huppert:

Morning, James. Thank you. Yes, it’s been fascinating. Every time any of the emerging technologies end up in the mainstream press, it’s always fascinating to have a look at and see what the hype is about, but also see what’s behind it and what we can learn from it. And so for people that aren’t aware, as James said, non-fungible tokens, and fungible is about whether it can be interchanged or not.

Stephen Huppert:

So if I have a $20 note and you have a $20 note, they’re interchangeable, it doesn’t matter which $20 note I use when I want to go and do my shopping. Similarly, with Bitcoin, Bitcoin or cryptocurrencies on the blockchain are fungible, whereas the NFT is not fungible, they’re not interchangeable. And they can get attached, as James said, too many sorts of digital assets. And when we’re thinking about digital assets, we’ve got everything from digital pictures right through to tweets. And one of the interesting applications is Jack Dorsey, the founder of Twitter, an NFT was connected to his first tweet ever, and that’s been sold for nearly $3 million.

How are non-fungible tokens used?

James Milne:

And we’re seeing some big numbers, aren’t we? I know that the artist, Beeple, sold an artwork for $69 million. So obviously an established artist and a credible artist in his own right, but by attaching an NFT to a digital artwork, some big numbers are being generated. And I think that’s why it’s got some attention in the mainstream media as well recently.

Stephen Huppert:

Absolutely, and even some of the colourful names of some of these digital artists like, Beeple. And to put it in some sort of perspective, it was auctioned off by Christies, which is a big established auction house. As you know, it sold for $69 million. And a bit of context, one of Monet’s paintings was sold in 2014 for $15 million. So here we’ve got Beeple, a bit of art being sold for significantly more than Monet, and everyone has obviously heard of Monet.

Stephen Huppert:

So it’s fascinating, and you know, you can go online and have a look at Beeple’s collage. It’s called the First 5000 Days, and it’s just 5,000 little images all put together in a big collage. And I think the interesting thing is you can download that image, but you just don’t own the NFT that goes along with it.

How sustainable are non-fungible tokens?

James Milne:

Looking at the technology that underpins the digital assets here and the NFTs, our last chat was about climate change legislation in New Zealand and Australia. Similarly, to proof of work in the cryptocurrency space with things like blockchain is the amount of electricity and those types of things that are coming into the considerations when you’re purchasing these digital assets. Do you know anything about the background there, around how these things are put together and the amount of electricity for instance, that they might be using?

Stephen Huppert:

Yep. And given that NFTs use the same blockchain technologies as cryptos and other things, they have the same sort of energy-hungry attributes and end up using a lot of electricity. But what’s interesting is that there are, you know, if you look at some of the marketplaces and galleries that have been set up and some of the communities around NFTs, there are people looking at mitigating this issue, but they do generate a lot of greenhouse gas emissions.

Stephen Huppert:

In fact, there’s even some documentation of artists that have decided not to sell NFTs once they found out about this. So a lot of people aren’t aware of the huge energy usage of NFTs, and so some artists, when they become aware of the effects on climate change, they’ve actually decided not to go down the NFT route.

Are non-fungible tokens a worthwhile investment?

James Milne:

Right. And, Stephen, what do you think? Is it just like any other investment? Is it like owning a piece of physical art?

Stephen Huppert:

Look, everything’s investible. You know, you can go on eBay and buy the old Pez dispensers for hundreds of thousands of dollars. So yes, anything’s investible, anything you can make a market these days. And, you know, the internet had a big impact on markets and collectables, and I think what we’re seeing now is blockchain being used. And any emerging technology tends to get used in all sorts of imaginative ways. And we’re seeing that with NFTs, where gaming companies are looking at how they can exploit NFT technology inside their games.

Stephen Huppert:

We’re seeing people talking about investing in NFTs as an investment category. And there’s more and more talk about digital assets, whether it’s NFTs, or just more generally from an investment custody, investment operations point of view.

James Milne:

And of course, we saw Goldman Sachs come out just recently and say cryptocurrency itself is another asset class. They obviously had a lot of pressure from their investors or their customers, to have exposure to that asset class. And so they’ve come out and said we endorse cryptocurrency as its own asset class.

Stephen Huppert:

That’s right. And there is quite a bit being written here in Australia about people with self-managed super funds using cryptocurrency as an investment. So, I’d imagine it won’t be too long before people are starting to think about NFTs as a legitimate investment inside, whether people are going to wrap them up into ETFs or buy them individually, it will be interesting to see how that develops.

I think the other aspect of it though, like any emerging technology, it’s always important to look past the headlines and what we can learn about it as investment operations professionals and thinking about the impacts. And what fascinates me about it is also that we’re always looking for applications for blockchain. You know, it’s now seven, eight years probably, the hype goes up and down during that time, there have been some commercial applications of blockchain. Mostly, it’s been around cryptocurrencies and the speculation around cryptocurrencies. Now we’ve got the NFTs, we are seeing smart contracts.

How is AlphaCert planning to approach blockchain implementation within investment operations value chains?

Stephen Huppert:

So at AlphaCert, what are you doing in terms of looking into how blockchain can be implemented within the investment operations value chain?

James Milne:

Yeah, it’s a good question, Stephen. So you mentioned the hype cycle. Certainly, I think we’ve come down from the peak of the hype cycle around blockchain, but we did do some R&D work and we have done some R&D work into blockchain. We haven’t seen a practical use case come across our desk, but certainly, we’re prepared for it when it does so. And we can read from a blockchain, we can write to a blockchain, and the applications that we’re looking at are really around those smart contracts potentially on a network such as the Ethereum network, were you might enter into a swap contract or an option contract, based on those smart contract technologies. Nothing on a blockchain of course is disputable, so everything around those smart contracts is locked in and distributed across the ledger.

James Milne:

So, some applications that we can see definitely, but nothing practical that’s come across our desk at this point.

Stephen Huppert:

And it’s interesting to note that NFTs, I think mostly all of them are built on the Ethereum blockchain.

Stephen Huppert:

So, you’ll be ready when super funds and fund managers want to start putting NFTs into their investments?

James Milne:

Yeah, ready and waiting, ready and waiting.

Stephen Huppert:

Terrific.

Non-fungible tokens: a trend to watch

James Milne:

Well, thanks Stephen. I think that’s been a really informative chat. It’s something that’s out there in the mainstream now. People are talking about NFTs and access to these new digital assets, I think, driven by the amounts that are being paid for some of these, there are inequities out there. But yeah, it’s something that we’ll watch and see whether anything comes from our providers, custodian banks, or anybody else around people investing in these new asset classes.

Stephen Huppert:

And we should close off by reminding people that this isn’t investment advice.

James Milne:

Absolutely. Obviously, it goes without saying, we’re just having a discussion around something new, no investment advice given.

James Milne:

Thanks a lot, Stephen. Always great to have you, and we’ll talk to you next time.

Stephen Huppert:

Thanks very much, James.

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