The Breakdown - Are NFTs Just This Cycle’s ICOs?

Episode Date: March 3, 2021

On today’s episode, NLW looks at the explosion of interest in NFTs. Big money, big names, big problems?  He asks whether non-fungible tokens are this cycle’s initial coin offerings by looking at five different comparison points: Inflated prices Overpromises Celebrity hype Wheat-and-Chaff Competition with bitcoin So are NFTs just a new version of the ol’ ICO? Listen to find out. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

ICOs were, in many cases, offering a completely different vision for what, air quotes, crypto was supposed to do and be in the world. And frankly, we've been fighting battles because of that ever since. NFTs are obviously tied to the underlying technology architecture, but otherwise have almost nothing to do with what else is going on in the finance and money side of Bitcoin and crypto. No one is using hash masks as a global settlement currency or looking at NBA Topshot as an inflation hedge.

In other words, there is no narrative competition. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The breakdown is sponsored by nexo.io and Casper and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, March 2nd, and last night I saw Diplo, Dead Mouse, and Paris, in a clubhouse chat talking about NFTs, so I think it is highly reasonable to ask, are NFTs just this cycles ICOs? As I mentioned before, the way that I think about the breakdown is that it's a show about

power shifts. The particular dimension of power shifting that I tend to focus on is economic, although I do love my geopolitical shows. And usually I'm thinking about those economics on a macro level versus in the context of any one industry. That's why sometimes when people ask me why I'm not covering other things in the crypto industry outside of Bitcoin, it's not necessarily because of a disinterest in those things, although sometimes that's a part of it. It tends more to be due to the fact that I'm focused on these big macro power shifts and Bitcoin is at the center of so much of that, while other

parts of crypto simply aren't at least not yet. This is also the reason that I haven't spent as much time on NFTs. I gave it a headlining spot on last week's weekly recap show, but that was pretty much it. That said, I at least wanted to do this show for a couple reasons. First, there is no denying how central to the crypto industry narrative NFTs have become. Over the last couple weeks especially, they have completely shunted defy to the side as the air quotes other thing besides Bitcoin. And right now, in the last week at least, they are stomping even Bitcoin when it comes to getting mainstream press and attention. NFTs are seeing celebrities, specifically musicians, come in a huge way and they're also seeing price. prices that some find unbelievable. So all those factors mean that from a crypto industry perspective,

they're worth some attention. There is also, however, a second dimension, which is power. Power in the music industry has been historically extremely concentrated. For many years, that was because the cost of production was high and the mechanism of distribution was extremely gate-kept. Of course, the internet changed all of that. Home recording has become extremely accessible and distribution is as simple as putting something online. However, music more than many, other industries has been able to retain significant power, and I think there are a few reasons for this. First, the music industry has continued to leverage terrestrial radio as the power source of pop music and gatekeep that. Second, and more importantly, because they were one of the

first industries to be truly disrupted, when they survived the assault of Napster, I think that the music industry learned defenses that other industries wouldn't adapt for a long time. Part of that was learning to buy into the disruptor, which is why record labels have such a cozy relationship with Spotify. The point is that it does strike me that there is a dimension of power in the NFT story, particularly as it relates to music. But let's not get ahead of ourselves. First, let's define what an NFT actually is. NFT stands for non-fungible token, and fungibility means mutual interchangeability. The U.S. dollar is fungible, meaning that each dollar is mutually interchangeable with each other dollar. Bitcoin is fungible too. Any one Bitcoin is exactly the same as any

other one Bitcoin. At least theoretically, because there are traceable UTXOs, some have expressed concern that certain Bitcoin could one day be flagged as dirty for having been used for illicit purposes, but that's way beyond the scope here. As designed, Bitcoin is fungible. The idea of a non-fungible token, then, is that it's a token that is explicitly not designed to be like every other one. Non-fungible tokens exist to be expressly different to be a unique asset. If the analogy for fungible tokens like Bitcoin is fungible offline currencies, an analogy, albeit a limiting one for NFTs is collectibles like baseball cards, Pokemon cards, or my personal favorite, Magic the Gathering cards. These physical items are like one another, but they are not mutually interchangeable.

They have rarities that range from common to absolutely one-of-a-kind with values that tend to correspond. NFTs have been a part of the crypto industry for years. Remember the Crypto Kitty craze in 2017-2018? Yep, those were NFTs. That said, over the last few years, a lot of development was quietly brewing in the space. And also, I guess, just for the sake of being clear, there are many potential applications of NFTs that people are excited about that don't have anything to do with art or collectibles. I'm going to stay focused on that use case because that's where the attention has been most recently. And over the last few weeks, especially, a lot of attention has been piling in. Why? Well, money, of course. First, there have been a lot of

crypto-native projects that have seen some pretty serious prices. Hash masks were a collection of 16,000 unique digital portraits with different rarities and commanded anywhere from hundreds to hundreds of thousands of dollars. Cryptopunks were 10,000 character collectibles that were sort of in this 8-bit style, they ended up having an average sale price of 16,753 and a total value of 110 million. Second, there has been a ton of mainstream attention around the Beeple auctions. Beeple is an internet artist who had an NFT sell for $6.6 million last week via Nifty Gateway. He has another piece up for auction on Christie's right now, the first time they've auctioned off a digital-only piece of art. The current bid is at $3 million with still more than a week

left. Third, there has been music overlap. Justin Blow, who goes by Three-Lau, released 33 unique NFT sets, and in so doing made a total of more than $11.6 million. Every manager I follow on Instagram, and I follow a lot because I've had a long-term flirtation with the music industry, was talking about Three-Lau or Blow's release feeling like they had to go do something with it. Grimes did her own NFT sale that was structured a little differently, where there was a set of 10 NFTs, but only a few were unique versus a few that had hundreds of versions for a smaller price of just $7,500 each, and she ended up selling about $5.8 million worth of these things. Fourth, there has been some serious overlap with social media and regular collectibles.

Here's the audio of a TikTok of Logan Paul explaining something he did with Pokemon cards. I spent $2 million on six boxes of first edition Pokemon cards. Now, this may seem irresponsible, but check this out. boxes there are 36 of these first edition packs I auction 33 of the packs off that sold for $40,000 each grossing 1.3 million dollars not including the split I had with the auction house who by the way also an investor in now here's where it gets crazy I gave the last three packs to three people who purchased my first ever digital collectible it's called an nfts but I didn't realize how many people would want it so by optimizing one box we actually ended up paying for all of them and I'll be

opening the million dollar box today it's actually the 25th anniversary of Pokemon, live on my YouTube channel, 6 p.m. PST, be there. By the way, that NFT he mentioned in the video, it made him $3.5 million. He also made NFTs out of the specific box break moments from his stream that he's selling for $20,000 plus each. So let's come back to the question that started this whole piece. Are NFTs just this cycle's ICOs? When we talk about comparing something to ICOs, there are a bunch of dimensions to that that I think we need to take one by one. The first is inflated prices. The second is over promises. The third is hype celebs coming in from outside and Normie's getting in. The fourth is a lot of stupid BS coming along with the good stuff. And the fifth

is whether they compete with Bitcoin. Let's first discuss inflated prices. This is actually kind of complicated. On the one hand, I feel like some of these, as crazy as it sounds, may not be as inflated as they seem, particularly around the ultra-premium art and music, although I'll come back to that in a minute. On the other hand, it feels nearly impossible to me that the true long-term collector's market for these things isn't being somewhat warped and potentially pretty dramatically warped by the short-term crypto speculator market. Crypto has simply had too many hits from a short-term financial perspective for money that doesn't care at all about the art to not pile in. So without any knowledge of what the quote-unquote right price is or whether there's more room to grow before

something pops, it seems nearly impossible to me that at some point there won't be some massive correction in some of these prices. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12% and swap between more than 75 market pairs with the instant Nexo Exchange. Try the Nexo Wallet app. to get the whole 360 degrees of crypto banking. Get started at nexo.io. Until now, blockchain technology has been a series of compromises. No layer one protocol exists in the market that supports everything enterprises, developers, and consumers need from

decentralized applications. Mead Casper. Casper provides the blockchain ecosystem with a solution that makes no compromises around decentralization, security, or performance. Learn more at Casper. Network. Second comparison point is over promises. In the ICO era, overpromising was about literally saying that you were going to do things that you were never actually going to do in order to make a bunch of money off of highly liquid tokens. NFTs aren't making any promises that they're not delivering on, at least not this wave

of digital art and digital collectibles. Instead, what's a bigger question to me is about whether people give a crap about quote-unquote true digital asset ownership in the long term. In other words, it is obviously incredibly easy to create facsimiles of any NFT. I've seen Beeple's Crossroads that's $6.6 million selling one about 100 times on 100 different websites that had nothing at all to do with the buyer, which means that the value of true digital ownership has to come from either intrinsic motivation, i.e. I want to know I own it, extrinsic motivation of other people knowing I own it, or speculative value of believing

someone else will want to own it more, versus anything that comes with controlling the original because in the internet world there is no control. On the one hand, there are going to be massively huge numbers of people who well and truly will never, ever give a fuck about this. It will not even make sense to them that one could give a fuck. Some of this will be generational, but I guarantee you that there are some zoomers looking at this being like, yeah, don't care, that's nuts. On the other hand, it probably doesn't matter. What matters ultimately for any market is not the people who don't care about it. It's how big the market of people that do care about it is. And really, the only question then is not whether a market exists. It's how big that market for

NFTs is. How many different types of NFTs can exist, what its total purchasing power is, which categories of NFTs are most interesting to it. So it's not so much an over-promising on delivery issue. It's potentially that there may be some early speculator overestimating on total addressable market. On the flip side, it is at least worth acknowledging that the complete opposite may be true, and that as more of our lives move online, particularly into virtual worlds, we're still radically underestimating the size of this thing, even as we watch millions of dollars be cashed in for stuff that it feels like we could just copy-paste. All right, the next comparative dimension to ICOs is hype, and I think this is the clearest dimension in which there is a common

thread. Indeed, this more than anything else is why people are asking this question right now. Last night, like I said, Paris Hilton was in a clubhouse room talking NFTs, which she has now released, Diplo and Deadmouse were there as well, and there's obviously the Logan Paul thing I mentioned. On top of that, there's NBA Top Shot, which is the biggest NFT by volume right now, and has every NBA team trying to figure out how the hell to get involved. Now, hype and celebrities don't buy themselves, damn a thing. The most worrisome to me would be the eighth-tier celebrities trying to use this for sustained relevance in a quick buck. No matter what your space is, you really don't want that. On the other hand, the group whose use I'm most interested in are

musicians. I tweeted the other day, something hit me last night watching Blow NFT auction. This isn't just a new creator business model. This might be the first time creators have been able to enable true markets around what they create. In other words, previous models like album sales and tickets to shows set an effective cap on what a fan spends. NFTs blow that cap off, allowing the biggest fans or speculators to set the ultra-premium price. Wildly, this means less constrained capitalism that has way more benefit to creators. Basically, the idea for me is that there hasn't really been a good way historically, not at least a highly efficient market way, to let superfans pay way, way more. Sure, we can talk about patronage, but the terms of something like Patreon are still set and fixed

and reduce the difference between fans rather than allow markets to allow them to be unique. I'm very interested in this idea that these NFTs could create a mechanism for the 100 people who love an artist's most and or who have the most resources to love an artist most, to provide a way bigger portion of their income than before, especially in a world where album sales were already effectively dead as a way to make money, leaving touring the only option, which can be really devastating for people's lives and relationships.

I'm also interested in the idea that NFTs could effectively create markets for betting on the future prospects of talent in a unique way. I would have bought the hell out of Scrilex NFTs in early 2010, and I would have been right. All of that said, I'm definitely still concerned that these early prices we're seeing are, one, due to them being really early, i.e. not a lot of competition, and two, due to the rampant speculative aspect. In other words, it's likely to me that when every artist starts to do this, which, by the way, they will. And when the speculators eventually get flushed out, there will be a major repricing. But it doesn't take $11.6 million for this to have been an amazing experiment for someone like Blow, and something that could have still been transformative in how he thinks about. about his business model. But this gets us, I think, to point D of the comparison to ICOs, which is sort of a separating wheat from chaff argument. I am not one to judge art, and my tastes are different than other tastes. But with that caveat, yeah, it is really clear that there is an insane amount

of stupid, terrible, inane crap that won't even come close to surviving this speculative frenzy. There's just no way for markets to see as much growth in attention as money as is happening in NFTs right now, without seeing a lot of. of terrible second rate stuff come in. By the way, a lot of the worst offenders will be those eighth-tier celebrities that I mentioned before, and this will definitely get worse before it gets better. In this way, the space around NFTs right now are absolutely akin to ICOs, which were just a magnet for trash. But finally, let's discuss 0.5. Does it compete with Bitcoin? And to me, this is the area where NFTs are least like ICOs. ICOs were, in many cases,

offering a completely different vision for what, air quotes, crypto was supposed to do and be in the world. And frankly, we've been fighting battles because of that ever since. NFTs are obviously tied to the underlying technology architecture, but otherwise have almost nothing to do with what else is going on in the finance and money side of Bitcoin and crypto. No one is using hash masks as a global settlement currency or looking at NBA Top Shot as an inflation hedge. In other words, there is no narrative competition. Outside of narrative competition, one could ask, is there a competition for scarce resources? But I sort of don't think so there either. One, Bitcoin is pulling from a pool of clearly less and less scarce resources from a group of buyers that have nothing to do with NFTs and don't

care and couldn't care less about them. NFTs for their part are coming from dollars that almost certainly were not allocated for investments in Bitcoin or anything like it. In fact, I would think that if there was any deleterious effect from strict resource numbers, it would come from altcoins in defy as the quote-unquote hop-new crypto thing to make a buck from, but even that I don't really see. It just feels like too much orthogonal money or money being pulled in from new communities. In fact, if anything, it feels like a chance to pull some of these normies in deeper. It's not surprising to me then that even diehard Bitcoin Maxis are having NFT discussions in Clubhouse. So let's get back to that original question. Are NFTs this cycle's I

COs. The short answer for me is no. There are some elements that are worth being concerned about absolutely. I don't give financial advice on this show, but it's hard for me to imagine that prices won't be insanely inflated due to the twin presence of speculation and celebrity. I also believe that there is going to be a stupendous amount of bullshit before things resolved to being able to actually see who cares about these things for real in the long term and how many people and types of people that represents. But I'm also at least intrigued by their potential, and to me it does remain a potential to shift markets around creation in such a way that the market can better reward more good creators outside and around the conventional system. As one whose primary interest is in shifts

in power, that's something worth watching. Let me know what you guys think is this all just total crap. Is it a joke? Is it a waste of time? Is there something here that's interesting? Hit me up on Twitter at NLW. Shout at me in the YouTube comments and whatever you do, I appreciate you listening. Until tomorrow, guys, be safe and take it. care of each other. Peace.