TL;DR- if we’re talking about JPEGs of Bored Apes selling for a minimum of $400k, then yes- it’s overhyped, and it’s a bubble. However, the more our economy moves onto the internet, the more likely NFTs will have a true use case. Ownership, scarcity, and authenticity are vital tenants of capitalism. NFTs bring these traits to the digital asset space.
In my 8 Things I Hate About NFTs article, I’ve highlighted the downsides of the NFT space. To save you from reading the 1500-word rant, here are some highlights:
- NFTs are a flawed, high-risk market for those with lots of extra cash to spend
- NFTs can’t be easily explained to people not involved in the space
- Insider ownership or ‘whitelisting’ peddles inequality and invites insiders to sell off once a collection becomes publicly available. In a public stock market, this would be illegal, and people would go to jail
- NFT owners and advocates can’t shut up, and it’s annoying
NFTs are a controversial subject. So let’s take inventory of what’s going on here.
In the beginning, NFTs were white-hot. Some powerful platform or celebrity was getting in on the action everywhere you looked.
Coinbase released its exclusive NFT market beta feature. Twitter allowed you to set Ethereum-verified NFTs as your profile picture. Mark Zuckerberg announced NFTs are coming to Instagram. (What does that even mean?) Everyone from Katy Perry to Snoop Dogg to Tom Brady bought NFTs or started their own collections.
NFTs ended 2021 with a total of 41 billion in sales/trading activity.
Chinks are beginning to show in the armor. NFT trading volume is down. Google searches for NFTs are down. NFT’s brother, cryptocurrency, has been in remission for nearly a year. Scams, fraud, and fake collections are at every turn.
This downtrend doesn’t mean that NFTs are or aren’t over-hyped. They are subject to the same ‘hype curve’ that many new technologies face.
Humankind has a history of misplacing hype. In 2013, Jeff Bezos announced that Amazon would come out with a superior smartphone. Sergey Brin said Google Glass would be widely adopted that same year. Elizabeth Holmes fleeced investors for billions with a product that was a lie.
Even still- are NFTs a particularly stupid innovation?
What is an NFT, actually?
It’s similar to the title on your car. Instead of a piece of paper that you should definitely not keep in your glove box, an NFT is a digital document that identifies the valid owner of a digital product. Your car title relies on an ecosystem of cost-intensive dealerships, banks, lenders, insurance companies, and state regulatory agencies. It’s worth the cost because cars are a valuable asset to our society (mostly). NFTs drastically lower the cost of this ownership proof. This low cost will benefit cheaper digital assets like digital art collections or items in a video game.
Grainy, pixelated pictures of CryptoPunks aside, our society still has a problem that needs to be solved.
Our record-keeping, financial, and regulatory systems have failed to keep pace with the rapid digital transformation over the last 30 years. This antiquated system makes the idea of NFTs a breakthrough. Private property and ownership are central to capitalism. As more of our lives and assets move online, the concept of easy digital ownership proof makes sense.
How do NFTs help solve this problem?
NFTs bring something to the digital space that the internet lacks: scarcity and authenticity.
NFTs bring scarcity
Tech startups are valued highly by markets because software can be reproduced without limits. Likewise, a JPEG can be copied and shared millions of times. Spotify and earlier technologies like LimeWire have broken the barriers of physical distribution that long ago defined the music industry.
NFTs put a cap on ownership of certain digital items like artwork or items in a video game. If those items are in demand, the fact that there are more buyers than sellers creates scarcity. In our society, if you’re the owner of a scarce asset, you can command high sums, and your item is seen as a status symbol.
History brings us ample examples of odd things that people chased because those things conveyed status.
Tokenization of digital assets could reduce digital piracy, which has stifled tech profitability and long-term innovation.
NFTs bring authenticity
Authenticity is getting tough to come by on the internet. Facebook Is infamous for being a hotbed of rage and debate that gets proliferated from non-credible news sources. When you enter a Google search and click a website you don’t recognize, you have no way of knowing if the content you’re about to read is legitimate.
News sites could have tokens proving they’re a viable source. NFTs and blockchain could track the food you eat, so you know precisely the sources from which it comes.
What about JPEGs of Apes?
Make no mistake here- this part of the NFT space is a bubble. The same way Cabbage Patch Kids, Tickle Me Elmo, and Beanie Babies were bubbles, JPEGs of bored apes are likely a bubble. The floor price on a Bored Ape at the time of writing here is $384,000. I don’t see prices this high as sustainable. We’re likely to see a reckoning in due time. Observation of this insanity is where the NFT haters are right- simple JPEGs shouldn’t be selling for the median price of a home in the United States, no matter who they’re made by.
As folks have rushed into the NFT space, fraud and scams have been everywhere. OpenSea is still laden with fake NFT collections.
The other hard truth that we blockchain enthusiasts need to accept is that most NFT collections on OpenSea will expire worthlessly. Apply the simple laws of supply and demand, and you can see there are way too many NFT projects on OpenSea. Demand for NFTs isn’t that high, given it’s still such a niche space.
NFTs will still live
There has always been and will always be a space in the economy for collectibles. Contemporary art has outperformed the S&P 500 over any period within the last 30 years. Magic: The Gathering and Pokemon cards have stubbornly held their value and more with age. There is still a need for authentication for digital assets.
NFTs can offer portability across mediums- say you owned an outfit or weapon in a Fortnite or Grand Theft Auto game, and you wanted to bring that outfit/weapon with you into a sequel game or the same game on a different platform (like Playstation vs. Xbox).
The point is that there are too many use cases that make sense for NFTs to be in the future. In the meantime, I caution everyone to be wise and think long and hard before they make any purchase on OpenSea.