What’s in an NFT?
NFTs, or non-fungible tokens, are a crypto-craze that is sweeping the internet. People are buying and selling crypto art for tens or hundreds of thousands of dollars, and some minting and marketplace NFT platforms are seeing millions of dollars in sales per day. Is it likely to die down as a trend? Like everything on the internet, probably. But at the same time, NFTs for me signal a fundamental sea change in how value is created and exchanged on the internet.
In the future, I expect that basically everything is going to become an NFT on social media. Because why wouldn’t it? Social media already incentivizes behaviors with “likes,” etc. It’s an obvious extension to link those to redeemable values. And crypto is the natural fit there (especially one with low/no cost transaction fees).
With that in mind, I wanted to jot down my thoughts about where the actual value is in these things for both the creator-seller and the buyer. I see there being basically four parts:
1) The digital asset
The core component of NFTs in their present form is the digital file associated with it, in other words “the asset.” Is it a PDF, a JPG, an MP4, something else? Does the asset itself have some kind of inherent, identifiable, or other value?
2) The associated creator
NFTs are generally issued via a web3 wallet, such as Metamask, though countless others exist. When the creator issues them, the digital asset becomes cryptographically associated with the creator (or at least the wallet holder). Is the creator known and somehow “proven?” Does their existing or potential reputation itself have some kind of value? Is the wallet owner authentic, and not impersonating a well-known creator?
3) The store of value
The asset and the creator themselves already present some kind of value. Here’s the “magic” of NFTs though: that value becomes solidified as a specific offering. That is, the asset is presented for sale by the creator in a specific context where it becomes a store of value.
Why is that important? Because the store of value can be assessed by, and traded in the market, or it can be held as property. This is what the term tokenization means for me.
This to me is the actual “thing” of NFTs, which are kind of slippery as a subject. What are you actually buying/selling? It seems abstract, but it’s not really. You’re buying the store of value, backed by the asset, and linked to the creator.
Also, in addition to the asking price, the reputation of the creator, and the inherent value of the asset itself, there are transactional costs associated with launching these tokenized “stores of value.” Interacting with most blockchains costs money in order to fuel network computational power associated with it. Though some platforms have “gasless minting” where the seller does not necessarily pay to produce each offering/store of value (which I really recommend to artists), many crypto artists are paying from $50–100 USD each time they mint they mint a piece onto the Ethereum blockchain. I’ve seen some people claim having experienced minting prices up to $300!
As a seller, unless you have a surefire, specific, identifiable reason why you need to pay gas fees (perhaps to appear on a high-profile popular platform), it might not make much sense. Use a platform like OpenSea, where you only pay to initialize your account, and then minting is free.
The point of bringing that up though, is to consider that there is a transactional store of value above and beyond the asset itself that is associated with the offering. Depending on the blockchain used, it may be quite a substantial gas fee, and it may fall on the shoulders of both the creator/seller and the buyer to pay for parts of it. Now, paying high gas fees for no reason doesn’t automatically make a piece more valuable. But, if many people are making transactions involving this offering, it may well be an indicator.
4) The social proof
While social proof certainly involves the reputation of the creator of an NFT, it also involves community response to it and to the creator’s larger body of work. Is it well-received on social media? Are people talking about it in the news? And most importantly, are people buying it?
Think about it like this: the creator puts all these elements together as a store of value in the offering of a work. They’ve stored a certain amount of value in the effort, and their asking price reflects what they think it is worth, or what they hope to receive from others for it. But, while that’s all well and good, it’s a bit meaningless unless and until someone (or preferably many someones) actually looks at the offering, looks at the asking price, and actually agrees to go through and complete the transaction in order to buy it.
This is social proof in a nutshell. The work is selling. It’s what seals the deal on the theoretical value stored by the creator, and makes it actual value that is being transacted between people.
Now, like any of these elements that I’m proposing make up NFTs, social proof can be gamed. Due diligence is always required. People might collude on social media to make certain work look popular. And they might do the same thing on marketplace platforms and aggregators, by engaging in a form of wash trading. In this variant, the seller uses another wallet to buy their own piece, or has someone colluding with them do the buying. These trades may happen over and over between two or a few wallets. Typically, they might be tracked on chain when a series of transactions occurs involving a piece where the value goes down each time it is traded in the same or about the same amount as the gas fee powering the transaction.
So you should look at: is the work (or other works by this creator) being traded on secondary markets (i.e., after the original sale)? Is the price sliding consistently downward (bad sign)? Or is the price increasing with each sale (good sign)?
I imagine that as these markets mature, tools to automatically analyze for and hopefully eventually prevent gaming of these systems will be developed. But right now, it is pretty much the Wild West. It seems like most platforms right now are too busy ramping up to meet new customer demand, rather than spending a lot of time correcting for these kinds of systemic issues. And while it’s trashy behavior, it makes sense in a way for sellers to engage in it, because it fools algorithms on markets and aggregators into thinking their work is being traded a lot. This causes them to trend on the sites, which causes real buyers to jump in, and cement the fake social proof with real social proof.
Anyway, there’s a lot more to NFTs than that, but this seems like a good place to press pause for now, as the market is developing rapidly.
In the meantime, don’t forget to pick up an edition from my latest NFT crypto art series: Spudward The NFT Comic, available on OpenSea.