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NFTs will (probably) be back
People like collecting stuff.
NFTs are really the third use that people have found for blockchain technology. The first one was illicit value transfers; Bitcoin and other cryptocurrencies may not be a very good form of money in general, but they make it easier to commit cybercrimes and to evade nations’ capital controls. The second one was DAOs, which at least in theory allow people to form organizations without paying the overhead of hiring lawyers (though as far as I can tell this doesn’t quite work yet). NFTs represent yet another thing you can do with blockchains — you can assign and transfer ownership of a digital collectible.
Not legal ownership, mind you. If I use a copyrighted image without permission I can be fined; if I refuse to pay the fine, people with guns will come and jail me. If I right-click on a non-copyrighted NFT image and use it, the most the NFT’s “owner” can do is to try to get a bunch of people to yell at me disapprovingly. But NFTs at least give some people a sense of ownership.
In recent months, the NFT space has experienced a major bust. NFT prices are down even compared to the rest of crypto, which itself is down by a very hefty amount. There are rumors that the number of people using OpenSea, the main NFT marketplace, has plateaued. Axie Infinity, a video game where you collect NFTs, got hacked by North Korea for $620 million — possibly the biggest heist in human history. Bored Ape Yacht Club, the most popular series of NFT collectibles, has had some major stumbles as well. And so on. In fact, there’s at least one entire website devoted to fiascos in the NFT and crypto space.
This underscores the fact that it is a very unwise idea to invest your life’s savings into NFTs. The space is absolutely chock-full of scams, Ponzi schemes, pump-and-dumps, and products of dubious value being supported by hype and nonsense. I don’t own any NFTs, and I wouldn’t blame you if you avoided the market entirely. I certainly wouldn’t want to end up like the guy described in this Daily Beast story:
[A] 38-year-old registered named Lauzrus Esteban [said] he lost his entire life savings this month in the Luna crash…Still, he said, he’s not about to take his money out of the market.
“I’ve already decided that whatever I have there I'm willing to lose, because I’ve been hearing you only make real money during the bear markets,” he said. “So I’m risking it. I’m risking everything.”
He added: “I still think it’s gonna be the future.”
But that said, I think it’s easily possible to go too far in the other direction, and to claim that the entire concept of NFTs is itself a scam or a Ponzi. I think that there is a place for NFTs in the world, and that the space will probably bounce back eventually.
People like collecting stuff
I was never much of a collector myself, but lots of people just love collecting things. Take postage stamps, for example. The stamp collecting market is estimated at somewhere in the range of $10 billion — much smaller than the NFT market, but still sizeable. In the past, some tiny countries like Lichtenstein, Monaco, and San Marino have even raised a significant amount of revenue from selling collectible stamps. The sports card market is somewhere in the same range. And of course the art market dwarfs them all.
Art, of course, is often intrinsically nice to look at. But the pleasure you get from looking at a thing is often only a very small part of the value of a collectible. A perfect replica of the Mona Lisa looks every bit as good as the original, but will sell for far less. The value of the original comes from its unique provenance, and from the owner’s knowledge that they have exclusive ownership of something rare. This is even more true of stamps and sports cards, where the value of the collectible depends on its perfect, untrammeled condition.
In other words, people are willing to pay a lot for the fun they derive from being the exclusive owner of something rare and desired. That’s circular, of course — collector communities collectively decide on which items they revere the most. But the actual thing being consumed is the stream of pleasurable emotion the owner gets from the knowledge that they have something other people would like to have but don’t.
It’s more difficult to create rarity for digital objects than for physical ones. Rare stamps and baseball cards are nigh-impossible to forge, but information is easy to copy. You can get an organization — say, a company — to assign ownership of a digital collectible to you, but you always have to wonder if at some point the organization will just decide to clone your rare software object. Maybe there are laws telling them not to do this, but your ownership is always at the mercy of an outside organization.
NFTs sort of solve this problem. If you own the NFT of a jpeg, anyone can just copy and paste or screenshot the picture itself. In fact, the picture at the top of this post is an NFT picture I just right-clicked and saved off of Twitter. The thing that can’t be copied (at least, if you have good cybersecurity) is the digital title to that object. It’s just a notional connection.
But people value notional connections! If you own a rare piece of art, and you display it in public for free so that other people can constantly walk in and look at it, it’s essentially like owning an NFT of a picture that everyone copies and shares around.
Except, of course, for one big difference. If you own a piece of art, you have the option of withdrawing it from public view. If you own a rare stamp or baseball card, you have the option of locking it in a box in your basement. But you can never stop people from copying and sharing your NFT picture, once someone has copied and shared it once. In fact, you probably couldn’t even stop someone from making their own NFT linked to the same picture as yours, except by leveraging the court of public opinion to shame that person. NFTs are property without enforcement.
But for many people, that will be enough. They will still derive pleasure from the sense of ownership that NFTs confer.
And as collectibles, NFTs have a natural market. Even though cryptocurrencies have taken a beating in the markets lately, there’s still over a trillion dollars of crypto wealth out there, largely concentrated in the hands of very rich people who might as well plop down a couple million on some fun crypto-related stuff:
A piece of the fun
Collecting digital stamps and baseball cards is one thing, but NFT people realized long ago that they could do better if they had some appeal beyond simple collection. Thus, NFT creators sought to use NFTs as access cards to some exclusive and desirable realm — an online community, some piece of “digital land”, etc. If you want past the gates, you have to buy the NFT.
The impetus for this probably comes from the way that the internet has flattened the social landscape. In 1990 you could create subcultures that were very hard for outsiders to penetrate — if you were part of, say, the grindcore scene, you knew tons about grindcore music and its attendant subculture than most people. But in the the age of the internet, it’s far harder to keep anything about your subculture secret. And if the community itself is online, it’s very hard to keep random people from walking up and joining the club. Social exclusivity is valuable to lots of people, and it’s far harder than it used to be.
So naturally people are trying to use NFTs as scarce access cards to create exclusive online spaces. The problem is that you don’t really need a blockchain to do this at all. Blockchains are about distributed consensus, and to make an exclusive club you only really need the consensus of the club’s existing members.
Sure, you can use NFTs to sell admission to the highest bidder. But you could do that anyway, without a blockchain. And if money is the only criterion for admission, then you’re just making a club of the richest people, rather than a club based on shared interests. In fact, our world already has a club like that, and it’s called “rich people”.
These factors, I believe, are why organizations trying to use NFTs to sell access to digital clubs and environments haven’t done well so far. Blockchains don’t make social exclusivity more fun; if anything, they make it less fun.
But the search for ways to sell NFTs as access cards to fun-land will continue, and “membership in a club” isn’t the only possible model here. One alternative model is being pursued by a Japanese group Shinsei Galverse.
I had dinner with the Shinsei Galverse people the other day, here in Tokyo, and they explained their vision. They’ve created a series of 8888 algorithmically generated female characters, using combinations of visual traits designed by a professional artist and names and backstories created by the Galverse folks themselves. Each one of these characters has an NFT assigned to it, so notional ownership rights to those characters can be bought and sold on markets like OpenSea.
Now comes the fun part — the Galverse people are trying to make an anime. They’re attempting to secure a deal with Toei — the Japanese animation studio that gave the world Sailor Moon, Dragon Ball, and One Piece — to make a series based on the most popular Galverse characters. This will almost certainly be a great source of pleasure and excitement to the people who own the NFTs for the characters featured on the show.
Making TV shows to sell products is hardly new; the whole Transformers media empire was created to sell toys. NFTs just present a new wrinkle — by owning the NFT of a Galverse character, you own a special feeling of unique connection to that character. And because not even the Galverse company itself can revoke your NFT ownership, that sense of connection is something that no one can ever make you give up. For superfans, that’s likely to be extremely valuable. And what’s valuable to superfans, and what might in the future be valuable to superfans, will also probably be valuable to collectors and investors.
That doesn’t automatically mean you get to decide what happens to that character in the show — owning the NFT doesn’t mean owning the copyright. But maybe you do get some input! Maybe the Galverse people can prevail on Toei to let NFT holders give some creative input to the show writers! The Galverse people have been quite explicit that they intend to make the anime a participatory product. Their slogan is “WAGMAA” — “We Are Gonna Make An Anime”, an iteration on the popular crypto slogan WAGMI (We Are Gonna Make It).
(I should mention that Galverse also has a bit of a social/political angle to it. Whereas U.S.-centric NFT series like Bored Ape Yacht Club have had a decidedly bro-y tinge, Galverse is being set up by its creators as an explicitly feminist project, reclaiming 90s-style girl-themed anime from the old men in charge of corporate Japan. This has resulted in a bit of GamerGate-style harassment, but it suggests that NFTs’ appeal might ultimately be broadened beyond the traditional crypto-enthusiast demographics.)
In other words, Galverse has figured out a possible new method to use NFTs as tickets to new realms of fun. We’ll see if it works. But it shows that the potential applications of NFTs to the entertainment industry were not exhausted in the initial rush.
Security is the biggest problem
So this is the case for the future value of the NFT market — blockchains present a new way to create a relationship between a collector and a digital collectible, and that’s likely to have value. But there’s a huge problem the NFT space has to solve before it can really take off, and that’s cybersecurity.
NFTs, like cryptocurrency, get stolen a lot. Sometimes this is due to hacks like the Axie Infinity heist. Sometimes it’s due to algorithmic exploits of DAOs. And sometimes it’s due to good old phishing scams, such as when Seth Green — who, similarly to Galverse, was going to make an animated series with the Bored Ape characters whose NFTs he owned — got his apes stolen. In fact, “all my apes gone” is by now a classic internet joke.
This is obviously a problem that has to be solved in order for the NFT space to have any real future. No one would collect stamps or baseball cards if they had to keep them on the porch where anyone could steal them. The crypto world in general has skimped on cybersecurity, and the result has been utterly predictable. If I were investing in crypto companies, I think I’d probably focus on cybersecurity solutions.