When Rolex NFT?
Significance of NFTs beyond speculation. Convergence of social and financial capital on the internet of value.
Growing up in the 90s eastern Europe, I never had a problem understanding why someone would pay hundreds of thousands of dollars for a 631px-sized monkey image. In the fast transforming post-communist countries of the eastern bloc, money culture was pervasive, and sporting a brand or two was a sign of class. So I have never found it puzzling that people buy their status. But this is not different in other parts of the world. From rolexes to sports cars and paintings, status symbols have always been used as extensions of personality and objects of tribal belonging.
Luxury brands, of course, thrive at playing with the concept of social status. In an act of well executed salesmanship, Tiffany sold earlier this month 250 real gem-encrusted pendants designed to resemble Cryptopunks. Only existing Cryptopunk holders were eligible to buy an NFTiff. The asking prices was 30 ETH, and they sold out immediately. Punk holders are wealthy; they like to show it. One has to wonder: “when Rolex NFT?” Obtaining social status is very easy and transactional with money, but, of course, entirely possible in its absence, most notably via excesses of fashion and lifestyle. People do crazy, stupid things in the spirit of tribalism. But regardless if we pay for it in gold or blood, we value the statuses we’ve attained. We are them.
As a twitter-addict semi-detached from reality, I have a natural preference for the digital, so I have to watch my tact here when I say that a lot of these extensions of us — this social capital — is fast moving into the digital realm. This is not a COVID talk either. Yes, the pandemic made us spend more time online, but thats not it. The digital is becoming very material to our lives. The first place to show off a new luxury purchase is on instagram. Everyone you care about sees it instantly; wearing it IRL doesn’t even matter anymore. Similarly, people spend hundreds of hours carefully building up a reputation on twitter, and would tweet their big idea there first before any other interaction in the real world, knowing that if they get lucky, their reach on the digital platform can be immense.
Crypto Bad Blood.
The basic joke on crypto is that, other than being a convoluted scheme to strip people of money, it doesn’t do anything. That maxim is fun, but untrue. Bitcoin was a successful creation of artificial scarcity. A great way to explain this, which I often borrow from Matt Levine, is that you and I can type a string of letters and numbers on our computers and they would mean nothing. But those same letters and numbers become the hardest form of money if they are on a ledger maintained by an automated distributed consensus mechanism that is beyond the control of men*. “Hardest” in this context means that over time, men will choose to store their wealth in it because it is least likely to be manipulated, in short inflated.
This was immensely powerful. Once you open a pandora’s box, there is no way back. The irreversible growth of bitcoin has inspired a whole generation trying to elevate more complex socio-economic concepts on blockchain, like a transfer and exchange of real assets, property rights, legal frameworks. And that was, for the most part, a dead end. Security token offerings, as a more mature version of the previous Initial Coin Offerings, were all the hype of 2017/18, but failed miserably, amounting to little more than illogical attempts to put stocks, real estate, and other assets subject to old world paper rules on blockchain, resulting at best to double work and at worst to legal actions against the issuers.
In many ways, they could never succeed because they were cutting right through the existing legal frameworks. An ownership title to a house, for example, exists within the very analog system of the physical world — it is recorded, overseen and subject to land registry, notaries, lawyers, courts, etc. — so you cannot represent it in a token that is globally transferrable 24/7. And even if you subject the token to some automated rules maintained by smart contracts, the existing authorities will still demand their way of doing things like paying a custodian to maintain a record of who owns the stocks, recording each transfer on a paper, etc., hence double work.
Abstract Becoming Real.
For all its excesses, the degen culture and CeFi failures, the last crypto bubble of 2020s had a good direction because it was reinventing value in an abstract form detached from reality on chain. That is, it was attempting to conjure things that we deem valuable that exist in complete absence of the rules of the physical world. (“In absence” does not mean insulated. To the extent that the old power structures disapprove of the use case of a protocol, they can effectively sanction it out of existence, e.g. Tornado Cash.)
A token that gives user access to a DeFi protocol, where she can trade, borrow, lend, buy insurance or fund an insurance pool in an automated way is valuable, but it becomes even more valuable over time, as the total capital committed to the protocol and the universe of users of the protocol grows to achieve a diversity and scale that would make it self-sufficient. (As in, not propelled by one speculative product like Anchor, but dispersed across many use cases that in their totality provide an efficient exchange of value among users and keep the capital locked in.) Yes, the growth of DeFi platforms has a ponzi-like dynamics, but I argue elsewhere that achievement of a certain critical mass of capital will make them long-term legitimate in their utility.
A monkey image becomes a pricey status symbol, if the owner can point to a receipt of purchase recorded on blockchain because that is in a very technological sense an eternal form of ownership. For now, this is practically irrelevant. At best, the owner can parade her pixel monkey on twitter, a centralized and highly censored platform. Or she can sell it on an auction site, an AMM, or even get a loan. This is all great and possible, but the user experience is a fragmented journey through hundreds of protocols & wallets. But, knowing human nature, it would be unwise to bet that this is how it stays. The history of the development of internet protocols is not an entirely bad reference point here**.
Today, when you build a social capital on twitter or instagram, it is tied to that platform, and you will lose it if you decide to leave, or worse break the rules and get kicked out. The promise of platforms built on free cryptography is that this order flips. In the next 5–10 years, your crypto wallet may well become your identity, your bank and your safe. It could be a single tool through which you do banking, get a loan from a DeFi protocol, invest, connect to a social media platform and store your wealth.
Your identity will be your name.eth (or .ens or some other tech converting crypto address to human readable names) domain and you will carry it with you, no sorry, it will be you, wherever you go on the digital value layer. Your activity on twitter or instagram of today is data owned by the platform and its popularity or lack thereof is to a large extent a verdict of their black box algorithm. On the twitter or instagram of future, your activity and your followers will belong to your .eth identity and will be transferrable. You will carry your social graph with you. Your social and financial capital will merge and your control and ownership of it will be absolute.
This is a vision of peak interoperability, which is hard to imagine now, but the direction is clear. Most web3 social media projects involve tokenization as a means to distribute ownership among users in some form of a decentralized organism propelled by tokens, governed by tokens and rewarded by tokens. This includes projects like mirror.xyz or peepeth.com. But they are siloed and divided in terms of which blockchain protocol they sit on, as well as how their ownership/reward structure and user algorithm works. Perhaps more promising are blockchain protocols created specifically as a breeding ground for many interoperable web3 social media projects like lens.xyz and deso.org. On lens, for example, users obtain their profile NFT which can be used for identity purposes across all apps powered by lens. A future of many-app interoperable social media allowing their users to travel with their social graph. In this future, tokens will be both your social and financial capital; your control over them will be absolute and censorship free.
Software Is Eating the Money.
Software has been eating the world, but it is only now that it started biting into money, finance and public sector. It is reinventing previously government mandated industries into software applications. If you believe this thesis, then over time, significant capital will detach from the physical world and become purely digital; it will stop flowing according to the rules of the centralized, siloed system. In other words, in today’s world capital is a guarantee of a counterparty (a book entry of your bank representing your money, which is really just a debt). In future, it will become truly digital — records on blockchain that only you have control over.
As the universe of use cases and number of users in the digital realm grows, that expensive monkey image will become more and more like real estate, collectibles, fine wine, or art in the physical world, only with a much better market efficiency, price discovery and liquidity***. The rise of BAYC and cryptopunks and the record breaking auctions for some unique NFTs were all generational moments. They were statements made by money about the legitimacy and value of ownership held on the new digital layer built on free cryptography. If you take into account that the conventional art market is essentially wash trading among few wealthy hands of items forever buried in a tax-free harbor in Switzerland, you cannot find it surprising how fast the blue chip million dollar NFT market picked up. For the rich, NFT was a deja vu all over again — a great, no sorry, in fact a technologically superior way to store and transfer wealth.
For the sake of argument, imagine that in the conventional art world a large collector has 800 pieces of Andy Warhol. Surely, he has to maintain, pay, organize, ______ [add your word] a whole army of gallerists, critics, auctioneers so as to keep the selling of Warhol orderly. In other words, a flop cannot happen. This is expensive when you have to move around actual people like pieces on a chessboard. It maybe less expensive and more practical in digital world? And you can do it from home?
So What?
Other than speculation and hype, crypto is also a fertile ground for jargon. Constantly rebranding crypto, giving it new names and narratives is society’s way of learning what crypto is. Most recently, crypto was rebranded to “web3,” and thats fine, although it is still the same thing — a transition from internet of information to internet of value****.
We go through waves of excitement breeding speculation. First succeeding as social status symbols for the wealthy, NFTs have later become the epicenter of speculative hype, but as social and financial capital converge on the digital layer of cryptography now called web3, their role of storing and transferring value will become more important. Recognizing this now can make you an outstanding capitalist(⸮) in 5–10 years.
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*with the exception of election system, which has been proven time and again to withstand influence even from large interest groups — see The Blocksize War by Jonathan Bier
*the history of internet, beginning with the development of arpanet, was very much a research task and an academic challenge of coming up with the optimal technology and protocol to solve the transfer of data efficiently and securely
***For a more comprehensive discussion of the structure of NFT market, please see Meltem Demiror’s article here.)
****as coined by Don Tapscott and his team at the Blockchain Research Institute
