NFTs – Quietly building in the background

Less than 2 weeks ago, crypto was dead in the eyes of the market. Then came the news that Blackrock was filing for a Bitcoin Spot ETF, along with the crème de la crème of “TradFi”, while at the same time Citadel et al launched a crypto exchange, EDX, offering an eclectic array of assets, specifically BTC, ETH, LTC and BCH.

The about-face in market sentiment was arguably as stunning as the grimness that preceded it, as “the institutions are coming” once again became the meme of the day. The hope: that the institutions that dominate Wall Street successfully twist the arms of crypto’s most hated regulator, the SEC, and that their success heralds in another great bull market.

The vacillations of US$1.1tn of market cap (yes, it’s a third of the peak market cap in late 2021 of almost US$3tn, but it’s not a shabby number either at current levels) are often what catch the attention of the market. Crypto’s latest run has earned it some days in the sun of the mainstream press especially while the numbers are going up, but if one were to judge the success of crypto on the trajectory du jour of its token prices, it would quickly be written off as mere series of flashes in the pan.

As the debates around the topic of the day rage on – and to be sure, they are very pertinent debates that have material impact on prices – there remains one segment of the crypto space that continues to demonstrate great promise which has yet to be fully discovered.

We wrote back in 2021 that NFTs were something you’ve been doing all your life anyway -  collectibles of all shapes and forms, conferred value as a function of demand and scarcity, not necessarily by an entire population but certainly by enough people to argue that the price is real.

And perhaps it is ultimately in NFTs, rather than their fungible counterparts, that crypto finds its sweet spot, its “killer app”.

Breaking out

This podcast featuring the great anonymous NFT collector known only as Punk 6529 (complete with a voice scrambler in his interview) gave us much to think about within the NFT space. 6529’s discourse around the importance of digital ownership and permissionless protocols is fascinating and extremely well thought out, but where he speaks about how NFTs separate the ownership of an art piece from the ability to view that same piece, fundamentally changing the way art as an asset is stored, appreciated and ultimately valued, that gave us much to think about.

As far as real-world adoption is concerned, the NFT space remains crypto’s best shot at mass adoption – and with good reason.

The fungible life of crypto so far, from Bitcoin to Ether, to DeFi to CeFi to CeDeFi to DeFi 2.0 to GameFi and so on, offered independence from centralised exchanges and counterparties. And while its innovation brought liquidity and access to many, its very nature was financial, which meant naturally that it appealed only to a specific subset of the population – much like trading in stocks, bonds, FX and derivatives is considered “fun” by some, and “too complicated” by everyone else. Its use cases were therefore relevant to and appreciated by a limited subset of people, and once it got to saturation, it started to feed itself more and more leverage until the inevitable rebalancing we saw.

After a certain point, innovation became incremental, and sometimes even the “same old brand new” features, as new founders who were sufficiently removed from the previous market cycle doom themselves by reinventing the same mistakes as their predecessors. To top it off, these purely financial innovations inadvertently draw the ire of regulators and incumbents, as we see happening now. The result: either regulation and/or co-optation, both of which lead to the same outcome of assimilation into the same system crypto sought to escape. Indeed, we need look no further than the spot ETF applications being lauded as crypto’s salvation to see the contradiction.

For crypto to escape the very system it seeks to circumvent, it needs adoption that is so widespread that it cannot be regulated back into a box. It needs to graduate from the realm of speculation to being useful, or – to quote an old crypto term – “utility”.

Utilitarian Degeneracy

Punk 6529’s latest acquisition is a piece called The Goose, part of a series call Ringers, previously owned by the infamous hedge fund Three Arrows Capital, for which he paid an eye-watering US$6.2m in a Sotheby’s auction of 3AC assets - even in this crypto bear market. There’s no doubt he’s a serious art collector in both the physical and digital space – he has set up a museum of digital art on-chain, but it is through this that he explains his thinking of how digital art and NFTs fundamentally rewrite the rules of owning and displaying art.

The argument goes as follows: 6529 owns a Warhol piece at home. It is visible by visitors to his home, but from anywhere else in the world, that piece of art is not going to be visible. He could put it in a museum, but even so, putting it in New York City still leaves it inaccessible to the vast majority of the world’s population. Prints of the Warhol piece could be made, but it’s just not the same anymore. In contrast, a collection of digital art is visible by everyone, anywhere in the world, as long as they have an internet connection. The ability of many to view the original “Goose” takes nothing away from his ownership of the piece.

What does that mean for the value of the Goose? In a way, it becomes a public good: its purpose, which presumably is to be looked at, is not diminished by being consumed. It is non-exclusive, but it is owned by a private individual, and yet in contravention of all standard economic theories around non-exclusive public goods, it has great private market value.

The economic paradoxes around NFTs extend beyond NFT art. Already, as underscored by our friend Stephen McBride at Riskhedge, corporates have made significant forays into the NFT space: from the NBA to Starbucks Odyssey to Shopify now offering tokengating APIs, a concept that was highlighted by Alex Danco when he moved to Shopify to make this a reality in this post just over a year ago.

Tokengating is just the tip of the iceberg, and it’s already a huge iceberg – the addressable market is effectively the entire world of ecommerce. But unlike the usual loyalty scheme, if access is controlled based on the ownership of a token, and the token is sold, then is there a market for “powered up” tokens?

It can’t just be about the money

Rather than the purely financial applications that crypto has spawned to date in the fungible space, NFTs continue to offer the prospect of something less speculative and more utilitarian. How it does so isn’t clear yet, but under the hood, the experimentation continues.

Add to this the ability of NFTs to represent anything non-fungible: from physical assets to memberships to claims and rights on property, and things potentially get very interesting. All that said, it’s still not entirely clear where the value accrues with all of these, and it’s something we’re actively seeking to discover.

Staying out of the territory of finance has the added benefit of being out of the purview of regulation. Furthermore, the addressable market is way bigger. To be sure, the low-hanging fruit in crypto is gone, but what is clear is that for those willing to put in the work to think carefully about what crypto can REALLY do for us, the answers might turn out to be highly lucrative.

Ultimately, the bottom line is this: crypto may look dead, and especially so with NFTs. But writing the space off, especially during this stretch of “crypto winter” that we’re seeing, is likely to be a costly mistake.

Eugene Lim