I’m posting new material on my web site chrisliss.com, but figured I’d cross-post this one here while we get our newsletter capabilities in order. Apologies if you end up getting emailed twice when that eventually happens.
Someone is making a category error.
It’s either them or me. It could be me, but let me make the case that it’s them. Maybe in making the case, I will discover it is in fact me. If you can’t articulate something clearly, it’s often a sign you don’t understand it.
I was talking about non-fungible tokens (NFTs) with a friend yesterday, and I felt I got some clarity on them: they are not like art, and they are not even like traditional collectibles. People are valuing them by analogy to those things, but the analogy falls apart.
Imagine owning a Picasso displayed in a museum. The Picasso is there for everyone to see and appreciate, but only you have a piece of paper (physical or digital) attesting the Picasso belongs to you. While it is on display, it might as well belong to everybody or nobody — its place on the wall does not discriminate as to who holds a certain piece of paper.
But that piece of paper entitles you to take delivery of that painting, so that should you wish, you can remove it from the museum and hang it on the wall in your home. You might never in your entire life choose to do so, but you could because it’s yours. In that case, no one can see it except you and your guests. You can be said to own that painting in the same way you own your car or your house.
The NFT in the virtual NFT museum or simply purchased online is not the same. Anyone can right-click and copy it. Like visitors to the museum, it is owned by everyone and no one, as viewing that particular arrangement of pixels does not depend on who has the piece of paper (or in this case the private key) proving ownership.
But unlike the Picasso, there is no way to “take delivery” of the NFT and remove it from public view. Unlike the Picasso owner’s piece of paper, your private key identifying you as the owner does not confer upon you a special power or benefit. Yes, you can sell the NFT to someone else, but that someone is willing to pay for it does not give them the power to “take delivery” either. It only gives them the burden and opportunity of finding a “greater fool.”
Now maybe NFT’s, being programmable, will have ancillary uses like booking concert tickets or coveted restaurant reservations, and the technology itself will take off yet. In writing this, I actually convinced myself of this, and the NFT for the concert seat could even entitle the goer to a .01 percent stake in the revenues of the band’s next album, for example, incentivizing each attendee to become a marketing arm for the artist. This is a far better model than having a record label handle marketing and take a much bigger cut.*
But that strikes me as a different proposition than NFTs as art/collectibles, and the price of those NFTs would presumably be proportional to their utility in that case. In other words if an NFT entitles me to a concert seat that normally costs $300, it is surely worth $300. Maybe it’s worth extra if it comes with backstage passes, an unreleased track or a piece of the band’s album revenue, presumably the value of the ticket, backstage pass, track and projected revenue stream. But could the NFT eventually have value as a collectible — the first show by mega-group X in 2035 that also contains their unreleased single? Maybe, but I’m dubious.
Because what is it that would be collected? The private key is just a string of alphanumeric characters, and the public-facing version (maybe it’s got some cool artwork like an old album cover) is replicable pixel for pixel by anyone who right-clicks. The only thing the person who purchased that NFT has (beyond the track, passes and concert venue seat) is proof that he bought those things. While I can imagine a ticket stub from the first Beatles concert having value as a collectible the receipt (proof of purchase) for that ticket feels like a reach. And the private key is really just a receipt, apart from the cool technological utility it might have, which, again, should be priced and valued for the concrete benefits it provides. But as long as someone can send me the exact image, get me the concert seat or single, why would the digital ownership keys to those things command a premium over and above the things to which they entitle you? Maybe owning the NFT of certain bands could confer status — but why pay the premium for that when you can have a T-shirt, or just add their songs to your play list? People might pay more for an IPhone or a Mac laptop than they would for devices made by Apple’s competitors in part due to status signaling, but I can’t imagine anyone buying AAPL stock over MSFT for that reason.
Moreover, it hard to anticipate what people will later find valuable as collectors’ items, and almost universally those items are valuable because they are scarce and non-replicable in the physical world due to unforgeable age. Sports card maker, Topps, could (and has) reissued 1952 Mickey Mantle replicas, but while they can copy the design, they cannot (yet) mimic the aging process and make a perfect atom-for-atom duplicate of the original.
Why does the 1952 Mantle have so much more value than the remake? Because so long as one can ascertain which one was from 1952, when Mickey Mantle was in his second year, it is both provably scarce and connected to baseball history. But, one could argue, NFTs by definition are not only provably scarce, they are provably unique! That’s the meaning of “non-fungible.” Even if you could copy the art pixel for pixel on your desktop, the original version, the one accessible via the private key, is the only one connected to the artist or event’s history. Consider a case where technology got so good, you could in fact copy a Picasso atom for atom, mimicking the aging of the materials and exact work entirely, 3-D printed at trivial cost. (Right-click, save and 3-D print a Picasso!) In that case, would the original Picasso still retain its value, so long as it could be identified as such (say, through chain of custody)? I think probably, for a while it might.
In that case, the only real difference between original, digitally-certified, jpeg art and the Picasso would be that there was a time where the Picasso could not be faithfully duplicated. For that reason, it would probably have legacy value, just like gold still has value, even if it’s technologically inferior to bitcoin as money. In other words, the original Picasso might have value, even if it could be trivially counterfeited, due to collective memory. Gold might just be a shiny rock, but for now it still has the legacy of being the soundest money humanity had ever known for millennia. Eventually, though, as memories fade, I’d expect gold to lose its monetary status (so long as there’s another option for sound money), and the Picasso also to be worthless if it were trivial to 3-D print atom-for-atom duplicates.
This might sound like a case for NFTs — they’re just like perfectly replicable Picassos! — but it’s actually the opposite. Picassos are not yet replicable atom for atom, while NFTs are, pixel for pixel. The thing then that might one day kill off the Picassos as a store of value already renders dead the jpeg.
In 2022, the properties of scarceness and historic import that are usually necessary to make a collectible valuable are still difficult to fake, i.e., possible to authenticate. The original NFT also has proof of authenticity, but it’s not due to age and history — it’s decreed authentic by code. In other words, the NFT’s uniqueness has been granted by fiat, not by surviving over time. There is no proof of work, so to speak, the work of enduring in the physical world while other versions are destroyed, damaged and decayed. The NFTs are scarce by design, not by the organic process of mothers tossing untold future fortunes into the trash while cleaning out closets in the 1950s and ‘60s.
There is actually a parallel to this in the baseball card industry.
In the mid-1990s, the baseball card companies, having overprinted worthless sets for a decade that, to this day, have not appreciated much as collectibles, took a different tack. They started creating cards that were scarce on purpose by having, say, 1 in 500 or 5,000 of a particular card come with a player’s signature, or tiny piece of game-worn jersey or chunk from his bat. Immediately, the value of those cards — you had to buy a lot of expensive premium packs to luck into them — skyrocketed. I remember seeing a brand new signed Alex Rodriguez (then the biggest young star in the game) worth $500 right out of the pack! But the problem was every card company was incentivized to make scarce versions of star players, so that while each individual special card was scarce, there were several different competing versions. And of course, it was contrived — scarcity by design rather than survival over time. And predictably, most of those early valuations (even for stars) did not hold up over the decades — with a few exceptions, they failed to keep pace with vintage cards from earlier eras that had earned their scarcity.
So while I don’t doubt NFTs, run on a secure and reliable platform, (see footnote) might be the future for many forms of commerce, I won’t be investing in any jpegs or digital collectibles any time soon.