NFTs: Non-fungible, but not immutable

Let’s face it – there’s only one word that can adequately describe what’s happening around NFTs now and it’s a “frenzy”. From the first generation of Apes, Rocks, Fidenzas and Ringers, to the growing interest around play-to-earn games like Axie Infinity, to the Facebook/Meta renaming-triggered metaverse mania – everyone’s trying to make their mark in the NFT space.

Not everyone can spin up a game, but when it comes to randomly generated art (or even text, like Loot and its many derivatives), everyone can take a wild shot. And so it was, that we saw randomly generated everything: dogs, pandas, gangsters, cats in mugs, geckos – you name it, and someone probably had a shot at it.

But few will succeed. Of those which fail, failure may well come regardless of the aesthetic or artistic quality of the NFTs minted. There are simply too many NFT projects around, each jostling for a VERY limited number of spots in the hall of fame of NFTs. The result: a graveyard of failed NFT projects, with tokens not only trading at floor prices of close to 0, but in many cases, with tokenholders facing a market with zero liquidity, and learning the true definition of “non-fungible”.

With the exception of famous collections like Fidenzas, Apes and Punks, and even then, only the top rarity ones, the reality is that within this graveyard of NFT failure does lie some artistic or aesthetic quality. However, with many of these NFTs minted via randomised first-come-first-served minting processes, the NFT world has become one beset by the tyranny of the lucky.

Only by overcoming this tyranny can the projects in the graveyard of unsuccessful NFTs find potential salvation.

Is it possible? Potentially, but only if one thing is made clear: that NFTs are non-fungible, not necessarily immutable.

The tyranny of the lucky

One of the most appealing aspects of the world of crypto is its openness and the ability for anyone to make life-changing wealth just by being early and making the right decisions. Censorship resistance and permissionless access are the cornerstones of what sets crypto apart from the centralised, permissioned institutional offerings the community so vehemently decries.

NFTs, too, were meant to be the logical extension of this openness to assets that weren’t necessarily financial in nature. Randomly generated pieces of imagery, whether in the form of generative art (like Fidenzas) or generated profile pictures (like punks and apes), were arguably most “fairly” sold in a random draw: buyers would interact with a smart contract on a first-come-first-served basis, and be given a randomly generated or selected piece from a collection. Luck of the draw, how could things get more fair?

In theory, this meant that everyone had an equal chance of minting a super rare piece of the collection, which could be worth hundreds of times the minting price. In practice, however, assuming the odds were stable for every mint, the probability that someone with deep wallets mints enough pieces to land at least one super rare specimen is much higher than someone with a much smaller stack to play with.

Furthermore, the first-come-first-served nature of these minting events meant that popular projects were often sold out to “whitelisted” addresses before the general public even gets a chance to know about them. Add minting bots that hit the smart contracts directly to the mix and the reality is that most “normal” crypto people will never even get a whiff of the “best” projects around.

As such, many go to the second tier, and the third tier, and the fourth tier and so on, trying their luck in the hope of minting the next big thing, holding out eternal hope that MAYBE on a lesser-known project, with a lower minting cost/less crowded queue, they have a chance of minting the rare ones, not realising that an unknown project by virtue of being unknown has little chance of benefiting from the hype brigade. Millions are collectively spent on gas fees and minting costs, potentially benefiting the odd artists along the way, but ultimately that is capital condemned into a black hole of non-fungibility.

On the flipside, those who through either luck or statistical advantage (more mints, more chances) seek to protect the rarity of the items they’ve minted in order to preserve and increase their value. One could cynically argue that it is in the interests of super rare NFT holders to promote the proliferation of MORE run-of-the-mill NFT projects in order to underscore the increasing relative rarity of the original rare specimens.

Underlying all of this is the idea that NFTs also need to be immutable: cast in stone at their minting, never to be changed, and the value of the rare NFTs come solely from the same fact that they are statistically rare and scarce, especially relative to their common siblings.

We don’t like to name names, so we won’t, but keen observers of this space would have seen multiple incidents of squabbling over the rights and privileges the “original” holders were to be entitled to, to the exclusion of those that came along later. Squabbles like these turn promising open-community projects into hoarding competitions which ultimately descend into decision paralysis.

Breeding a new form of elitism born out of luck is arguably as bad as that born out of privilege.

A chance at salvation

In our minds, conflating the immutability of blockchains and the non-fungibility of NFTs into one single concept is a major fallacy. NFTs are non-fungible, but nothing more, and there’s no reason at all they can’t change or be improved – made more aesthetically pleasing, rarer and/or more valuable.

We haven’t yet come across any project that attempts to do this and would love to be pointed in the right direction should there be one. But conceptually, the idea of a protocol that takes NFTs in a collection and merges them (burn 2 to get 1, for example) for a fee to upgrade and “re-roll” its characteristics as a function of the defined rarity framework might be interesting. Such functionality serves the dual purpose of 1. Reducing the existing supply of NFTs by burning at least one in the process of upgrading; 2. Improving the rarity of the resulting NFT, in accordance with its own rarity characteristics framework.

To be clear, such a protocol would not necessarily create utility where there wasn’t any before – a poorly designed generative art project, even if rendered “rarer” on a statistical basis, would look no more pleasing to the eye despite improved rarity. What it does do is allow the well-thought out, well-designed projects to shine, where they had possibly been drowned by the multitude of other projects in the past.

There are examples of projects that have recently introduced such a burn and merge mechanism: for example, we saw this with the POTE(n)ZAs project launched on Nil DAO (the DAO governed by holders of The N Project NFTs). POTE(n)ZAs are initially minted as Black and White randomly generated designs, which their individual rarity characteristics. Subsequently, two black and white POTE(n)ZAs can be “burnt” and merged into a single-coloured design which, by construction, exhibits statistically rarer characteristics than each of its constituents.

Similar to how lower-grade items in games can be used to “craft” better quality ones, there is room for the concept to be applied to NFTs. Is there a market for some sort of “Artisan” contract, where low-rarity NFTs can be brought to be merged and reconstituted – given the resources intrinsic in the constituents – into a better NFT?

We certainly think so, and we’re sure that many NFT holders would find it useful too.

Now imagine floor punks being merged to generate a rare punk.

Win, lose or draw?

Does it hurt the holder of a rare, randomly generated NFT that there now exists few common NFTs around? Arguably not – after all, one could argue that a rare that was generated at genesis is rarer than a rare that was generated through multiple rounds of crafting and merging.

Going back to the point that we made in the beginning about the permissionless, open nature of crypto, we are certainly not in the camp that a chance to create generational wealth is the preserve of those who are already wealthy or lucky. There must always be a way up.

As it stands, there aren’t many options for someone who, through statistical unluckiness, ends up with a common, unglamourous NFT from a first-come-first-served mint, to climb the ladder of rarity. Buying more floor NFTs in the market doesn’t help, because the rare ones are hoarded; and owning more unwanted floor NFTs just makes him/her the greater fool.

But introduce a way to burn floor NFTs and start combining them, like breeding wildflowers into rare breeds, and suddenly the whole dynamic changes.

That’s before even considering the possibilities of cross-breeding different series of NFTs.

And that is what we call a whole lot of fun.

Immutability is for blockchains, and that will never change.

For NFTs, the only requirement is to be non-fungible. Everything else is fair game.

Eugene Lim