NFTs: A Skeptic’s View

Web3
Written By Chris White

Why Write About NFTs?

I’m a fairly tech-savvy guy. I mean I’m an electrical engineer, technology product manager and business leader and I’ve been working in the telecommunications and RF technology domains for over a decade. And while that would seem to equip me with a good baseline from which to understand the new web3 tech, NFTs still seemed to elude my rational mind. Not so much the mechanics, but rather the rationale. Why do these things exist? What are they good for? How will people make money with them? And why would someone use an NFT instead of other forms of value or transaction?

Because the answers to these questions were not obvious or clear to me, I was skeptical about the real value of NFTs. Not yet understanding the underlying technologies, I viewed them as an extension of cryptocurrencies which I saw as just another fintech innovation built to extract money from a society eager to find the easy path to grow wealth, while offering nothing of true value or utility in return.

And so that remained my perspective until late last year when Scott spurred a discussion about NFTs and their uses. I do try to stay open minded and when I see smart people like Scott diving deep in this space, instead of writing NFTs off as a “crypto-bro” bubble fad, like so many in the media qualify it, I set out to better understand the underlying concepts and technologies so that I can make a more informed judgement. I mean, if this is the future, I don’t want to be stuck in the past.

Punchline

So let me give you the answer first based on the research I’ve done so far (I’m still just scratching the surface). I believe the jury is still out on exactly how significantly NFTs impact our society and economics, but I do now have an appreciation for the underlying philosophy of the web3 vision and its potential to transform the way our world works; NFTs being a big enabling feature.

For those that care about the details, here’s what I’ve learned…

What are NFTs?

Well, in the spirit of embracing new technologies I asked my new favorite personal assistant, ChatGPT. Here’s what it told me:

An NFT, or non-fungible token, is a type of digital asset that represents ownership of a unique item or piece of content, such as a digital artwork or video game item. NFTs are created on blockchain platforms, which are decentralized, digital ledgers that allow for the creation and transfer of assets without the need for a central authority. The ownership and authenticity of an NFT can be verified using the blockchain, making them a useful tool for digital art and collectibles.

So, that seems logical, right? It’s simply a unique digital ticket that cannot be duplicated that shows your ownership (or partial ownership) of something. And one of the key ideas is that it doesn’t necessarily have to be only digital assets (like a digital picture). The uniqueness of the token is what creates it’s value, and the blockchain (decentralized ledger) is used to certify it’s authenticity.

If we forget for a second about the physical implementation of this concept, the idea itself makes a lot of sense.

Imagine you’re a super fan of baseball and are trying to buy some sports collectible (Ken Griffey Jr’s bat, e.g.) from a collectible shop in your town. The case at the store says it’s his bat. The price tag claims it’s his bat. The owner of the shop claims it’s from Griffey. How do you verify that? Also, the price is really high. How do I know that’s a fair price? In these types of everyday scenarios there aren’t ledgers to show who owns what piece of the former star’s gear so proving the authenticity of the item is near impossible. Additionally, typical sources for pricing are less than scientific and are often very outdated. These realities make this a painful process to acquire something you value as part of the baseball collectible community.

Now imagine you had a digital ledger that showed exactly who owns that bat and a real-time exchange that listed the latest transaction price for similar items. This is exactly what you get with NFTs on the blockchain. The authenticity is traceable and the value is visible. And the best part is that the decentralized nature of the blockchain ledger means there is redundancy in the record of ownership or price so the community holds the power of the information, not a single organizing entity.

The media often focus on comparisons to traditionally rare art, like a Monet, that is auctioned through Christie’s or Sotheby’s. And while in those examples NFTs and digital NFT exchanges would significantly cut down on the money that goes into the hands of the auction broker (also a good thing), the broader implication of this technology is that it transforms the ubiquitous everyday uses cases like buying the digital equivalent of Ken Griffey Jr’s bat or his rookie card.

“But It’s Just a JPEG”

Not everyone wants to spend money to collect baseball memorabilia, or comic books, but there are definitely contingents of die-hard collectors that will spend a lot of money to acquire those items. There are also secondary trading markets, and a whole ecosystem of economics around these categories of collectibles. So given that reality in today’s physical world, why do people deny the value of digital collectibles or other online assets? I’ll admit, I was one of these people until I really evaluated the logic and also listened to some of the conversations happening in these communities.

The most prominent NFTs that get attention today are things like CryptoPunks, which to the vast majority of people are unremarkable and form the outsider perspective, seem trivial. My previous perspective, which I think was pretty typical, is summed up by with, “why would anyone buy a digital image of a silly pixelated character? I could make that in Photoshop.”

My take is that these skeptical perspectives come primarily from a lack of ability to relate to the feeling that these digital items are a legitimately valuable form of art. “…but you don’t get to appreciate it in your house,“ was another argument I heard a lot. The value of the item is determined by the affinity people feel toward it and the desire they have to call it their own. The reality is, whether we personally relate to it or not, like baseball cards or comic books, there are communities of people that do value that form of art. These communities value the creativity of the creator, the process of creation, and are drawn to the output of the process. People who collect want to reinforce the values of the community and support its creatives.

We now live in a world where people feel affinity toward and appreciate the beauty of algorithms and desire to be connected to the coder whose keystrokes created it. Is this really distinct from the reverence we have for the painter whose brushstrokes create a remarkable physical painting?

We’ve talked a lot about NFT art, but that’s not all NFTs are good for…

What Else Can NFTs Do?

As with ownership of digital art, an NFT can represent ownership in almost anything. It’s clear that the range of potential use cases is vast and like we couldn’t predict the invention of something like Uber from of the invention of geolocation and mobile broadband, it’s hard to imagine what else might be created using NFTs in the future.

In addition to the record of ownership aspect, NFTs they are living pieces of code that can have additional functionality built into them enabling even more potential use cases.

One very interesting use case for NFTs that doesn’t seem to get a lot of mainstream attention is as a means to build community through shared ownership. One really good example of this that I stumbled across is the Natural Selection Tour (NST). For those who don’t know, the Natural Selection Tour is a set of 3 cross-style snowboarding events with some of the best snowboarders in the world. The tour is led by the infamous Travis Rice and visits locations all over the western hemisphere to seek out incredible terrain that tests the limits of the riders. This is a tournament built to bring together people driven by a passion for snow, nature and the art of flight.

In 2022, NST released a set of NFTs (NSTxNFT) initially issuing a piece of digital art for each event. Along with the art, however, was the promise of some set of additional “utility” in the future which was signaled by the publication of a roadmap. The people who bought these NSTxNFTs are theoretically investing in the proliferation of the community and its ethos by connecting themselves to the production of assets and information that are created within the NST community. This is, in my opinion, a real reason for personal connection that has legs in the value of NFTs.

Terminology side note: You’ll hear the word “utility” used without explanation, but what it essentially means is some ongoing set of rights, access, items, etc. that the owner of the NFT has claim to through their initially purchased NFT. You may also hear the delivery of these things called “air drops.”.

The Business Model of Creativity

Now, if NFTs are going to spur a move to mainstream use, then they must provide an improved economic option for creators vs. today’s options and that will have to prove true for use cases far beyond digital art memes. There’s no question that NFTs aren’t going to solve the income challenges of all creative endeavors, but they may help in some areas. Wrapping your head around this aspect of NFTs is pretty challenging, and in my opinion, is too nuanced to offer a yes/no answer.

To wrap our heads around where we might see impacts from NFT-based models, we can gain insight by using a simple framework to evaluate real examples. Let’s take a look at 3 distinct use cases.

Digital Artists:

Digital artists (or artists in general) are used as the poster child example of how an NFT-based business model could be very beneficial and could sustain an artist economically in a way that wasn’t previously possible.

We can see why that is when we look at the details above. As an artist, with NFTs, you now have a new type of funding your work up front via a type of crowdfunding that has material cultural and economic benefits for investors. NFT purchasers not only get to support the culture of a community they presumably value, but also have economic incentives through the potential for token value increase.

This model also provides more sustainable value for the creator who can both hold back some tokens for themselves on the initial issue, as well as the potential for upside via royalties from secondary market trades. There is potential for these NFT assets to be turned into new speculative financial instruments that look a lot like CDOs wrapping up parts of ownership in a portfolio of art into a single investment . Some would argue that is a risk and others that it’s a useful tool to incentivize the understanding of risk. My take is that it’s more risk than benefit, but I’m no expert in financial products.

The key thing in this use case is that the distribution path to the customer really hasn’t changed. There is no major hurdle to overcome from a UX perspective. You still self-promote on social, you still send folks to your website and you link them out directly to the NFT platform. The only thing that would be different is the transaction mechanism since purchasers would have to have a crypto wallet, but let’s assume that folks seeking an NFT are already onboard with crypto payments, in which case this is a fairly frictionless transition for consumers.

Result: NFT-based models are a clear net positive for digital artists.

Mobile Game Developer:

When we look at the impact of an NFT-based business model for mobile game developers, the picture does not seem so transformational. The startup costs remain very high, and the key limitation for this type of creative product is that the “community” is accessed through the distribution medium. Given the scale of mobile gaming, distribution through mobile platforms remains a high cost to developers and a key point of leverage by the platforms that own the customer relationship.

Today, high quality mobile games like Fortnite already make money with in-game purchases. The only real distinction between this current model and the NFT model is that users are not purchasing a stake in the items they acquire in-game. Regardless, the same virtue signaling process compels users to spend and they will spend where other players can see.

Utilizing NFTs only improves this option through the potential for marginal gains in token value on secondary exchanges, but this is essentially the same in the end as owning actual shares in the company, the difference simply offering access to the community of potential users who care about the game’s existence.

I think the question here is what it would take to change this paradigm. I see this changing ONLY IF the demand for these games was somehow to transition to distribution channels that can run on blockchains (maybe that could be mobile some day?), AND the purchases of in-game assets were to be transferable across application and blockchain boundaries. Otherwise, customers will stay where they are. The vast majority of users don’t care about the economics of the company, they want to play where everyone else is, and unless a blockchain-based platform could drive enough volume to transfer the network to a blockchain-baed platform, players will stay put.

Result: Marginal improvement in access to capital, unless you already have a fanbase. Does not change distribution costs.

Musician:

What we can see here is the same dynamic as other forms of culture and art. For those that already have major brand equity, the potential is there to use NFTs as a way to realize extreme upside income, similar to how 3LAU did with his NFT release that offered ownership of a re-release of his Ultraviolet album as well as some other exclusive features.

But what if you’re a nobody starting from scratch? What if you don’t have a following? It seems to me that your potential is the same as anyone else off the street: minimal. The key for music, movies, or other forms of digital work that relies on mass consumption to generate substantial amounts of income, is that your path to the consumer’s ears or eyes, is through a distribution platform (Apple Music, Spotify, Netflix, etc.). Sure, as a musician, you could put up your own site, or post your music on SoundCloud or some other web-based host, but if you really want people to consume your music in all those situations where it makes sense (running, riding the bus, driving, walking, etc.) you need a ubiquitous mobile app, and there are only a couple at the moment.

Result: If you’re already popular, large upside potential. If you’re not, little to no benefit.

Pulling It All Together

In the end, I think it’s clear that the NFT-based model is not an end-all-be-all that will revolutionize all of today’s businesses. It seems to be most useful in cases where where ownership, community and investment potential are most important. This lack of a broadly compelling economic and user experience reason to switch is the primary source of my skepticism. But maybe it’s not so binary. When I think about this potential as a question of marginal benefit, I have to wonder whether a smaller quantity of people investing in your creative act could actually sustain your pursuit of that endeavor? I suppose it’s a numbers game and sufficiency is a personal thing.

One thing is for sure. The digital nature of the items for which NFTs are sold, paired with the low cost of creation/publication, means the quantity of crap will skyrocket. If you look at some of the NFT platforms (Nifty Gateway, e.g.), there is an endless list of images NFTs that are just hanging out with no action. It seems that those that already have brand will profit further from it through a new channel, and those that don’t, will likely remain without and that’s probably ok.

There’s no question that it’s beneficial to have economic systems that encourage us to shoot for the moon. NFTs are an open space for innovation. Some of the biggest hurdles to mass market adoption are limitations in distribution and user experience rather than the underlying decentralization or ownership. If those constraints can be overcome, (I believe they will) and NFTs are used in a manner consistent with the altruistic web3 vision of web3, then we will see a new kind of internet future. At this point, I don’t see it, but I hope the optimists are right.

-Chris

Sources of Research (thus far):

Chris White
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