NFTs: You’ve been doing it all your life anyway

Photo by Thom Holmes on Unsplash

For most people, fungibility isn’t something that comes up in daily conversations, partly because it’s pretty much intuitive what is and isn’t fungible: incidentally, it is the things that matter which aren’t fungible – the home we live in, the relationships we have, the things we collect and/or enjoy, whether art, stamps, cars, figurines, whatever tickles our fancy.

The things that don’t matter so much, easily substitutable one for another, are the fungible ones, and the most fungible of it all is cash. Cash is the lowest common denominator: the one thing whose value everyone can agree on as an intermediate medium of transaction, solving the need for a coincidence of wants.

In exchange for cash, we provide our time, effort, labour and capital, but accumulating cash was never the end goal of our existence. That cash needs to go out and do something – part of it goes to pay off living expenses, but the rest of it goes towards acquiring the things that give us utility, or our much-loved word, Nachas.

Some of these can be consumed, some of these are experienced and others are bought to be displayed and appreciated over time. Whatever each individual’s inclinations may be, the general idea is similar: fungible assets (cash) derive their raison d’être from their ability to ultimately purchase non-fungible assets for personal enjoyment.

In this context, it becomes much clearer how the blooming ecosystem around NFTs could easily start to assimilate ever-larger segments of the economy into its networks. As always, we are on the lookout for developments that cause material disruption to business models, particularly at the nexus of crypto and traditional businesses.

Where concepts like DeFi were already ground-breaking in their nature, the ability of NFTs to bring the unfettered distribution of the decentralised web to literally any form of asset (not just fungible financial ones), in addition to creating NEW classes of objects that people can spend money and derive their individual satisfaction from, is fascinating.

And contrary to the cynic’s view, it all starts with “real life”.

Artefacts of time

Many factors contribute to a thing being rare. Scarcity is one of them – but not everything that is scarce is de facto rare, or even valuable. Rarity has a notion of value attached to it, and value can only come from the item or object in question being of use (whether sentimental or practical) to its owner.

More important than scarcity are perhaps the notions of time and provenance: an object that was created or acquired at a specific time (and/or place) is something that is not only rare; it is absolutely irreplaceable. Think about a sheet of papyrus from ancient Egypt, even if just a fragment – in terms of raw materials, it costs nothing; but if proven to be millennia old, then its value is off the charts, because it represents something from a time gone by that can never be replicated again. Sure, new sheets of papyrus can be made, but it’s just not the same.

Most importantly, the value of an item has very little to do with what can be done with it. Fragment of papyrus from King Tut’s tomb? Certainly not using it to scribble down a shopping list; it’s going into a hermetically sealed glass case and put on display because it’s equivalent to calling dibs on a world from 3.5 millennia ago.

When it comes to collectibles, old is often better, because time is the one thing that cannot be manufactured and replicated.

Of course, collecting relics from ancient civilisations isn’t exactly everyone’s cup of tea, and that’s also perfectly fine. Just as a fan of archaeology would pay top dollar for a papyrus fragment, and a wine connoisseur for a 100-year-old Bordeaux Grand Cru vintage, and still seem like absolute maniacs to the rest of the world, value is in the eye of the beholder.

The world of NFTs is arguably just a digital iteration of what people have already been doing through the centuries: it is a record of time, a ledger of ownership of specific digital assets that attests to that fact.

Punks, apes, Bitcoin volatility art, Loot, Numbers, Colours – these can make as much or as little sense as collecting ancient relics or century-old wines, depending on who you ask.

At least with NFTs, storage and spoilage aren’t really issues.

To each its own value

Now whether you consider it worthwhile to be part of a club of Ape or Punk holders is again a matter of personal choice. In the world of the non-fungible, not everyone needs to agree on a market value, unlike fungible assets that need to have a well-defined market value so that they can act as viable substitutes to whatever they are fungible for.

That seems to be the hurdle that many of the sceptics fail to get their heads around when they ask, “how can you pay so much for a JPEG of a rock/monkey/penguin/punk??!”. “You” (the buyer) can pay whatever “you” want to pay, and the seller can accept whatever the seller wants to accept, and it would have no consequence on anyone else outside that transaction because in effect that transaction of a non-fungible token, being non-fungible, has no direct impact on any other asset.

One may choose to base the valuation of a similar-looking asset to latest transaction prices, but then that puts the individual in question in the bucket of a speculator – along with all the attendant risks of speculation.

Make no mistake, there is a lot of speculation going on – that’s human nature. But buying an NFT for millions of dollars is a different kind of decision.

It’s a decision that buys the owner of the NFT membership to a club that counts increasing numbers of the rich and famous, both crypto and non-crypto royalty, amongst its ranks. From Steph Curry to Snoop Dogg – these are heavyweights in the “real world” in their own right. How much would you pay to be able to able to hang out with them in a private club for NFT holders only?

Quite a fair bit, we’d guess. More if you’re a fan.

Just the beginning

We return to our point at the beginning contrasting the fungible and the non-fungible, and hopefully our thinking process is becoming clearer now: applications like DeFi deal in the fungible – more money, more yield, more tokens earned. These applications of fungible tokens echo the beginnings of crypto, with Bitcoin as a payments system – financial applications like payments, derivatives, trading, lending etc fall into that bucket.

But life isn’t only about the financial and the fungible. It’s not only about “buy low, sell high”.

The world of NFTs opens the fundamental characteristics of a decentralised web to all of the non-financial activities that we as humans undertake in our daily lives: from purchasing homes to picking up collectibles to signing up for a club membership, but with the unfettered global distribution and reach. No geographical boundaries, no physical limitations.

We’ve already seen NFTs enable the previously impossible, like large-scale play-to-earn with Axie Infinity (each Axie is an ERC-721 standard NFT), which incidentally also disrupts the traditional payment rails of credit/debit cards and bank transfers, making wallets available to the unbanked all around the world. Not to mention effectively circumventing app store fees since all transactions are on-chain rather than in-app.

And we’ve also seen NFTs take existing concepts like avatars and art collection and give it a steroid pump to the next level with Apes, Punks, Penguins and Rocks. The skeuomorphic applications (e.g. trading homes on-chain and representing title deeds with NFTs) are interesting, but more fascinating are the new businesses which can come into existence which we can’t even begin to imagine right now.

The visual representation of the NFT is just metadata, but its essence is a certificate of provenance of time and place – when was the NFT minted and with whose contract. And with every transaction happening on-chain, it also creates a full audit trail of every single holder in a token’s history.

Add this to the idea of the metaverse, which we have written about extensively, and it is not hard to imagine that the metaverse version of “swag” – whether having a Rembrandt painting in a sitting room, or a limited edition Birkin Bag from Hermes, or an autographed pair of Phil Collins’ drumsticks (all of which have close to zero practical utility) – would come in the form of NFTs with provable and traceable origins. No questions on whether it’s “real” or not.

Of course, there will be trash, lots of it – but it’s no different from the real world. How would anyone be able to know if the next Andy Warhol is the next Andy Warhol until he/she becomes the next Andy Warhol? Until the fact materialises, it’s just a gamble, unless of course you’re “in it for the art”, in which case you probably don’t care whether it’s the next Warhol because why would you sell something you enjoy looking at?

To top it off, we haven’t even got started on NFTs that have the potential to generate cashflows – much like a car, a building or a plot of land in real life (equally non-fungible), these could well derive additional intrinsic value in a growing metaverse, based on nothing less than cold, hard cashflow.

There is a lot to think about when it comes to what we can do with these new digital objects, and if we can’t seem to piece anything together in our heads, it’s likely for want of truly letting our imagination run wild.

In the beginning, there was nothing

NFTs aren’t going away. Rather, they’re just getting started. After all, non-fungibility it turns out is a concept that has been with us all along.

To date, only 30k accounts were active in the last 30 days on OpenSea (source: dAppradar), the largest NFT marketplace around, clocking in 2.39m transactions worth a total of US$2.74bn – that’s tiny in terms of participation, and microscopic if we consider that in the “real world”, the total value of the global real estate market (the most non-fungible thing around) is larger than the total values of global equity and fixed income markets COMBINED. It is yet to be seen what the digital equivalents, or in fact the non-equivalents, could be, and we’d rather err on expecting it to be larger than – rather than smaller than – their “real world” analogues.

That said, there was a first bubble in NFTs earlier this year (remember Beeple’s auction?), and arguably there’s another one now, and there will be many more to come. But such is the way of nascent industries and the unavoidable cycles of hype and bust on the path to development.

We are of the view that ignoring NFTs and writing them off is something to do at your own peril. Their potential to spawn new applications as a primitive of the decentralised web is profound.

But just remember, speculating and flipping these things comes with an extreme warning as they are illiquid and there a lot of weird stuff going on too.

Rather just make sure you are in it for the Nachas.