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It’s not about the NFT

Why limited edition artwork and exclusive auctions risk undermining the real Web 3 opportunity

Money is not the same as what we chose to purchase with that money. This ‘insight’ may appear obvious, but in the world of Web 3, even such basic assumptions risk being discarded in the quest for something newer and more revolutionary.

Money is principally a medium of exchange – not the actual purchase itself. It’s value – or more correctly, utility – is determined by the amount in circulation and its ubiquity as a medium of exchange. The former is a function of demand and supply. Government efforts to print more money (quantitative easing) over the last few years has led to its devaluation (inflation), most notably across Europe and the US.  Ubiquity is about the proportion of citizens comfortable and accustomed to using a particular currency for exchange; the more ‘users’ the more valuable the particular money will become.

So money – and in particular, currencies – are subject to a delicate balancing act between managing supply (to create value), but ensuring that their use is sufficiently widespread to represent a meaningful mechanism of exchange.

There are many nuances of course – certain currencies will be trusted and valued more than others based on their history and provenance (the principle of seigniorage) – but these are the fundamentals. 

And crypto currencies are no different: a finite, well-documented supply, together with a range of incentives to encourage usage.  The principle difference between such currencies and traditional ones, is that the latter are issued managed by national central banks and largely reflect their respective Government’s policies and priorities.  The de-centralized nature of crypto-currencies ensured precisely the opposite; there is no central bank to do a Government’s bidding.

Non fungible tokens (NFT) use the same decentralized, Blockchain system to validate ownership and accord rights and privileges; while they may be denominated in crypto-currencies, and (in some instances) resemble them, they are not synonymous.  In the same way that money and company stocks are distinct.  

While the value of money reflects the various criteria described above (demand/supply, ubiquity, seigniorage etc), stocks are based on something more intrinsic – what old school market analysts call ‘fundamentals’. These are typically revealed in the balance sheet, or by studying the market: cash-flow, revenue expectations, market-shares etc.  They are the factors that determine the share price. Of course, sometimes shares behave like money, and prices defy the logic of the balance sheet, but that doesn’t negate the difference between the two.

I repeat – shares are not the same as money; they may be denominated in a particular currency and – at times behave as (solely) a function of demand and supply – but the two concepts are distinct.

The same is true for NFTs. The latter is a mechanism to maintain the integrity of a particular product (in terms of its provenance and/or its quality), as well as those with the right to dispose of the same. The value of an NFT has more to do with how or where this mechanism is applied.

Your Arsenal NFT token will ensure access to matches and merchandise related to Manchester City’s feeder and retirement club; nothing more and nothing less. In reality, the value of the token will be a function of whether Gabriel Jesus can actually score more than 10 goals per season, or whether Ben White will remain injury-free

NFTs are a mechanism that protects the integrity of the product/service as well as the rights of the person who purchases them. Their decentralized nature (Blockchain) means that these aspects can be ensured and transferred without reference to a third party to oversee the exchange. Arsenal’s NFT is not going to prevent Granit Xhaka getting sent off at least once next season!

And this is why my heart sinks when I see (and am asked to promote) NFT art sales, memorabilia auctions and other exclusives, as if the mere association with this acronym will defy the laws of market demand, and miraculously increase valuations. Mike Winkelman’s (Beeple) $69 million sale of NFT-based artwork possibly had more to do with the fact that he’d spent the previous 14 years establishing a following (including 2.5 million social media followers), and publishing an original art work every single day during this time. Auction house Christies recognized and leveraged this notoriety, but – despite what the media latched onto – the sale was all about the art, not the NFT.  

One of my collaborators in Brazil has a ‘stress test’ for such NFT launches, and politely declines work that doesn’t match up.  I’m not going to reveal his IP, but it’s based on a simple logic of product (irrespective of the NFT): market size/potential, liquidity/transferability, exclusivity, product/service fundamentals etc. None of which are likely to be suddenly transformed by the incorporation of a decentralized validation mechanism!

Another of my collaborators (in the crypto trading space) is fond of reiterating that crypto-currency valuations are two (apparently contradictory) functions of demand: finite availability backed by infinite ubiquity (ie. limited supply and – at the same time – presence everywhere). It’s a neat summary of one of the paradoxes of money; but it’s equally applicable to traditional currencies.

NFT valuations are a far more complex and interesting affair. When assessing their value I urge people to look beyond the NFT, it’s in the fundamentals where the value will be found.

In this sense, the limited edition NFT art auction is an outlier; and limiting discussion (and media coverage) to the same inflicts a huge disservice to Web 3’s potential for value creation and re-distribution.

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