Most people can understand utility tokens like ENS domain names. However, I haven’t seen a compelling case for why an NFT of a cartoon rock should sell for millions. Is it some sort of scam? Without further ado, here are some perspectives:
NFTs are a way for artists to get paid
This makes intuitive sense for cheaper NFTs. Say you’re an artist who makes digital art. There’s no sense of scarcity. There’s no “original” file. With paintings, once you sell it, the object is out of your hands. NFTs let the artist sell a title to the art in the same way you can sell a title to a car. The argument is convincing if the artist sells for the labor cost of producing the art. But some NFTs sell for millions, and that’s where it feels like something else has to be going on.
NFTs are a scam
I can think of one way this can play out. The key insight is that the blockchain doesn’t necessarily contain all the transactions between parties. I can sell you an NFT for $1 million in crypto. I then cash out the $1 million and make a bank transfer to send that money back to you. So, why would I do this?
Suppose I’m an artist and I want to make a living from what I do. Making money as an artist is hard. However, suppose I have a wealthy friend, and we trust each other. I know that I’ll get some attention if people see that I sold my art for $1 million, and it will generate interest in my work.
So I “sell” the NFT to my friend just to get that price information out there and to generate buzz. The hope is that my future artwork will actually sell for $1 million because I now have precedence for selling at that price, and there’s a chance someone else will be duped into paying that amount.
NFTs are a way to launder money
Suppose a drug dealer also happens to be an artist. Large transactions are suspicious. However, people do buy expensive art, and so the drug dealer becomes a shitty “artist” as a cover for the real business he’s engaging in. He puts on art shows, but also after-parties. Those in the know get access to a fun party. Those not in the know buy the art while unknowingly subsidizing some people throwing wild secret parties. This plausible deniability is what adds a layer of thrill to the art market. When you’re buying a painting, you have no idea what you’re actually buying. And if you’re the confidence artist, you mostly want to keep it that way.
NFTs as risk management
Ethereum can go up or down. Buying an NFT can be used to manage risk, or make your wealth less legible. Suppose you bought an NFT for 1 eth, and the price of Ethereum drops to almost nothing. Suppose the artist spent 80 hours on the piece. Is the piece now worth nothing since Ethereum is worth nothing? If the art at the point of sale was worth $3000, maybe it’ll be more fair to adjust to that?
If you’re the owner of the NFT, there’s a sense in which you’re better off than someone who holds eth. The eth holder always experiences the full drop in the value of his assets. The NFT holder might experience the full drop, but maybe not.
However, it’s not quote so straightforward. If you bought your NFT for $50 worth of eth, you might lose the entire $50 even if eth’s price stays strong. There is a way ensure that your money isn’t wasted, but you need to have balls and be willing to go big. You need to buy an NFT that will become widely recognizable, and this is where we get into the next perspective on NFTs.
NFTs are legitimate artisan money
This is a long and complex argument, but I’ll try to keep it simple.
Some things you want in money:
Easy to carry around
Hard to counterfeit
Has stable value
Widely accepted
NFTs are easier to carry than a painting. An NFT on a crypto wallet is a very space-efficient way to carry value. If you’re wealthy, sure, you can keep your money in a bank. If you think the money is safer with you than with a bank, then you want to convert it into something that’s simultaneously portable and valuable.
You can look at fiat money as government sanctioned mass-produced art. It’s democratized art you can keep in your pocket, and there’s limited supply. The more limited the copies, the more value it can have.
However, a painting can be forged. This is something NFTs solve for. Trump supposedly owns a fake painting believing it to be real. A fake painting doesn’t have to be a copy. It can be an original painted in the style of someone like Picasso. NFTs can’t be forged. You know who you’re getting your NFT from, and nobody can pass off a fake unless they steal the artist’s private key.
In the blue chip art market, paintings tend to retain their value. Maybe it’s that they’re used as a store of value, or even more simply, a way to keep track of value transfer. Most of the most expensive paintings have faces in them just like the $20 in your pocket.
Money also needs to be widely accepted for it to be useful. The US dollar has this quality. People know what it’s supposed to look like and what to do with it. Some paintings also have this kind of global appeal. Take the Mona Lisa. Its value transcends borders—we all know what this painting looks like. Many of us know which museum is resides in. Doesn’t this feel a lot like a distributed ledger? The value of a painting isn’t guaranteed by a bank, but by public appeal and knowledge. We care about the arts because it is in the best interest for the wealthy for everyone to know about a very specific set of artists.
NFTs are more of the same
The primary difference between paintings and NFTs is that they’re stored on different blockchains. One is stored on the meathead blockchain and the other is stored on computers.
A painting is a unique id in the form of an artwork designed to be easily stored in the visual cortex. This ID is then associated with a price in a distributed brain ledger.
Maybe NFTs selling for outrageous prices shouldn’t be so surprising. Jackson Pollock sold his paintings for millions. Almost any artist could have done what he did. However, what’s important is that you can’t make the same paint splatter twice, and therefore his paintings had a special anti-counterfeit quality and cheap photography made it easier for copies of his painting to be distributed.. Jackson Pollock’s paintings sold for lots of money because he could convince enough people to take photographs of his art, and not simply through some inherent quality of the art itself.
If someone claimed to have the original, they could be checked against all the photographs available. There’s a great deal of distributed effort involved in ensuring the authenticity of his paintings at this point. All of this work costs money. If everyone forgot about Jackson Pollock, his art would lose all value.
The more international appeal a work of art has, the more secure it is against collusion. You get a kind of protection that resembles a distributed blockchain. Maybe this whole time artists have been yearning for something like NFTs to show up, and it is merely the latest iteration of an old idea.