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NFT: an asset that no one bothers to understand in the fear that once they do, they would realize there was nothing to bother about.
Manager M of the (fictional) FISO ( fraud is simply opportunity) corporation: we will be auctioning the first ever fullstop in Kelly Indiana's first ever blog post as an NFT. Bidding starts at five million dollars.
THE NF in the NFT
Here is one proven pathway to wealth. Do not worry, what you have to do is simple: jump on a trend before most people do and cash in later. Simple is, however, not the same as easy. Just ask the venture capitalists whose entire business model is to act as 24/7 detectives for that magic combination of talent, effort, timing, luck, and a groundbreaking business idea. These days, you can scratch that last part; it's no longer necessary.
The problem is it is very hard to tell the beer from the foam until everything has settled down. By the time that’s happened, there aren't any significant gains left on the table. Venture capitalists insure themselves against these possibilities by making many independent bets at once. Ordinary people do not have the capital to hedge themselves like these. But they are still presented with the same dilemma. In the particular case of NFTs, the question is simple: are these unfounded hype or transformative technology.
To start with, it's important to consider what NFTs were created to do. The first clue is in the name: non-fungible. A fungible product is a product or commodity whose units can't be distinguished from other units of the same good or asset. It is perfect exchangeability.
Fungibility can be a good thing. Take a ten dollar note. If my ten dollars aren't perfectly exchangeable with yours, there would soon be a massive problem. In Iraq, after the Gulf war, new banknotes of inferior quality were printed en masse. Although these banknotes carried the same notional value as the older banknotes, they weren’t valued the same way. The old banknotes quickly became a sought-after hedge against rampant inflation, simply because the new banknotes were not perfectly fungible.
Fungibility is one of the biggest reasons the same kind of stuff usually pop up as currencies throughout history: cowries, shells, bank notes, gold, .... All of these things have fungible properties. If money stops being fungible, it stops being money.
However, fungibility can also be a bad thing. There's a case to be made that automation, mechanization, and the gig economy are all a relentless drive towards making labour more and more fungible, such that workers become increasingly exchangeable cogs in the wheel of the economy. There's a direct correlation between how fungible you are as a worker and how much you earn. If everyone else can do your job pretty well, you can only keep it if you are willing to earn very little.
A lot of this hardly mattered anyway because fungibility was quite difficult. We tend to forget that in today's industrialized world where everyone gets the same iphone, the same Samsung tv, the same M&M chocolate without any discernible differences, even though it took several advances in automation, quality control processes, standardized education, and extensively supervised labour conditions, to create a world and an economy of largely fungible physical goods.
With digital assets, it's a different story. They have no mass, no history, no nuance, and no dimensions. They can be copied infinitely and transferred as many times as you want. Digital assets are perfectly fungible. It's a copy and paste world for a reason. Different copies of the same book are perfectly identical, which makes the digital world a perfect breeding ground for piracy. Piracy is nothing more than the realization of the true distribution costs of a particular asset. And that is both good and bad for creators.
Piracy allows the creators of popular content to reach an even much wider audience as more people sign up when it's cheaper or free. And then, the benefits of that wide audience can be converted into monetary advantages. As a result, piracy helps the very best ( who are ironically often the worst critics) but everyone else on the creative pecking order ends up worse.
What does all of this have to do with NFTs? Well, an NFT is a non replicable, non alterable, token that establishes conclusive proof of ownership. It's a digital ID card of a particular asset. The asset need not even be digital. They can be physical assets as well such as real estate. The good news is thanks to the blockchain, no other person can acquire comprehensive control and rewrite the rules in their favour, which often happens with physical deeds of ownership.
NFTs are not cryptocurrencies, contrary to certain beliefs. You can't exchange one for the other and you cannot spend them. People have taken to calling then digital collectibles but they are not collectibles either. A collectible cannot establish ownership. Since NFTs have been used excessively for digital art, they have acquired a reputation as collectibles. But we must deal with a concept within its full implications rather than as it is currently used.
An NFT is simply:
a token stored as a piece of code, or usually just the link to the NFT,
on a superior, unalterable ledger aka the blockchain
that cannot be exchanged with other tokens aka non fungible.
NFTs are not set in stone. You can create tons of NFTs over the same piece of content or asset, thereby devaluing it. And your NFT doesn’t stop anyone from creating theirs over the same asset. The difference is buyers will know which NFT was created by which person.
In other words, an NFT is a digital ID card. So, why is everyone getting this excited. The only time anyone should be allowed to get excited over an ID card should be at a decent matriculation ceremony. What's really different about this new technology? And who actually benefits?
People often react to technological advance with an amusing schizophrenia: it's either the promised messiah that will fundamentally change society or it is an overhyped waste of time and effort.
If it gets through that stage, it becomes our irrevocable step towards future apocalypse. And yet, our convictions about the future are rarely rewarded with being right. So, I want to take a different tack: what's good about this new exciting technology, what's dangerous, and what is the ultimate reason behind their continuing rise.
THE GOOD
Well, the first and most important benefit is NFTs allow creators to earn money they couldn't otherwise earn before. Because of the costless and easy replicability of digital assets, it has always been very difficult to earn a living off it. Those who do earn their money primarily through other ways: endorsements, affiliate marketing, simply refusing to shut up. However, as of the moment, NFTs are not recognized under copyright law and confer no special legal benefits. Expect that to change as more and more people push for more comprehensive protection of their digital assets.
Buying anything is easy. Certifying that what you have been sold deserves your money is the difficult part. Under most legislation, the original owner can reclaim ownership if a thief sells property to an unsuspecting third party. So, if I can always be sure of ownership, I have an easier time committing money to the transaction. As NFT technology improves and adoption accelerates, trade in all kinds of assets will boom as a consequence.
THE BAD
First off, there are a few caveats to mention here. NFTs are currently difficult and expensive to create. I do not count this as a demerit. All technology starts out difficult and expensive before accelerating. Mobile phones in the nineties were bricks that sometimes allowed you to talk to someone else. And they cost quite a lot of money. These days, they are one of the most impressive technologies around.
Because technology follows exponential S-curves, progress crawls and then it flies. Improvements can be imperceptible before becoming quite drastic.
The real problems with NFTs, as with everything else, are in the backseat behind the scenes:
It provides strong incentives for parts of the internet to be accessible only to the wealthy. The internet has produced significant problems but it's also a miracle: never in human history have so many people been allowed to create, consume, comment, and of course, curse, with such ease and satisfaction. A big part of that is because the internet is mostly free. That could change with NFTs. The ridiculous amounts of money spent on digital art this year make it merely capitalism's latest Veblen goods. But soon enough, ridiculous amounts of money will begin to be spent on other kinds of digital content. Once digital copyright goes into overdrive, we may have significant swathes of the online world cut off from the general population.
Most creators aren't winning but the platforms are. Here's the secret about anything at all: it's far better to serve the crowd than to join it. Rather than join the rioting crowd; sell a megaphone instead. Rather than apply for the next mortgage; sell the cement in the housing boom. And in this case, don't create the next NFT; create the next NFT platform.
NFT platforms have been making quite a lot of money. To put a number to the quite a lot, the combined market capitalization of NFT platforms is 22 billion dollars. David Finkler and Alex Atallah, the founders of Opensea trading platform, are merely waiting a few months to be billionaires themselves. NFT platforms need the NFT hype because money comes from sales fees, transaction fees, and large sums paid upfront to create an account on these platforms. And NFT hype means more sales, more transactions, and more accounts
Are NFTs Symptoms of a Larger Bubble
In the seventeenth-century, an exquisitely beautiful flower swept through the Netherlands. They were called tulips and they were soon everywhere. At some point in Holland, a viceroy Tulip was selling for five times the price of an average house.
Tulipmania was the world's first recorded asset bubble. We've since gone on to do many more irrational things. But I’m far more concerned with the similarities between Tulipmania and the present-day festivals of excitement over NFTs:
a.) Tulips were new to Holland. NFTs are similarly new today. Bubbles often develop over new assets because most people are both ignorant over what is new and excited about it. For enterprising swindlers, that's a perfect combination. The internet bubble of the late nineties began over what was then a relatively exotic technology. A big contributor to the 2008 meltdown was new and exotic financial instruments that merely repackaged dangerous debt.
2.) The rich and famous began the frenzy. The earliest and most active participants in Tulipmania were the wealthiest dutch people. When Gregor Macgregor invented the fictional country of Poyais and sold shares of a fictional company incorporated to manage Poyais' resources, he started with the royalty and nobility. The South Sea bubble also received a ton of help from the endorsements of Isaac Newton and King George the First. The directors bribed a large number of eminent politicians as well.
Getting the rich and famous to sign up first does wonders. First off, most bubbles have an aspirational element: there’s usually more social mobility afoot and a greater chance to emulate the rich and famous.
People also often wrongly assume that since the rich and famous are already, you guessed it, rich and famous, they have no incentives to cheat. But nobody likes more money more than rich people. Add in the Halo Effect, our tendency to assume that the wealthy are automatically better and smarter people, and we have a winner.
The extravagant sale of Jack Dorsey's first tweet and the 69 million dollar sale of a digital art NFT has done pretty much the same thing for the technology.
3.) The laws changed. The Dutch were the first to come up with modern futures contracts, which are transactions to buy and sell a commodity for a fixed price at a later date. Then futures contracts got changed by the dutch government to options contracts. If we have an agreement under which you buy an asset at a million dollars on a due date, you'd do all your due diligence before signing up. If, instead, you now had the chance to forfeit that price if it was not to your liking and simply pay a fee for my trouble, then you have a layer of insurance.
Almost all bubbles need legal and political sanction either to make them desirable or to make them viable. The next step for NFT platforms is in acquiring thick blankets of legal protection and framing the technology as a giant leap for copyright protection and the economy.
4.) People have more money. Seventeenth-century Holland was the richest place on earth. The Dutch East India company had been making incredible amounts of profit from their activities in the spices trade, silk trade, and slave trade. There was simply much more money around in Holland than anywhere else in Europe at the time.
Right now, we exist in a world flush with capital courtesy of a pandemic that necessitated decreased spending, government handouts of free cash, and negative interest rates to spur a global economy back into first gear. Money has to go somewhere. And everyone fancies themselves a good judge of opportunity. When so much capital coincides with a new, exciting asset, that can double as a status symbol, the same things tend to happen. In human history, the cast and setting keep changing, but the story stays the same.
5.) People are buying at exorbitant prices in the hope that someone would pay for even more. We buy things for a few reasons: for our basic needs, for our secondary needs, or for worthless stuff that's useful only as a message that we could afford the worthless stuff. We've always done all three. But in the last few hundred years, we began a lot of buying for a fourth reason: speculation.
It's not a mistake that the first asset bubble began soon after the Netherlands created the first stock market
It's not a mistake that the two worst recessions in history, the 1929 great depression and the 2008 global meltdown, occured at a time when the stock market in the USA and abroad were at incredible highs.
It's not a mistake that asset bubbles tend to develop in industries with ironically the most sophisticated financial sectors.
A stock market is nothing more than a giant factory of speculation. Some of that speculation can be well founded. Most of it is not. But it boils down to the same thing: hope that for some reason, sensible or not, someone else will be willing to pay more for it, regardless of whether you eventually choose to sell.
The stupendous rise of NFTs coincide with incredible gains for not just these companies but for the stock markets at large. Nobody is making or buying digital art to bask in its aesthetic splendidness. They are doing so because they can afford to or because they figure someone else can.
The problem is in the loop: if you can only afford to take a decision because you can pass on the costs to someone else who can only do so because he can pass on the costs to yet another person, it takes only one link for that chain to break. Once a few people in that loop can't play the musical chairs, no one else can either. A bubble makes everyone's fates conditionally dependent on everyone else's.
Taken together, all of these reasons can be cited for or against NFTs depending on your own views about the matter; arguments are driven by preference rather than logic. But these reasons already exist in bits and fragments across the web. The ultimate reason NFTs are attracting incredible levels of hype and adoption ultimately has nothing to do with NFTs. It’s something else at work entirely.
One Reason to Bind Them All and One Reason to Rule Them
Here is an obvious fact: the amount of time people are spending online keeps going up.
In a recent study performed on thousands of RescueTime users, it was reported that people spent over three hours daily on their phones.
These are extremely conservative estimates because the study suffers from self-sampling bias. People who have committed to a productivity application will have much lower numbers than average.
Other studies rely on self-reporting and on direct observation, both of which are unlikely to provide any reasonable estimates of how much time people spend online. Regardless, that amount of time is a lot and it's rising. Digital media consumption, social media usage, online trading, … all of these metrics keep moving upwards with no likelihood of change.
In addition, even though the metaverse is much closer to PR right now than it is to a legitimate business, eventually, some version if it will exist. And that version, an entire videogame universe, will need lots and lots of digital assets. If you are spending most of your life looking at a screen, and most of us are, or as an avatar in a digital universe, and many of us will, you will want digital stuff and you will want to be sure once they are purchased, that they are legitimately yours. One may say the real business of a metaverse is the company could get to own and sell/rent every asset in that world from scratch.
This is the real appeal of NFTs: they can become certificates of ownership in an increasingly digital world. If you know any other kind of world we live in, please don't hesitate to raise your hand to defend a wrong answer.
Are NFTs The Right Answer
I'm not sure. Insofar as it is a journey in a right direction, it is less of a journey and more of a dance: a lot of effort and energy to end up in mostly the same place. As with the Bitcoin/blockchain dichotomy, excitement should really over what NFTs are composed of.
It is an interesting piece of code called smart contracts. Non-smart contracts, the kind we sign when someone wants to screw us or more fortunately, when we want to do the screwing, are like talking with a frustrated woman: you don't understand a word but you had better click or say I agree. They can also be very expensive. Lawyers get paid to prepare them, notaries get paid to notarize them, and courts all over the world get paid to take care of the problems when they inevitably cause disputes.
Smart contracts could eliminate all that. They are decentralized, so no intermediaries; autonomous, so no cheating; and self-executable, so no mistrust. It is a blockchain protocol that executes itself as long as certain terms and conditions are met. We may or may not keep buying art that look like badly edited pictures of japanese videogame characters, but smart contracts are here to stay. And they might do the job of, you know, actually changing the world.