After a run up earlier this year and a crash back down to earth in late spring, the NFT market went into the stratosphere in mid-summer, and it has gone in some interesting new directions.
1/ “Community” NFTs
Whereas “art-centric” NFTs were making the headlines in the springtime wave (eg. Beeple’s Everydays), the market is now dominated by “community” NFTs including countless game and avatar “projects” (which were actually the original genesis of the NFT movement in the first place). Instead of editioned multiples of animated stills that mimic fancy contemporary art objects, with community/project NFTs it’s not so much the visual itself that is being collected, but rather the status symbol of ownership within the context of a gamified construct. The markets trade very much like financial markets, but instead of there being one price for fungible asset particles (eg. shares, bonds and other instruments), the prices for a given project are expressed as a range, with a “floor” price and a “ceiling” and everywhere in between, according to some gamified formula, a function of “traits” of varying “rarities”. Among “blue chip” or “OG” community NFTs, CryptoPunks was one of the first, and constitutes a simpler construct. In next-gen projects such as Bored Ape Yacht Club, there is more of a “roadmap”, including utility of tokens for future games and metaverse incarnations, as well as brand extensions/segmentations such as dogs and mutants (following a model refined by the luxury industry), which allow the community or “club” to get larger in a manner that enhances the relative scarcity of the original generation rather than diluting it. We have moved past proof of concept for highly valued avatar “identities” that are about a status symbol rather than collecting the visual object per se. The existence of multiple competing avatar projects allows for a stratified hierarchy of status signaling, with “OG” assets like 24x24 pixel CryptoPunks trading for up to $12M (CryptoPunk 7523 sold by Sotheby’s in June).
Alongside avatar projects, there are also more game-oriented projects. In these, the NFTs grant ownership in a character that, in addition to being a mere status symbol, has utility towards a game construct. Zed Run is a game for racing digital horses, while Axie Infinity (currently the #1 most important NFT project by 7-day Sales Volume) is about cute animated Pokémon-like characters that are battled against each other. In most cases, the NFTs can be bred with each other to create new ones, and their collectible value derives from “utility” towards winning in the game (which often yields economic value, via increasingly complex game constructs).
2/ Completely “on-chain” NFTs
To the extent required by capacity limitations for storing data on the blockchain (which would be prohibitively costly for large digital media files), it is completely acceptable for an NFT-backed digital art object to live “off-chain” as an external reference that the NFT merely points to. As I have written about previously, for decades the contemporary art market has relied on certificates of authenticity as the collectible asset, especially within movements such as conceptual art where the art object is often manufactured, intangible, or ephemeral. Nonetheless, some recent projects have found elegant ways to keep the entirety of the NFT “on-chain” (which is aesthetically cute but not necessary). Art Blocks (currently the #3 most important NFT project by 7-day Sales Volume) is a platform for generative art where the art isn’t stored on chain but rather produced, deterministically and on-demand, from the cryptographic hash of the NFT, which serves as the random seed for an algorithm that resides on chain as a smart contract. In other words, the NFT is a key that uniquely seeds the algorithm that makes the artwork.
Another example of purely “on-chain” NFTs, Loot is a new project where the NFTs can feasibly reside completely on-chain because the object is merely a string of text, specifically a list of words describing items in a “loot bag”. What are these items for? They are to be used in a to-be-determined manner for games that don’t exist yet. Again, let me emphasize, the NFTs contain merely a string of words describing a list of items. Numerous derivative projects are now being built on top of these NFTs, including algorithmically generated images of the items, and communities have formed discussing realms and potential games in which the items could be used. Touted by supporters as the ultimate democratization, where the community gets involved in making the rules and deciding what gets built to implement the “loot bags”, I find it hard not to interpret this project as a sign of “froth” in the market, putting the “cart before the horse” and monetizing something before even creating it, much like Jim Clark’s “new new thing” at the height of the dot-com craze, where he was able to raise money for his “new, new idea” before even articulating what the idea was exactly. Furthermore, Loot is proof that indeed anything at all can have value, so long as a market of participants simultaneously agrees that it does.
Where to from here?
Remains to be seen whether a new pyramid of value will be built from the crypto community upwards (ex CryptoPunks), or whether the role of the traditional offline “meatspace” arbiters of value (MoMA, Christie’s/Sotheby’s, Gagosian/WhiteCube) will persist. I suspect that both value pyramids will persist to some extent in parallel, with crypto-native “community/project” NFTs diverging from those residing within the contemporary art pyramid (where the NFT will become a standard medium).
Damien Hirst’s NFT project Currency is an elegant crossover between the two worlds: Hirst is a blue-chip contemporary artist but the nature of his Currency project speaks perfectly to the “community” NFT project template, with a large set of unique variations, with a game theory twist where, next year, collectors will have to choose between burning either the crypto token or the physical print, creating a duality within the project of physical prints and digital tokens. As it happens, astutue and innovative marketing has always been integral to Hirst’s work (for example, his 2008 Beautiful Inside My Head Forever sale pioneered the concept of a primary sale directly through auction house, which previously handled only secondary sales).
For now, the meatspace arbiters are still in the mix, with high asset prices being validated by auctions at Christie’s and Sotheby’s (witness Christie’s landmark $69M Beeple sale back in March; Sotheby’s sale of 9 CryptoPunks for $16.9M in the May 2021 New York Evening Sale; and, most recently, Sotheby’s Ape in ! sale including a lot of 101 Bored Apes for $24.4M on September 9). While providing validation of the stratospheric valuations assigned to NFTs within the crypto community, such sales are just as crucial to the meatspace incumbents for maintaining their relevance as the world of collectibles rapidly evolves. At some point I suspect that the NFT space will no longer require additional validation, and the crypto community will become self sufficient as a decentralized arbiter of value.
That being said, I do believe the initial narrative of NFTs as some utopian democratization of art will soon dissipate entirely. Crypto is definitely about decentralization and removing central powers, but nobody said it needs to be a charity project. Luxury goods, Veblen goods, positional goods, positive price elasticity: these rules of economics continue to apply now in NFTs as they did before in art and other collectibles. NFTs are the inevitable next iteration of contemporary art, now that the digital realm has evolved to include transactable digital assets.
For anyone looking to dive deeper into the NFT space, I highly recommend the podcast Two Bored Apes, both entertaining and highly informative about latest developments in the space.