Sunday, December 12, 2021

NFTs Are Like Having an Asteroid Named After You

There's jargon you can ignore, because it's trendy and soon to disappear, and there's jargon you need to have some vague notion about, because it will stick around for a while. NFTs are the latter.
NFT's (non-fungible tokens, a fancy term for the slightly less fancy term "digitally scarce goods") are a way of taking ownership of a digital thing. You don't physically own it (ones and zeroes aren't physical), but while others might possess copies, actual ownership can, thanks to clever tech, be established and recorded.

Copies of a certain digital photo of the Mona Lisa might exist on 10 million computer disks, but say there's an ironclad way to establish ownership. Even if there's no qualitative difference to yours, or tangible benefit, there may be value to the mere abstract assignation of ownership. In fact, if people get excited, that value might be high.
That was not a particularly good definition of NFTs. Get up to speed via this explainer from The Verge; Chris Hayes' podcast episode "Is Bitcoin for Real?", and/or Ezra Klein's podcast "A Crypto Optimist Meets a Crypto Skeptic").

Below I offer a highly creative analogy explaining why NFTs are vaporous bullshit, but also how they may nonetheless become established as a legitimate and widely-accepted financial instrument/market/thingee.

Years ago, there was a dodgy (though not blatantly illegal) proposition. You could send a company some money and they'd name a star or an asteroid after you.

It wasn't exactly a scam, ala selling the Brooklyn Bridge, because no one claimed it would become, like, yours. You just had your name attached to it, which is as "real" as the registering entity. If it were a legit enterprise, so you could inquire at the Hayden Planetarium and have the chief astrophysicist say "Oh, wow, you're THE Sheila Fleischbaum?!?", then, ok, there'd be something to it.

But even so, the inhabitants of planets orbiting New Sheila Fleischbaum would never recognize it by that name, nor would they be responsive to tax bills from Sheila's accountant.

While there’s no tangible ownership, there is some value in merely having your name in a registry - so long as it's a serious registry, and not just some smart-ass kid jotting it down on his Etch-a-Sketch. If you can verify that 1. it's seriously registered, and 2. serious people take the registry seriously, then there may be transactional value, even if there’s no intrinsic value.

Me, I personally wouldn’t be into it. But I'm not into anchovies, either, which in no way detracts from the fact that millions love them and fortunes are made with them.

An increasing number of legitimate-seeming entities are taking NFTs seriously, and NFTs are legit verifiable. So while they may not be tangible or meaningful, they do potentially have value.

Now, say there was a land grab, where suddenly everyone wanted their name attached to an asteroid, and most of the good ones had been sold. Prices begin to rise, per basic economics, attracting a new class of buyers. It’s no longer just a rabble of geeky space nerds. Sharks appear in the water, angling to get in early on the gold rush. And that's where we are with NFTs.

The notion of conjuring value from an abstract notion of ownership seems dodgy, but, as any gold bug would tell you, our entire monetary system is highly abstract, and, in the broad view, terrifyingly dodgy. It seems solid only because masses of people buy into the value. A consensual hallucination. We all agree that a five dollar bill is worth five bucks despite its utter lack of intrinsic value. It’s just a stupid piece of paper, but that's good enough if enough people believe in it.

So if I own an NFT of a photo of some recent LeBron James dunk, I don't own any thing. As with the asteroid, all I have is a marker, valuable only insofar as people 1. acknowledge the proof, and 2. deem it valuable. It's not very different from owning a hundred dollar bill. Since people will trade it for $100 worth of goods or services, its value is real. Or, at least, real enough.

NFTs are a widely accepted proof of ownership of a digital good. The registration is legit. That much is worked out. So it's just a question of whether people will keep buying into ownership value beyond this initial gold rush. For now, it all seems dodgy, but abstract value propositions always seem dodgy in the beginning. Everything hinges on popular acceptance. Value is as value does.

Does success with this sort of contrivance create incentive for would-be trillionaires to find ever more clever ways to wave their wands and create instant value out of nothingness? Yes, it does. And is that what NFTs are? Yes, it is. And the really scammy part is that those "legitimate seeming entities" that are buying in and stoking confidence are the very wand-wavers and registrars*. As we speak, they're wiggling myriad tentacles to ensure they grab a piece of every transaction. The sharks are in a feeding frenzy.

There is an undeniable Ponzi stench to the tableau of wand-waving sharks inviting us to greedily sink money into a shiny new world of meaninglessness. The difference between a pyramid scheme and the creation of a legitimate new market is robust longevity. With the latter, the music can stop without the structure collapsing, and the base of the pyramid profits even beyond the initial land grab. We shall see which one this is, but my advice is to steer well clear, as there's nothing dumber than buying late into a pyramid/Ponzi scheme.

* - The reason bankers cultivate a veneer of stature and proprietary is that they are, at their core, unhinged. They are shamelessly and terrifyingly untethered from any regard for intrinsic value. If they can profit from transacting fluff and smoke - and it's not specifically illegal - then deeply into the fluffy smoke they will dive, well aware that their weighty imprimatur of staid conservatism fosters the perception (some might say “illusion”) of value, to their vast profit.

Here's a very brief postscript

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