The origin of value, what NFTs are, and what comes next
I was baffled by the rise of NFTs for quite some time.
Why would people spend such exorbitant amounts on jpegs? The art is not even that good most of the time. If people wanted beautiful art, isn’t it more sensible to spend far less on local artists who will most likely produce much better art? Physical art, that is, not jpegs that anyone could “right click and save”.
Furthermore, I did not understand why people were so excited about NFTs, or why they thought it was “cool”. I was never even into “real” art: my opinion of the modern art industry was (and is) that the whole thing is a money laundering scheme benefitting mostly the ultra-rich. Sure, this half-blue-half-yellow canvas that a five-year-old could paint in an hour sold for 25 million dollars, good for the “artist” and the money launderers, but why the fuck should I, or any regular person, give a flipping shit? If anything, the art industry is evidence of everything wrong with our society, and is another reason to “eat the rich” so to speak. It’s a problem yet to be fixed, rather than something worthy of celebration.
Which is why it confused me that so many people in crypto were attempting to recreate this broken system, and that even more people were cheering them on. To me, crypto is about creating a better, freer, and more equitable world. I have been working on decentralized finance (DeFi) and Decentralized Autonomous Organizations (DAOs) ever since I got into crypto, precisely because I have always wanted to enable people to freely collaborate without the fear of censorship, as well as utilize financial tools previously only available to the super-rich.
What the fuck is the art industry compared to this?
Sure, art is often genuinely enjoyable, I’m not arguing against the inherent value of art, but improving the art industry is waaaaaaaaaay down on the list of things that can generate positive impact for the world at large. Assuming that most of the NFT folks are even attempting to improve the art industry, that is, which is a fairly generous assumption on my part, since the existing NFT market has been little more than a 100x more fast-paced & speculative copy of the traditional art industry. I failed to see how anything in the NFT space could possibly be as valuable as their hefty price tags; the whole thing smelled like a scam that will collapse spectacularly one of these days, and the people involved were likely either scammers or useful idiots.
Nevertheless, I aped in. I mean, of course I did.
I simply could not stand not understanding such a paradox: crypto people were working on things that were, at least in my view, anathema to the goals of crypto. I had to get to the bottom of it. So during the past months, I fully embraced the NFT sphere: I minted shitty NFTs at ridiculously high gas price and lost money, I minted NFTs that made me over 100x profit, I kept up with what people were saying about NFTs on Twitter, Telegram, and Discord, I made my own NFTs, I bought and sold NFTs on OpenSea which sometimes made decent profits and other times lost me big money…you get the gist.
In this post, I will not bore you with the details of what I’ve been doing, I will simply share my conclusions.
Belief = Fundamentals
It is easy to think that the value of something stems mostly from its fundamentals, i.e. its objective value. For instance, the value of a stock is determined by how much dividends its holders can receive and the growth trajectory of the underlying corporation; the value of fiat currencies is backed by the corresponding nation states and their armies; the value of a computer comes from its performance, features, durability, etc.; the value of water comes from its ability to keep us alive, among other things.
It’s also easy to dismiss valuable things that don’t have clear fundamentals as scams. As I’ve previously mentioned, the modern art industry is a scam. Organized religions are obviously scams: believe in our big bearded sky daddy so that you’ll have the privilege of “donating” 10% of your income which we will spend on private jets! Companies like Uber that consistently lose money are clearly scams as well, and anyone buying their stocks are misguided fools or vicious speculators.
This is the rational, sensible way to view the world. It’s also wrong. Terribly simplistic, at the very least.
The value of something is not solely determined by its fundamentals, but also determined by what people believe its value is, i.e. its subjective value. These two factors are equally legitimate sources of value, and dismissing one in favor of the other would result in a flawed world view. Treating objective value as king will likely make you a “boomer wagecuck” as I call it, such that you subscribe to the mainstream idea that if you work hard at your job and improve your skills, you will be able to earn a good wage, buy a house, have a family and do some other shit. Thinking that subjective value is the only thing that matters will likely make you a cynic who regurgitates phrases like “fundamentals don’t matter man” “do you want to make money or do you want to be right” “it’s scams all the way down” and so on.
Thus the correct way to analyze value, in my opinion, is to consider both subjective and objective value, and appreciate the symbiotic relationship between them. One illustrative example is food: food has objective value in its ability to nourish us and keeps us alive, but it also has subjective value stemming from its taste, aroma, texture, history, et cetera. Subjective value is not independent from objective value: as long as a food item can nourish you and prolong your survival, you will never believe that it has no value, regardless of how it might taste. Therefore objective value acts as a kind of floor for subjective value, and situations where the subjective value dips below the objective value (e.g. when a coin gets unearned FUD) are usually good profit opportunities. A good thing to keep in mind during the upcoming zombie apocalypse.
In addition, high subjective value can gradually increase something’s objective value. This is in the playbooks of innumerable silicon valley VCs: take Uber for example, VCs pumped billions upon billions of dollars into them so that Uber drivers could be seen everywhere, making regular people believe that Uber was the future of travel and taxis were on their way out, even at a time when it wasn’t necessarily the case. Once they made enough people believe in it, it became reality. And once the continued existence of Uber was secure by virtue of their high subjective value, they were able to actually build up their objective value by improving their app and other stuff, which increased the lower bound of their subjective value, which further secured their continued existence, which…you get the gist. This positive reinforcement dynamic can be summarized as “willing value into existence”.
If I have to state a single law that can describe the dynamic between subjective and objective value as well as possible, it would be this: there exists an attractive force between something’s subjective and objective value, which is more intense when the difference between them is larger. This law describes the floor dynamic: if something’s subjective value dips below its objective value, over time it will increase until it’s roughly equal to the objective value. It also explains the “willing value into existence” dynamic: raising Uber’s subjective value far above its objective value and keeping it there required billions of dollars of continuous investment, since its objective is pulling its subjective value downwards; conversely, its subjective value exerts an upward force on its objective value, which makes it much easier to build up its objective value.
How should we think about NFTs then, using this framework?
Currently, the vast majority of NFTs are art, which have close to zero objective value and rely purely on subjective value to survive. They have not been building up objective value, meaning there is no floor on their aggregate value, which is why many folks are afraid of the price of their NFTs going straight to zero.
This kind of value composition is extremely dangerous, for several reasons. Firstly, good art by relatively unknown artists is frequently outcompeted by mediocre/bad art that are backed by people with clout who can convince the public that the art has value, since the latter employs a far more efficient & direct method for boosting subjective value. This decouples the value of art from its quality, which is not a healthy foundation for a supposedly improved art industry. Secondly, art NFTs need to constantly & loudly proclaim their existence in order to stay relevant and maintain their subjective value, since their low objective value is pulling their subjective value downwards. This makes keeping an art NFT alive quite unsustainable and costly, and the vast majority of NFTs will likely not be able to survive. Thirdly, subjective value is much more fragile and volatile than objective value, thus making the value of art NFTs fragile and volatile. Finally, accumulating subjective value is mostly a zero-sum game, since subjective value is based on belief, which is a relative metric, and on attention, which is a scarce resource. Therefore no matter how hot the art NFT market gets, it’s unlikely that the general condition of the artists involved will get much better: running faster in a rat race gets you nowhere.
Cryptocurrencies have gone through a similar stage. When Bitcoin was first created, it did not have much objective value at all: sure, you could send it and receive it, but since Bitcoin had little value the same was true for the ability to transact it. Therefore, any value Bitcoin had was based upon its subjective value, which came from people’s belief that one day Bitcoin will be huge. As Bitcoin’s subjective value increased, it became easier for people to increase Bitcoin adoption and boost the objective value of Bitcoin, which solidified its subjective value. In this way, Bitcoin was able to transition from something whose value is mostly subjective (like art NFTs) to something with a positive reinforcement loop between its subjective and objective value.
You can probably guess where I’m going with this. In order for NFTs to go to the next level, they need to start building up their objective value in order to survive in a sustainable manner, and establish a positive reinforcement loop to continue their growth. And that means shedding the status of “art” and becoming something else.
NFT > Art
I think the characterization of NFTs as art/collectibles will be looked back upon as a narrative even more horrendous than calling Ethereum “the world computer” or saying “Bitcoin not blockchain”. It’s completely missing the goddamn point.
NFTs can be so, so much more. NFTs are the other side of the crypto coin: cryptocurrencies are good at capturing objective value, while NFTs are good at capturing subjective value. An NFT is a store of subjective value, one might say. I would argue that NFT is an even more powerful primitive than cryptocurrencies, because pumping subjective value is much easier than pumping objective value, and pumping the subjective value of NFTs is much easier than pumping that of cryptocurrencies. Since the first step of the “willing value into existence” loop is pumping subjective value, NFTs have a natural head start in growing their value. The effect of this is not apparent right now, because no NFT has established this loop; the value explosion that comes when the first NFT project figures out a workable loop will surely be immense.
What will such a loop look like concretely?
I don’t have all the answers, of course, but I do have a rough idea. A project employing this loop will likely consist of both an NFT offering and a regular token offering, where the NFTs are responsible for attracting & storing subjective value and the tokens are responsible for attracting & storing objective value. The project team will first launch and pump the NFTs to hopefully gather subjective value for the project; if they fail at this step it will be difficult for them to succeed. Subsequently, the team will extract some of the raised subjective value into cash, either through the sale of the NFTs or through raising funding from VCs. After this, the team will use the raised cash to secure the project’s survival, by hiring more team members, adding value to the token, build out a protocol/platform where the token has utility, and distributing dividends. Rinse and repeat, and the project’s value can grow quickly and consistently.
Crypto projects, especially DeFi projects, will likely move away from being dry, boring, technical, and number heavy as they are currently, and become more like brands, such that they will be as fashionable and avant-garde as they are powerful.
Many projects are already on a similar trajectory, though not quite doing what I’ve described above. They know the importance of building up a brand, but they’re still employing Web 2.0 tactics, doing little more than posting memes, commissioning art, building Discord groups et cetera. To them, the branding efforts are merely advertisements for their core product, rather than a product to focus on in itself. Once these projects begin to systematically solidify their branding and subjective value into a coherent NFT offering, and put the NFT offering on the same level of importance as their current core product, then they will likely become the crypto version of Apple, offering not just technology but also fashion.
I expect the first successful crypto brand to emerge within the next 2 years. Can’t wait to see it. Can’t wait to build it.