It's not NFTs you don't understand, it's art.

A breakdown of what is happening in the NFT world, how it emerged from longstanding trends in art history and why skeptics are wrong not to take it seriously.

In this issue:

  • The exploding market for ownership itself

  • NFTs aren’t actually the confusing part

  • Things you don’t value can be valuable things

  • NFTs enable wild new possibilities

  • The future is NFTs but not all NFTs are the future

In the last 30 days, ~$350M worth of non-fungible tokens (NFTs) have been traded across various projects, most notably NBA TopShots. In this issue of Something Interesting we break down what is happening in the NFT world, how it emerged from long-standing trends in the traditional art world and why skeptics are wrong not to take it seriously. We last discussed NFTs in January.

The exploding market for ownership itself

Non-Fungible Tokens (NFTs) are one-of-a-kind tokens that represent ownership of something unique - real estate in virtual worlds, digital art, in-game items, or most famously at the moment short videos of NBA highlights known as TopShots:

Sometimes these tokens convey specific rights to the holder (like the ability to name a Hashmask or to specify the "location" of Robert Alice’s Block 21) but more often than not the only rights an NFT holder has are bragging rights - and the option to sell those bragging rights to someone else.

That is true of the two largest NFT projects: the NFTs in CryptoPunks and NBA TopShots are - in a certain sense - useless. You can’t do anything with them other than prove that you own them or give them to someone else. They’re still quite valuable though - as of writing the cheapest available CryptoPunk is 22.5 ETH (~$35k). Four different CryptoPunks have sold for the equivalent of more than $1M USD:

Owning the NFT does not grant copyright ownership of the images and there is nothing preventing anyone from using a CryptoPunk they don’t own as an avatar or including it as a graphic in a newsletter:

The whole phenomenon is pretty counter-intuitive when you first encounter it. Why are people spending millions to own things that do nothing and don’t exist? Because they are - Grimes sold a set of 10 NFTs for ~$5.8M in under 20 minutes. Last week a 10s video clip by digital artist beeple sold for $6.6M, this week he has a collection auctioning with Christie’s - at time of writing the bid was $3M.

Something is happening here, even if it isn’t immediately clear what it is. It is worth taking the time to understand it.


NFTs aren’t actually the confusing part

A lot of people’s first response to NFTs is to reject them as a scam or a fad - but that is essentially the same category error skeptics make about crypto itself. The NFT space is indeed full of scams, shills and fools - but the core is something genuinely interesting and powerful.

Many people think they are NFT skeptics when actually what they actually are is skeptical about the art market itself. Rather than thinking of NFTs as a strange new genre of art, I think it is easier to conceptualize NFTs as a tool that helps people achieve all the strange artistic things they already wanted to do. For example:

  1. Paying more for the "real thing" predates NFTs.
    Real people have been placing real value on "authenticity" for literally centuries. Experts estimate the value of an original Gutenberg Bible at ~$35M - you can get a copy on Amazon for $97. Picasso’s Le Rêve last sold in 1997 for $48.4M but you can get a convincing handmade reproduction on Etsy for just $120. Brand names cost more than knock-offs, first-editions cost more than later printings and originals are worth more than even the finest counterfeits. The difference between owning an NFT and right-clicking to save a copy is basically distilled endowment effect - and while it may not be rational it is very real.

  2. Art that doesn’t (physically) exist predates NFTs.
    In 1991 in the midst of the AIDS epidemic Cuban-American artist Félix González-Torres created Untitled (Perfect Lovers) to describe the loss of his partner to AIDS. The work consists of two identical commercial wall clocks mounted on a light blue wall, set initially to the same time but then allowed to drift apart as the exhibit goes on.

    González-Torres wrote this about the piece to his dying partner:

    Don't be afraid of the clocks, they are our time, the time has been so generous to us. We imprinted time with the sweet taste of victory. We conquered fate by meeting at a certain time in a certain space. We are a product the time, therefore we give back credit were it is due: time. We are synchronized, now forever. I love you.

    If you don’t find Untitled (Perfect Lovers) to be poignant and beautiful than I don’t know what to tell you - you probably laughed through the first five minutes of the movie Up. But whether you find it moving or not, the point is that Untitled (Perfect Lovers) does not physically exist. Anyone can buy two clocks and hang them on the wall, just as anyone can right click an NFT and click save a copy for themselves. But that would be mistaking the map for the territory - the art is neither the pixels nor the clocks. It is the idea.

  3. Ownership as a pure abstraction predates NFTs.
    Rai stones were enormous stone disks used as money hundreds of years ago on the islands of Yap. The disks could be as large as 12 feet across and weigh thousands of pounds, so rather than move them the villagers just kept track of who owned which ones. At one point a particularly bad storm capsized a boat carrying one and it was lost irretrievably to sea. No matter! They didn’t move the stones anyway when spending them, so they just kept track of this one the same way - the physical stone itself was irrelevant. Only the ownership mattered.

In that sense NFTs are not a confusing new form of art/ownership but instead a new technology that services confusing forms of art/ownership that already existed. NFTs are just another tool for proving ownership, authenticity and provenance - why those things are valuable is another question entirely.


Things you don’t value can be valuable things

One of the more common criticisms of NFTs is that no one actually wants them and everyone buying them is just hoping to eventually sell them at a profit to some poor sucker down the road:

There is definitely a lot of bad art being sold to and by speculators who are more interested in the idea of flipping for a profit than they are in the art itself. But people buy art for lots of reasons. Sometimes it is a financial purchase, but it sometimes it is to support the artist (e.g. buying merch from your friend’s band) or to signal status (e.g. expensive designer handbags) or as a hobby (e.g. sport card collections). NFTs can span that same range of motivations.

The problem here is people confusing the idea of "I do not value this art" with the idea "This art does not have value." But NFTs are like any art - they are a conversation between the artist and their audience. You don’t need to personally appreciate the art in order to believe that it is real. I think Jackson Pollack paintings look boring and childish but that doesn’t make them valueless. If someone gave me one I would be very appreciative! Until tax season, anyway.

Suppose by way of example that Justin Bieber minted a 1 of 1 NFT token and declared the holder of the token would be his "girlfriend" - with no rights or relationship implied, just the title itself and nothing more. Whether you are a Belieber or not (I confess that I am not) it seems obvious that some of his fans would place an enormous value on the opportunity to hold that ceremonial title. Even if you personally don’t understand that desire, it is easy to observe it.


NFTs enable wild new possibilities

Once you graduate past the bUt yOU cAN jUsT cOpY ANd PaSTe iT stage of understanding NFTs the implications start to become really wild and exciting. NFTs can do things with art that have never really been possible before.

For one thing NFTs don’t have to be passive collectibles - you can staple an NFT to any kind of financial product you can imagine. For example EulerBeats are audio NFTs that pay the owner of the "original" copy a portion of every "print" that is purchased. NFTs allow fans and artists to organize and share in the equity generated by the cultural movement they create.

That might result in both a flourishing of culture that can self-sustain without the tax of middlemen like record labels. It might also mean a massive transfer of wealth to the young, often disenfranchised groups that tend to be at the start of new cultural movements, especially music. Imagine the kids who drive trends in hip-hop being able to buy shares in the next major artist they discover and popularize.

NFTs can also be leveraged as assets in other financial infrastructure - NFTX is creating index funds that turn pools of NFTs into fungible shares of the fund that can then be sold to investors looking for fractional ownership in the asset class or used as collateral in various DeFi contracts. Imagine the ability to buy a share of Picasso art as an asset class without needing to be able to afford (or verify the authenticity of) your own Picasso. Imagine not needing to argue with an insurance company about how much an original Picasso is worth - because the market is so liquid you can know the price without ever needing to sell.

NFTs are enabling that for digital art already.


The future is NFTs but not all NFTs are the future

To be clear the vast majority of art being marketed under the banner of NFTs today is very bad - both technically unskilled and artistically bankrupt. Much of it panders to its presumed audience with cryptocurrency logos or cringe-inducing waifu pinups or by pretending to be Banksy. It is often garish and slapdash and inscrutable. There is some good art, too, but it isn’t the majority by any stretch.

You also have to be careful about interpreting valuations and volumes in the NFT space - users might be wash trading their NFTs with themselves to create the appearance of a price history, or with each other to launder money and make illicit payments look like successful NFT trading. Nothing should be taken at face value in the crypto markets.

People are also buying very foolishly - mindlessly aping into every new project under the extremely bad assumption that NFT stonks only go up. This is the same recklessness that drove the ICO bubble in 2017: everyone sprinting to get in on the ground floor of the next big thing with no time to think about what they are buying. As in 2017 I expect it to end in a crash with a lot of failed projects and lost money. What I don’t expect, though, is for it to be the end of NFTs.


Other things happening right now:

  • One of the writers on The Good Wife is probably feeling pretty smug by now:

  • The secondary market is currently valuing Coinbase above $100B which if it holds would make Coinbase’s upcoming IPO the largest Tech IPO since Facebook debuted at $104B. More interesting to me are the numbers they shared in their S1 statement - institutional demand is real and growing.