Why are NFT’s Valuable?
It only makes sense from a Service Dominant (S-D) Logic perspective.
NFT?
A Non-Fungible Token is a digital token on a blockchain that has been embedded with data that makes it unique. This then makes a new class of token that is more scarce than a normal digital token.
Value Confusion Example
But, it is not clear that the newfound scarcity enabled by NFT’s is inherently valuable. For example, Bob, a lifelong artist, could create an NFT that is a one-of-one digital artwork, unlike anything else, ultra scarce, and have it be practically worthless. But at the same time there are collections like CryptoPunks where 10,000 tokens containing data representing slight variations on a standardized visual template are sold for tens of millions of USD.
According to Goods-Dominant (G-D) Logic this makes no sense, the CryptoPunk is an automated computer generated image based on a template, Bob’s piece is a one-of-one handcrafted artifact imprinted by his human soul. How is more nominal value embedded in a good with a repeatable automated production method than is with the undivided focus of an expert artisan?
Logic Shift
When you re-evaluate the situation with S-D Logic it makes perfect sense.
A quick reminder from sdlogic.net, “The foundational proposition of S-D Logic is that organizations, markets, and society are fundamentally concerned with exchange of service — the applications of competences (knowledge and skills).”
Now, with the mindset that service is the fundamental basis for exchange, the NFT is rightfully viewed as a simple artifact in a larger service ecosystem where actors co-create value via their relationships with one another. In other words, people will pay a lot of money for a CryptoPunk NFT because they value the relationships that it will enable — not the token itself.
Implications of S-D logic versus G-D Logic
To illustrate this concept further let us look at another example, this time a purely theoretical one. In two parallel universes there are two fruit themed NFT projects that are identical in the form of their goods — we will now label them Project 1 and Project 2 as a differentiator for this analysis. Both projects contracted the same fruit artist to make the same set of artwork for the same number of NFT’s with the same scarcity attributes notated by type of fruit, both on the Ethereum blockchain, and both with the same “tokenomics” and mint mechanics. Both projects launch at the same time and both sellout.
The difference is that Project 1 has the traditional G-D Logic and see their NFT as imbedded with value that is delivered to their customers during the mint at which time the value has successfully been exchanged via a good.
On the other hand, Project 2, has S-D Logic and views their NFT as an artifact part of a larger service ecosystem where value is not imbedded in said artifact but rather co-created by relationships between actors.
The resulting consequences of their differences in mindset is that after launch Project 1’s NFT collection slowly loses market value until it fades away into obscurity.
Conversely, Project 2 sustains their relationship with the people who now own the fruit themed NFT’s. Project 2 connects all of the NFT holders via an online chatroom called “fruit salad”, actors in the chatroom are constantly building out larger positions in each-others effectual networks via reciprocal communication, new chatrooms are made for every different type of fruit, the bananas and apples create competing podcasts, television shows emerge, lifelong relationships are being built, valuable business connections form. Project 2 gives the NFT holders control over a % of the revenue generated via the mint, the “fruit holders” decide to use it to fund research settle their pretty debate over which fruit is better apples or bananas. They discover something better than resveratrol that gives them a one-up on the grapes who are preoccupied with their successful line of wines. Wait, it turns out this fruit compound has properties that can cure cancer, Steve Jobs later life fruitarian diet is vindicated. All because project 2 used S-D logic instead of G-D logic.
Obviously this is an aggrandized fantasy, but the point is that an NFT’s value is not clear because our current societal value paradigm is forcing us to ask the wrong questions. We are hyper-focused on goods as the fundamental basis of exchange and therefore look to them when trying to define value.
The Real Question
So “Why are NFT’s valuable?” is hard to answer because it’s a bad question predicated on an oversimplified economic logic. Instead we should be asking “Why will this service enable the co-creation of value?”.
The answer to that is highly contextual, but now understandable, like everything when you apply the appropriate logical framework.
In the context of the CryptoPunk example, the people who are buying the NFT’s do so because they value the relationships that they enable. These people want to be a part of the Punk community, they want to have a voice in the Punk community, they want to be able to shape the Punk community. The NFT’s are a way to do that.
In the context of the aggrandized Project 2 example, the people who are buying the NFT’s do so because they value the relationships that they enable. These people want to be a part of the fruit community, they want to have a voice in the fruit community, they want to be able to shape the fruit community. The NFT’s are a way to do that.
The Answer
In the context of the current “NFT market”, the value of an NFT is co-created by the relationships that it enables within the community it creates.
Although I am certain that this is just the beginning and the proper way to be thinking about NFT’s is as a “technological lego piece” that will eventually enable much more interesting innovations than they are in their current form of as vehicles for financial speculation via collectible jpegs that give you access to nerdy online chatrooms.
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