Rabbit Hole #8: Non-Fungible Tokens
Fourth and last post exploring the crypto rabbit hole 🪙
In my never-ending quest to find the true shape of my online writing, I reorganized this newsletter a bit. Now it’s called Étienne’s Newsletter Universe, with two sections: Atlas of Rabbit Holes (you are here!) and Updates from Dark Gray Matters. The latter will be used for updates to my other blog. By default you’re subscribed to both, but you can unsubscribe from either separately.
This is my last week at Creator Cabins, and so it is my last week exploring the crypto rabbit hole here. Next week we return to totally random topics!
So far we’ve covered DAOs, blockchains and Bitcoin, and Ethereum. It was a bit of a weird ordering, since DAOs are an application of the Ethereum blockchain. But they say that there are many ways into the rabbit hole, so here we are.
The other application that gets talked about a lot is NFTs. So let’s talk about NFTs.
WTF does NFT mean? It stands for Non-Fungible Token.
Non means negation. Mind blowing, I know.
Fungible, a word that no one except economists used prior to this year, means interchangeable. Dollars are fungible: you can exchange a dollar for another and you won’t see the difference. Non-fungibility means uniqueness.
Token means some unit of information on a blockchain.
Did that help? No, that didn’t help.
First let’s clarify what a token is. I’ve always found this word confusing, because it has so many different meanings. Maybe the most useful synonym is symbol. A symbol is a thing that represents something else.
The symbol can be physical, as in poker chips. Poker chips are tokens that represent some amount of money. They also have some specific properties (like being accepted at poker tables in a casino).
More generally, money itself is a type of token. Coins and banknotes are a physical representation of some amount of wealth.
And money can be digital. When you put money in a bank, what you get in return is a verified piece of digital information — some data in the bank’s computer systems — that represents the money, and therefore the wealth, that you own. The token is literally that piece of data. Cryptocurrencies are the same, except that the bank is replaced with a blockchain.
But just as you can represent money with a physical token like poker chips, you can represent pretty much anything in the digital world (and beyond) with a digital token, if you want. For instance, “shares” in a DAO like Creator Cabins are called tokens. These tokens are stored on the Ethereum blockchain, they have some value, and they have specific properties (like being accepted to vote on Creator Cabins decisions).
All of the tokens I mentioned so far are fungible. Two red poker chips worth, say, $50, represent exactly the same thing: $50. And not two different instances of $50 (dollars themselves are fungible, so that wouldn’t even make sense). Poker chips are interchangeable.
(I mean, unless you go to a different casino. A fungible token isn’t interchangeable for any other kind of token, although it can be traded.)
Non-fungibility means that the token represents something unique. There’s no interchangeability possible. The clearest example might be real estate: your house is your house. It’s unique, and you have a token — a notarized piece of paper with your name and the address of the house on it, or something — to prove it’s yours. If you traded that piece of paper with someone else’s, then you would own a different house, with different properties (notably, it would be in a different location).
Deeds of property are a physical token representing a physical thing. When we talk about NFTs, we usually talk about digital tokens, stored on a blockchain, representing a digital thing (although not always; NFTs can very well represent physical objects too).
The most common use of NFTs right now is to trade digital art. Go to a marketplace website like OpenSea and browse around: you’ll see a wide variety of works of art, from cool 3D models to collectible profile pictures.
The most expensive NFT ever sold represents this collage of 5000 images called Everydays: the First 5000 Days. It sold in February 2021 for about 42 000 ETH or $69 million. Here’s a low-resolution version:
Wait, you may say. Why would someone pay $69 million for a work of art that anyone can just copy-paste from the internet into their newsletter?
Ah, this is where NFTs become interesting. And where the controversy begins.
You see, an NFT, as we discussed, is just a piece of data on a blockchain. It is not the artwork itself. It may not even come with any rights related to the artwork! For example, Beeple, the artist who created Everydays, still holds the copyright to his work. The buyer, known as MetaKovan, doesn’t. (This particular NFT, however, did come with a right to display the artwork. In general, NFTs can be bundled with all sorts of licenses to give more or less rights to the buyer, including transferring copyright if that’s what the artist wants.)
So what’s the point?
The point is artificial scarcity.
Let’s get philosophical for a moment. Most people in rich countries today live in an age of abundance. We extremely rarely lack any of the necessities of life like food and water. And we have access, thanks to the internet, to far, far more art and entertainment than it would be possible to consume in a lifetime.
But scarcity, counterintuitively, can be fun. It’s fun because we like feeling special. We like owning things that others don’t.
So yes, you can copy a digital image in your computer all you like. But you won’t feel special about it. There’s nothing special with having a pic of a famous painting in a folder on your desktop.
The painting Interchange by Willem de Kooning was bought in 2015 by Kenneth C. Griffin for $300 million, the second highest price for a painting ever. It’s currently on loan at the Art Institute of Chicago. Mr. Griffin, in other words, isn’t using it to decorate his fancy house. He probably bought it just to feel special.
Well, that, and possibly as an investment. For that matter, NFTs can also be investments, and many people have recently become rich buying an NFT and reselling it later after its value increased.
Many think it’s a scam. Many think it’s a speculative bubble that will soon burst. To be sure, there are a lot of scams in the world of NFTs, and it is possible that it all collapses. But I suspect that NFTs will remain a strong phenomenon as long as people like owning rare things.
Oh, and it’s also a new way for artists to make money. One of my co-resident here at CabinDAO, Grace Ng, will very soon be launching her own NFT collection in the Bitcoin ecosystem. She’s garnering quite a lot of interest, surely in part because the 10,000 portraits she’s going to sell are inspired by the excellent sci fi novel Snow Crash, and as a result she’ll probably make a million dollars or something. It’s pretty crazy.
Beyond digital art, NFTs can be used for many other types of stuff. I’ve been wondering about whether my JAWWS project should, for instance, sell NFTs of rewritten scientific papers, as a way to allow people to encourage the project and scientific progress. I have no idea if it would work — papers are less appealing than artwork — but the possibility exists. For instance, the Mirror web3 publishing platform has built-in functionality to sell individual essays as NFTs.