Beyond Right-Click-Save
Welcome back everyone!
It is time to talk about NFTs (Non-fungible Tokens), the “digital collectibles” of the crypto world. NFTs are special because they allow us to assign ownership rights to digital objects. Since NFTs are not interchangeable, they can also trigger an endowment effect in their holders, making them value the collectibles that they own higher than an unbiased observer would.
As an example, in 2021, someone rejected a 9.5 mn USD (the USD value of 2,500 ETH at the time) offer for their crypto-punk NFT because, in their words “[o]ver [the] past 6 months I have used [cryptopunk] 6046 as my identity and have built up a significant brand around it.”[note the word “identity”, its use is not a coincidence].
While you are reading in disbelief, consider how many of your friends [or was it you personally?] have ever invested in meme-coins [yes, the ones with the funny dogs], and are still holding them. Then start thinking of NFTs as meme-coins on steroids. Now, I would certainly sell all my NFTs for a lot less than 9.5mn USD but I am still more attached to them than is financially prudent.
While DeFi protocols are planning to disrupt the world of finance, NFTs may well transform every creative industry out there. What’s more, they are in the process of crossing the chasm from being a niche offering to becoming mainstream and will likely get there before DeFi.
Why do I think so? Because a growing number of brands are experimenting with NFTs. If you haven’t experienced this and can’t think of relevant examples, have a look at this list, and see if you recognise any of the names. Chances are you do.
Does this mean NFTs will have staying power, or are they just a temporary fad?
This isn’t NFTs’ first rodeo
Time will tell, but the signs are positive. NFTs have attracted a new group of users to blockchains. They have also always had high attention-grabbing power, even among crypto-natives. CryptoKitties [think decentralised tamagotchis] was the first dapp (decentralsied application) to become popular on Ethereum. At the height of its popularity it clogged up the Etherum network due to the exceptionally high user demand to play with these guys:
An example CryptoKitty NFT
In the CryptoKitties game, NFTs are game assets. In other cases, they can be fancy digital pictures. NFTs are extremely versatile!
Modern NFTs
As an example, here is my NFT twitter avatar:
Source: My NFT from OnJuno Maxi Collection
It is hosted in my wallet on a side-chain of Ethereum, called Polygon. I received it because I joined a crypto bank called OnJuno [this is an example, not a promo or endorsement]. So if you think about it, this NFT is a:
piece of art
PfP (profile picture) avatar
customer retention tool for the neobank
tradable asset
bright red flag to competitive crypto banks to target me with promotions
Point five illustrates that anyone can interact with as well as build on top of existing blockchain dapps and assets, in a friendly and adversarial manner. The crypto space is a Wild West of permission-less innovation.
But but but, …what are NFTs?
A non-fungible token
So you are still not quite sure what NFTs are? I don’t blame you.
Generally speaking, they are meant to signify ownership of a particular digital object. Still, this is quite broad, so let’s attempt a more formal definition. Normal crypto tokens such as BTC and ETH are interchangeable among one another (1 BTC = 1 BTC, 1 ETH = 1 ETH). In contrast, NFTs are “non-fungible” unique tokens which are easily distinguished from one another, by their particular characteristics and identification number.
They are often generated using the ERC-721 token standard as part of digital collections. However, they can also be created as unique pieces, not aligned with any particular collection.
NFTs help artists “secure the bag”
A major benefit of using NFTs for artists is that they can set a royalty percentage that they receive any time the NFT is re-sold. So they do not just get compensated when they make their initial NFT sale but also earn income from any recurring sales. In practice, NFT holders can find ways around paying royalties but these often also increase the likelihood that they get scammed during the sale.
The existence of resale royalties helps align incentives between creators and consumers. It incentives artists to work to continue accruing value to their original collections and provide the NFT holders with benefits which go beyond the ownership of the digital object. Creators can run NFT holder events, give holders the ability to sell merchandise based on the NFTs, provide existing holders with discounts to future digital creations, pursue brand collaborations that can also benefit holders, and so on.
Once they have “minted” [initially purchased] their NFTs, users can trade them among one another or on specialised exchanges such as OpenSea and LooksRare. Crucially, NFT exchanges do not control NFT assets, as these are hosted on the owner’s crypto wallet.
What have NFTs been used for so far?
Let’s look at some examples of what has already been done in the space.
Digital Art: Notable collections are Fidenzas, Ringers, Chromie Squiggles, Autoglyphs
Profile Pictures (PFPs): Crypto Punks, Bored Apes Yacht Club(BAYC), Meebits, Doodles, World of Women, mfers, Pudgy Penguins, Crypto Covens
Crypto Game Assets: Crypto Kitties, Axie Infinity, Zed.Run, Stepn
Music NFTs: currently a small but rising use-case. Music NFTs often give holders a royalty revenue share with the artists
Event attendance Badges: Poaps, here is my collection
Crypto Account Usernames: Ethereum Name Service (ENS, I own vaska.eth, which links to my primary public account)
Group membership tokens: e.g. CityDAO NFTs
Discount Coupons/”Physical World” Utility NFTs: OldNavy Magic Dogs NFTs, NFTickets from Europa
A Court Service Token!: In June 2022, an NFT Service Token was airdropped to an anon crypto thief, with the approval of the NY Supreme Court. You can read more about the court case here. [yes, this isn’t a mainstream use case yet, but I couldn’t help myself]
You may have noticed that a lot of the use cases can overlap. Your pfp can also be a game asset. Your digital art NFT can signify your attendance to the ABC event or membership of the XYZ community. It can be a memento of a physical or fully digital experience, or provide you with brand discounts and access to collaborative merchandise.
And yes, if you are an anonymous crypto thief [please consider turning white hat] you can now get served with court papers directly into your crypto wallet. How long until this starts happening to non-digital criminals? The days of having someone chase you to serve you papers physically may be coming to a close…
Yet, despite all this innovation, NFTs have become one of Ethereum’s most controversial creations. How come?
“Everybody” Hates NFTs
Are NFTs “burning the planet”?!
Detractors will often point to energy use concerns. Of course, these [should] apply to Proof of Work blockchains in general, whether or not they support NFTs. But, NFTs are becoming broadly popular, while DeFi is still quite niche [CeFi is not DeFi]. So it makes sense for blockchain sceptics to focus on stopping NFT proliferation among normal “non-crypto” people, as the latest frontier in their broader war on blockchains.
If you are primarily worried about the high energy use of blockchains and how NFTs can legitimise this, then:
consider that Ethereum is in the process of transitioning to a Proof of Stake (PoS) consensus mechanism which solves this issue (described in “The Merge” section in my Ethereum blog) and that many other layer 1 blockchains already use PoS
examine the arguments in favour of using energy to secure blockchains (read “It’s the new price of energy” subsection in my Bitcoin post).
Embrace the backlash
Anti-NFT crusades may seem to suggest the future of NFTs is bleak. The opposite is true. Let’s face it, no-one is going to do an hours-long YouTube video criticising DeFi. And even if they did, millions of people would probably not be keen to watch it. But, does it really surprise you that there is a two-hour YouTube video critical of NFTs, and it has over eight million views?
In a distracted world, attracting attention is a valuable opportunity! And, make no mistake, NFT people know this. One NFT project went so far as to stage a fake anti-NFT protest as part of their brand promotion strategy. Another NFT artist trolled a prominent anti-NFT community (furries) with a provocative art piece urging them to sue him for copyright infringement.
Despite controversies, NFTs are not going anywhere.
On the lasting impression of NFTs
Status signalling
The main “utility” of owning high-end NFTs is status signalling [looking at you, million-dollar BAYC pfps]. You signal that you were “early” in the community and in-the-know for what is fashionable or that you are rich enough to easily afford to buy your way in once an object’s popularity becomes apparent. Paradoxically, status symbols benefit from having low utility [and isn’t this convenient for NFTs!]
NFT’s use in status signalling is perhaps the deepest reason people hate NFTs. They introduce status games in the digital realm. In the “real” world we sometimes interact with people flashing their expensive clothes, bags, watches, sneakers, etc. at us. Thanks to NFTs now we have to also contend with “those insufferable crypto people” having million-dollar profile pictures in their social media profiles too! [at least until the latest crypto crash, when they will only be worth a quarter million, yay!].
NFTs will rule the high-end status signalling market for two reasons. First, digital objects offer buyers the ability to flex on more people than physical objects do, as we interact with more people in the digital realm than in the physical one. Second, it is easier to signal authenticity. Unlike with photos of expensive possessions, we can’t pretend that the NFTs in someone’s wallet are fake, as we can easily confirm if they are part of a legitimate collection on the blockchain.
But status games are zero sum and a waste of time? Yes, but they are also human nature. Status signalling was bound to arrive on the internet, and if we are being honest, it is already partially here [have you checked Instagram lately?].
Find a 1,000 true fans
While the rise of the internet and the web 2 industry has been great for programmers, it has not been kind to digital creators. The internet has democratised access to digital art, but made it hard for creators to monetise their work. We currently live in a “right-click-save” world where many artist creations are all over the internet and can be saved to our local folders in seconds.
As a result, the idea of establishing ownership of digital objects seems like such a foreign concept to many that whenever they first hear about NFTs they inevitably wonder “Can’t I just right-click-save the JPEGs?”. Any system where you need to pay for things you can just save for free must be a scam, right?
Some may see this as malicious refusal to compensate artists. The explanation is likely much more innocent. In a world of rising inflation for “real-world” assets (housing, education, healthcare), the post-scarcity world of internet objects is a refuge people naturally cling to. And that is perfectly fine. We can all keep right-click-saving NFTs. This is quite similar to taking pictures of museum paintings. NFTs are about the ownership, not enjoyment, of art.
They can allow normal people to support their favourite digital artists. Currently many small creators are dependent on social media platforms to provide them with income based on the advertising revenues that their content accrues [after taking a healthy cut]. At the same time, the artists can be de-platformed at a moment’s notice. Even in cases where artists are directly monetising by selling digital goods (e.g. books), usually they still need to give up a provide a hefty percentage to a centralised platform.
In contrast, Opensea’s cut is 2.5%, and may go down over time in the face of competition from other NFT marketplaces. Furthermore, if Opensea decides to remove your collection, there are other NFT marketplaces you can turn to, with little extra work. Platforms need your permission to connect to your crypto walletnin order to provide you and your audience with services. This is a fundamentally different power dynamic than you and your audience having to plug into their platforms to access your data and interact with one another.
Why would fans prefer this model? So that they can get closer to their favourite artists, and have direct financial upside in their success. If you discover and support an up-and-coming artist, chances are that you could later resell their original NFTs to future fans at higher prices, when the artist becomes broadly successful. Or you can continue holding their NFTs and brag about being an OG fan [status signalling].
This model can also make open-sourcing creative work financially viable for artists. A recent book I purchased is also available for free on the author’s website. However, those who pre-ordered it received a commemorative NFT, allowing us to showcase our support of the author’s work.
Finally, NFTs are location-agnostic and make it easier for creators and fans to discover one another and interact across country boundaries. We are all native citizens in the blockchain world. This favours underdogs, artists located in developing markets. They may need just 10 true fans from the developed world to be able to make a living off of their creative work.
Of course, there will be power law dynamics with the most popular creators achieving disproportionate rewards. But, overall, more people will have a shot at connecting to a global audience and finding their 1,000 “true fans”.
NFT-enhanced brand commerce
This may end up being the most lucrative space. NFTs will allow brands to forge a closer relationship with their customers, by making them “owners” of brand NFTs. These NFTs will make you feel a valued member of the brands’ community, and lead you to view them more favourably. They will also come with multiple discounts that you will be tempted to make use of because, well, they are only for super special NFT holders like you, it would be a shame if the discount went to waste, right?
As a token of their appreciation, they may airdrop you “new”, “top”, or “high-value” customer NFTs with appealing visual designs, which will make you like them even more, and give you access to further promotions. Many brand coupons may one day reside in customer crypto wallets. Smart marketers will exploit the endowment effect their customers gain from having a positive emotional experience of being an “owner” of a brand’s NFTs.
Due to the openness of the blockchain, brand collaborations will be much easier to execute. Do you have NFTs from both McDonalds and Pepsi? Congratulations, you can get a special discount if you purchase both. Do you have NFTs from both Apple and Chanel? Having both in your wallet gives you early access to their NFT-gated website selling the latest iWatch with a special Chanel wristband.
There will also be more brand-on-brand attacks. Coca Cola can airdrop NFT discounts to Pepsi NFT holders, Apple to the Android ones, Netflix to those of Disney+. This may seem undesirable for brands, but once a competitor starts issuing NFTs on public blockchains, they are at risk of losing the attention of fans who enjoy having nice pictures appear in their wallets, and magically receiving access to special experiences [this will be a large audience]. The temptation to join the NFT space and be an early adopter will be high.
The period of rapid brand NFT adoption will be exciting, brutal, and full of innovation. Emerging brands which discover how to play this game well will come to rival the current giants of our times. Existing brands which embrace the new opportunities that NFTs present will cement their place in the mindset of customers.
Yes, NFT haters will slow down the adoption process, and we will all have to read and listen to a lot of marketing materials explaining the differences between Proof of Work and Proof of Stake blockchains. We may even have to rename NFTs to a more palatable, less stigmatised name, in sane the way crypto is now commonly referred to as web 3. But, while the final adoption path may be somewhat uncertain, the trajectory is quite clear.
Conclusion
Cultural significance provides legitimacy. Yes, it would have been nice for blockchains to gain prominence based on the financial freedom benefits that they aim to provide to underbanked people. But the brutal truth is that that use case is taking too long to materialise at scale. In contrast, NFTs will soon be the darlings of many marketing departments. They have already introduced a new cohort of people to blockchains, one with a passion for the creative arts, and fewer libertarian tendencies.
As a result, NFTs are the use case that will likely help mainstream Ethereum and its native token ETH [and all the other layer one blockchains that survive the bear market]. The bottom line is that while some people are passionate about financial investing and speculation, many many more people are passionate about creative pursuits. It is not a coincidence that NFT crypto twitter is the only space where I have truly seen people lose track of their fiat-denominated wealth and primarily track their assets in ETH terms. Such behaviour is a necessary transition for mainstream blockchain adoption.
PS
Let me know what you think of NFTs! The next stop on our learning journey will be Decentralised Autonomous Organisations, aka DAOs.
Stay tuned, digital frens.
For the hobbyists
Look at some Fidenzas [high-brow crypto art. not being mean, I like them!]
Check out the top NFT collections on LooksRare and OpenSea.
Listen to Punk6529 talk about NFTs (requires a free registration)
Read this post on why NFT marketplaces may not accrue value long-term.
Consider that NFTs may usher in an era of token-gated commerce.