Our Non-Fungible World

In 1989, Bill Gates founded Corbis to purchase and license exclusive digital rights to great works of art. Most museums were reluctant to participate. In 1995, Corbis bought the Bettman Archive of 16 million photographs for an undisclosed sum.

In 2018, Dapper Labs was formed to exploit their CryptoKitties product. The CryptoKittie game allows users to buy, sell and “breed” digital images of cats whose ownership has been authenticated using the ERC-721 standard for non-fungible tokens (NFTs) on Ethereum.

Was Gates that far ahead in thinking about digital assets and what is this CryptoKitties foolishness?

An NFT or non-fungible token is a unique, non-transferable digital asset. The trail of authenticity is secured using a blockchain, that horrifically clumsy and expensive accounting mechanism underlying crypto currencies. Assuming not everything digital is hackable (a bit of a leap) the authenticity is secure.

Importantly, only the authenticating “signature” is actually unique. One of the ironies of NFTs is the reason many of the images have some value. It is not because they are scarce but rather, because they are ubiquitous. Or in the vernacular, they went viral. The authenticated image may be no different than the millions of copies that circulate on-line except that it is recorded in the blockchain ledger.

So, NFTs are similar to crypto currencies in that the scarcity is manufactured to create the appearance of value.

In March of this year, an NFT image, which was the aggregation of 5,000 other images created by a Wisconsin-based artist named Beeple, sold at a Christie’s auction for a whopping $69.3 million.

Now this is getting real – real money anyway.

According to Statista, the market cap of NFTs in 2020 was $338 million. That was for 53,663 unique works.  Early this year it had already grown to $490 million with over 150,000 pieces sold in one 30-day period. But then the market seemed to be fading with sales volume dropping 28% and prices taking a 40% hit by the end of April.

We do wonder about the fundamental value of these tokens. There is certainly an different esthetic experience between viewing the digital image of the Mona Lisa on this page and being jostled while standing in the crowd at the Louvre and noticing the small size of the canvas. Is the same true of these NFTs?

Does reading Jack Dorsey’s original tweet, which sold for $2.9 million, invoke a different emotional response than simply reading the unauthenticated tweet on-line? Is, “just setting up my twttr,” the modern day equivalent of Bell’s famous line, “Mr. Watson, come here.”

The masters of digital consumer applications are already running hard creating games to capitalize on this new concept. Digital assets inside a video game can now be acquired by the players and traded across the platform. You can use NFTs to buy, breed and race digital horses. You can buy and trade digital NBA highlights.

As the structure of Ethereum allows for blockchain contracts, NFTs could become a boon for artists of all types. Normally, once a work of art is sold, the artist has no further ownership rights. With an NFT, the artist could be credited with 10% of every future sale of their work. Imagine a song that goes viral and the musician receive a dollar for very time it is played. The possibilities seem endless.

In an attempt to secure this value for non-digital real-world art, the British street artist, Banksy, is creating NFTs of original art then destroying the original to hopefully force the transfer of the market value of the original work to the NFT. The Mona Lisa was painted 500 years ago and today is insured for about $660 million. Suppose there was an NFT of the Mona Lisa and the original was lost to a fire. What would the NFT be worth?

In the ultimate mocking semi-endorsement of this new fad, Saturday Night Live did a rap-style sketch seeming to ridicule NFTs. Then they took a digital copy of the sketch, signed it into a blockchain as an NFT and put it up for auction. It sold for $365,000.

Then there is this. An alternate definition from the Urban Dictionary: NFT stands for Normal For Tiverton. A medical abbreviation used by doctors to describe a patient displaying symptoms of extreme stupidity or features suggesting the patient come from a very small gene pool (e.g. webbed fingers or toes). Are we all being pranked here?

From time to time the market will send us a sign that things have gone too far in one direction. The sock puppet was a sign; Liar Loans was another. Perhaps, NFTs are that sign. As one Venture Capitalist told me at a conference hosted by the Stanford Institute for Economic and policy Research (SIEPR), “Jim, we know it’s a bubble. We know it will end badly but we can make a lot of money between now and then.”

That was ten years ago.

-Jim Anderson

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