NFTs and Human Nature
There are sound first principles fueling demand for scarce digital assets, but can manufactured scarcity fool people for long?
First, sincere apologies on the 3 month unplanned sabbatical I took from writing. As some of you may know, after a difficult last year of his life, my father passed away in January. He was 82 and lived a full life, but the death, and the events leading up to and after, put me in a bit of a funk for a while. But I am back home now and getting back to a regular schedule in terms of work, diet, and exercise. I am hoping to achieve a more regular publishing cadence going forward. Now on to the article.
Much has been written about the technology and rationale behind Non-Fungible Tokens (NFTs). And last weekend, we saw some crazy bidding on Jack Dorsey’s first tweet in 2006. The highest offer as of now is $2.5M. Of course, this is a tweet that is available online for free, but that seems hardly the point to prospective bidders. They are seeking to buy a digital asset encapsulating the tweet that is cryptographically signed by Jack Dorsey, stored on a public blockchain, and thus unique.
WTF right? Imagine what perverted celebrities like Trump —with the proclivity to run fundraising scams and a rabid fan base —might do with their rich trove of tweets, gifs, and tiktoks. (Note: a screen shot from an erstwhile twitter account is good enough to make a NFT out of, even if the account is now suspended).
There are more fundamental questions: a) Who is buying these NFTs and why?, b) Is this a pump and dump more akin to a ICO 2.0, c) How to segment the NFT market to make sense of it, and d) How might this likely pan out over the next 12-24 months?
First, let me set some context on the why and how of art is valued. Take Mona Lisa for example:
Last year, the Louvre received more than 8.1 Million visitors, and the Louvre management believes that 90% came primarily to see, snap, and selfie the Mona Lisa. [1]
Very few of these visitors are art connoisseurs and most do not know the ABCs of Art. So why pay entrance fees and visit in the first place? It is to experience the art in person, acquiring the bragging rights associated with the moment, and do something they believe is special.
The same concept also applies to ownership. There are high quality digital reproductions of the Mona Lisa available for free. But the original has only grown in value and now worth an estimated $860M. There is only one original Mona Lisa by Leonardo Da Vinci. It is a scarce asset. The valuation is not based on any intrinsic quality (the canvas, the paints, the materials or even the quality of the art per se) but the fact that it is unique, famous, and highly sought after. Art collectors are paying for owning something special that they know will also be valued by many others.
Similarly, Jack Dorsey’s tweet’s value derives from scarcity (there is only one first tweet with Jack’s verified signature), and the status of owning that scarce thing. It also provides a sense of tribal identity with others who can afford such items (or) who are fans of the creator.
Also see the conversation below around the sale of a Lebron James Dunk video for $208,000 (available for free here) on NBA Top Shot.
Jesse (the buyer of the moment) tweeted about it.
He also changed his Twitter Bio.
I am reminded that in Maslow ‘s hierarchy of human needs, “Esteem” is the layer where the individual desires fulfillment of psychological needs. It means both a) esteem for oneself (dignity, achievement, mastery, independence) and b) the desire for reputation or respect from others (e.g., status, prestige).
What NFTs seem to do —at least for some humans —is provide the second type of esteem. There is enough demand out there from people with wealth and high disposable income to buy, exhibit, and re-sell things that confer status and interestingness on them. It also translates to plenty of opportunities for flipping the assets in a secondary market.
Of course, the same behavior —ownership for status or enjoyment, and not utility —has existed for a long time in the offline world. Collecting sneakers, baseball cards, stamps, pokemon cards, etc. all appeal to the same human instincts to own scarce items, trade them, indulge in self-expression, and show them off . But it was only possible in the physical world of atoms where assets were tangible, real things; not in the world of bits, where you could make a million copies of anything and publish anywhere. NFT allows creators to manufacture and enforce scarcity online.
Is NFT a Bubble that will Crash?
We are in the beginning of the beginning. Remember the crypto kitties cycle? Imagine something similar but longer with multiple orders of magnitude more participation from brands and creators, large and small. The initial buyers are still largely the crypto nouveau riche. But the froth is building and the noise is ratcheting up.
The framing of bubble or not is a false choice. It is possible to believe in the underlying market opportunity for NFTs without dismissing the irrational exuberance. David Rudnick articulated this well.
Also, not all NFT markets are created equal. The level of genuine market demand, potentiality, froth, and speculation vary widely by segment and use case.
NFT Segments and Use Cases Span a Broad Spectrum.
It might be interesting to explore NFTs along two primary axes: Type of Good Being Sold (Physical vs. Digital vs. Hybrid), and Type of Scarcity (Real vs. Artificial).
Tokenizing unique real-world assets with organic scarcity to make them more liquid, fractional, and tradable is very different from creating new digital assets and infusing them with artificial scarcity where the creator (or) platform can mint as few or as many as they deem fit to generate interest and boost bidding.
In the next article in the series, I will cover each of these segments, the market opportunity and barriers, and the projects and experiments under way.
[1] Vanity Fair Article on the Louvre and Mona Lisa