TL;DR: NFTs can solve some very boring and costly human issues, but unfortunately we’re getting scammed & rug pulled with art.
Inspired by recent conversations with friends, I’m here to talk about NFTs. Sigh. There’s a lot of existing literature on NFTs, so I’m here to look at the common business happenstances going on.
If you asked me today what I think of NFT’s, I can succinctly say this: NFT Tech, great concept for boring businesses. Current NFT implementations? Great way to get scammed. So let’s get to it!
As always, you can find TL;DRs and graphics as I explain this shitshow cash grab set of concepts.
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Sections You Can Skim Around
WTF is an NFT?
WHAT are the use cases?
WHAT is the state of NFT Businesses?
WTF is a Rug Pull?
TL;DR: Blockchain tech makes digital scarcity possible.
A Non-Fungible Token, or NFT, is a way to represent ownership. It also represents all the underlying data, commonly referred to as metadata or boring data.
It’s built on blockchain tech, so it’s got the tech benefit of:
Decentralized Records - Anyone in that blockchain network has the record
Irrefutable - It can’t be modified or changed directly
Transaction History - All associated activity including transfer of ownership is contained
It is like an authentic, one-of-a-kind, certificate of authenticity that you own the thing, held digitally.
NFT’s allow for digitally-enforced scarcity, exclusivity, and verification of digital stuff to happen, something that was basically not possible previously, and if it was, it was way too expensive to constantly enforce. There’s a novel benefit from the tech.
However, while the technology is made to sound like it has unlimited potential, building a business around it is a different story.
TL;DR: They can have great utility in boring use cases in Homebuying, License Key, Royalties, and Physicians Credentialing.
From a pure technology capability point of view, which is basically speculative and not based on what it can do today, but more so what the technology can mold to do in the not so distant future, NFTs can fundamentally solve very boring use cases.
While they are being used to sell artwork and collector cards, I hope one day we can get passed that and get on to the real human issues. Here are some:
Homebuying
When buying a home, it’s rather absurd how much time and effort it takes into validating the history of a home, to the ownership, to what is permitted. An NFT can eliminate the hassle of record and ownership since an NFT can store all the underlying metadata (bureaucratic data? Insurance data? Your pick), with that information readily accessible in seconds at any time.
The challenge here won’t be the technology, it’ll be getting people and people-based systems (aka local government) to use it. Plus who is maintaining the tech?
LICENSE KEYS
Software that you buy that requires a license key. That license key is usually one-time used (or only one can be activate at any point in time), and not for redistribution. In a way, license key had a literal finite use, tied to the first person who activated it.
If this license key is based off of NFT tech, perhaps you can sell the License NFT to someone else, and ownership of that NFT grants access to that software. Ideally.
The specific markets an NFT License Key would counter are software piracy and software reselling.
ROYALTIES
When it comes to Royalties, specifically music royalties, there are so many payouts at a nano level that needs to be done every time a song is played that some companies just don’t even process it until the royalty-owed balance hits a significant threshold.
NFTs can reduce operating and administration cost between distribution, publishers, record owners, writers, and artists since NFTs (and the smart contracts) are design to automatically payout every party in the contract when it executes.
PHYSICIAN CREDENTIALING
It cost a healthcare system ~$20,000 per year in raw labor to do the credentialining process for each physician. Every year.
Perhaps in another edition I’ll dive extremely deep into Healthcare System nuisances, but the summary of Physician Credentialing is this: A metric ton of paperwork, phone calls, and waiting to verify the credentials of a Physician including their insurance plan they accept. It’s a nightmare since the patient suffers from a medical administration clerical error.
TL;DR: 75% Scam. 24% Diminished Returns. 1% Rich.
I have not yet directly interacted with an NFT-based business that has solved any human issue that could not have been solved by current and cheap low-tech.
The Enthusiasm from People
The rush for NFT and the need to collect is similar to the 1990s and early 2000s craze for Pokemon Trading Cards. And just like when we bought Pokemon Trading Cards, we’re collecting them with no regard to how to play the game.
Technically speaking, NFTs have served its purpose. You can make digital goods collectable. Except my next question is, okay - so now what?
The Projects
I currently view NFT Projects with a cynical outlook. The tech theory is great, the tech implementation and the people are not.
The underlying business model and challenges of NFT Projects can be compared to a Ponzi Scheme or a Multi-Layered Marketing scheme. Except, there are significantly less restrictions to participate and anyone with a crypto wallet can “buy in” without “knowing anything”. In a way, such projects are created to attract impulse buyers investors who are new to investing with crypto.
At core, this is how an NFT Project works:
Hype around a creator or brand
NFT Project Announced
Key influencers are targeted with affiliate kick-back
More hype is built
A portal to pre-order / pay / get whitelisted appears
People buy
Then one of 3 outcomes
Mediocre Product
Rug Pull
Launches and everyone that isn’t the creator, influencer, or super-early stage contributor suffers diminished returns.
Rinse and repeat.
Don’t believe me? Here are some amazing examples:
MEDIOCRE PRODUCT
PIXELMON NFTs - a project that was advertised as a game, raised $70M with each NFT minted at 3 ETH.
RUG PULL
Getting scammed in Crypto is the equivalent of saying you got the rug pulled out under you. I wrote about Rug Pulls over here:
TL;DR: Did you know that during the California Gold Rush, the people who made the most were the ones selling the tools?
Like any new tech, a lot of NFT Projects are selling you on future potential and future state, and not what it can do today. It is extremely important that you recognize that when you are getting advertised about NFT projects, and being sold NFT Projects, you are being sold on emotion, specifically FOMO.
It’s also important to recognize another trend: You will see a lot of “Platforms to Make NFTs” verbiage, or “A place to make NFT for XYZ Demographic”.
Be safe out there, and maybe one day we can get passed the JPEG era of NFTs. If you want more headlines, I’ve got an endless supply of NFT scams to make you feel great.
_
Btw for the CPAs out there - Given the anonymous nature of Cryptocurrency but the need to value projects at fair value, how would you verify that an NFT Project doesn’t have related party transactions involved?