How to Explain the NFT Boom

The NFT Boom

What would the NFT market look like if it was a person?

It would look like the coolest guy at the most exclusive nightclub in town. It would be surrounded by expensive liquor bottles with fireworks, influential people, and twerking girls. Everyone wants to befriend it. Rappers, actors, CEOs, movie directors, stand-up comedians, fashion moguls. Major companies such as Nike, Adidas, Mcdonald’s, Louis Vuitton, Universal, and Coca-Cola are throwing tons of money after it.

Meanwhile, people outside of the NFT-sphere generally feel bewildered and slightly agitated when they read about big corporations and celebrities that buy digital land in the metaverse for staggering amounts of money. Or when they see promotions about the latest, hottest NFT airdrops. Or when they hear about teenagers who become multi-millionaires from crypto investments and NFTs from their parent’s basement.

Yet, the NFT market continues to flourish, and it attracts successful individuals and exclusive brands like there is no tomorrow. A part of NFTs success is undeniably owed to large capital injections from certain stakeholders, however, it would be unwise to simply write the NFT boom off as another bubble or a Ponzi scheme. There is a more profound explanation behind the NFT boom as well: the potential NFTs have as building stones for a new reality.

This is a JPEG-version of an NFT from the famous collection Bored Ape Yatch Club that was sold for $2.67 Million USD.

The Most Popular Use Case for NFTs

NFTs are founded on blockchain technology. They provide you with provable ownership rights to assets that you can track on a blockchain. They are a natural next step for the evolution that started with Bitcoin and digital currencies. NFTs have the same properties that characterized Bitcoin as a unique payment system: trustlessness, transparency, disintermediation, decentralization, and secure digital ownership. But NFTs can have additional features as well such as rewards for the holder of a token, access rights to certain things like digital concerts, or voting rights within a project or a community. For one of my earlier, in-depth posts about NFTs and digital ownership, see here.

One of the obvious use cases I see for NFTs is governance of copyrights. In December 2020, I was ignorantly writing about that subject before NFTs became the trend they are today. One year to one year and a half ago I was unable to forecast how wildly popular NFTs would be soon after. They became popular not for their ability to track copyrights, but as proof of ownership for digital arts and collectibles.

I believe there are two main reasons behind the NFT boom:

1) The money in crypto

2) The metaverse hype

The Money Behind NFTs

In 2010, early Bitcoin developer, Laszlo Hanyecz (who at some point worked directly with Satoshi Nakamoto[1]), started a thread on the forum bitcointalk.org:

“I’ll pay 10,000 bitcoins for a couple of pizzas..like maybe 2 large ones so I have some left over for the next day. I like having left over pizza to nibble on later. You can make the pizza yourself and bring it to my house or order it for me from a delivery place, but what I’m aiming for is getting food delivered in exchange for bitcoins where I don’t have to order or prepare it myself, kind of like ordering a ‘breakfast platter’ at a hotel or something, they just bring you something to eat and you’re happy!

I like things like onions, peppers, sausage, mushrooms, tomatoes, pepperoni, etc.. just standard stuff no weird fish topping or anything like that. I also like regular cheese pizzas which may be cheaper to prepare or otherwise acquire.

If you’re interested please let me know and we can work out a deal.

Thanks,

Laszlo”

Four days later, on the 22nd of May (by some hailed as Bitcoin Pizza Day), another forum member took Lazlo up on the deal and had two Papa John’s pizzas delivered to him in Florida for the price of 10.000 bitcoins.[2] That trade marked the first purchase with Bitcoin at a time when the highest price of the year for Bitcoin was $0.39.[3]

In June 2011, the price of Bitcoin rose to almost $30.

In December 2013, Bitcoin’s price spiked to above $1,100.

In December 2017, the price went up above $19,000.

In November 2021, Bitcoin traded at a new all-time high above $68,000.[4]

It shouldn’t come as a surprise to anyone that Bitcoin and the new economy it gave birth to are notorious for high volatility. The most extreme example I know of in this regard is the meme token Shiba Inu (SHIB) which gained 43,800,000% in 2021. If you had invested just $2.29 in SHIB on Jan.1, 2021, and held on, you would have been a millionaire by the end of the year.[5]

Massive amounts of capital have been earned on digital currencies, and it needs to flow somewhere. NFTs are one of the popular outlets for beneficiaries of the obscene price upswings we have seen in the crypto market. That partly explains why anyone would buy an NFT of a fart sound, or why a collection of Beeple’s digital artworks was sold as an NFT for more than 69 million dollars in March 2021.

Expensive NFTs are often purchased with exorbitant gains from the earlier days of crypto. Combined with a strong faith in the underlying technology’s potential. The gains seem like monopoly money compared to “the old-fashioned” earning model where employees trade long working hours for a salary. In fact, traditional conceptions of money and payment cannot be applied to digital currencies. I would even question if fiat can be used in any meaningful way to measure the value of digital currencies.

The Metaverse Hype

It took me a long time to comprehend the metaverse concept. To give an honest disclaimer, I am still not fully on board with it. During the pandemic, most of us have realized how much working five days a week from home and living for the most part digitally, well, sucks. So why is there such a tremendous push from big tech companies to extend digital reality further? People should be living more in the real world instead.

The thing is, factually speaking, the metaverse has already arrived. And not in the narrow sense of a virtual world that you access through VR glasses. A better definition of the peculiar metaverse concept embraces social media, Teams conferences, Skype calls, Fortnite, Minecraft, Spotify, Netflix, online chess, and all other activities that we carry out in the digital space.

We are already living in the metaverse, albeit in a primitive, early version of it. Hardcore gamers and social media addicts have been living there for years. In the future, the digital and physical space will blend more and more together, virtual worlds will be interoperable, and the online experience will be consistent, yet alive, mimicking the world as we know it.

The metaverse is still an abstract idea, and no one can foresee what it will actually look like. Just like no one before the ’00s could foresee what the internet of today would like. But one thing that experts tend to agree on is that the metaverse is inevitable, and it will gradually sneak into our lives — there will be no clean “Before Metaverse” and “After Metaverse”.[6]

By viewing the metaverse as a sort of publicity statement that speaks towards the evolving online space, the idea is easier to swallow. At least it was for me. But if it turns out as an immersive virtual reality world like Meta led by Mark Zuckerberg envisions, it may be a dystopian nightmare. So thinks John Hanke, founder of Niantic, Inc. the company behind Pokémon Go.

In an interview with Steven Levy from Wired, John Hanke shares his thoughts about the metaverse:[7]

“It takes us away from what fundamentally makes us happy as human beings. We’re biologically evolved to be present in our bodies and to be out in the world. The tech world that we’ve been living in, as exacerbated by Covid, is not healthy. We’ve picked up bad habits — kids spending all day playing Roblox or whatever. And we’re extrapolating that, saying, “Hey, this is great. Let’s do this times 10.” That scares the daylights out of me.”

Instead of virtual reality, Niantic proposes an augmented reality where virtual objects appear in the physical world via outdoor-capable AR glasses. [8]

Niantic’s vision bears resemblance to “the mirrorworld” that Kevin Kelly, founder of Wired, wrote a hypothesis about in 2019[9]:

“The mirrorworld doesn’t yet fully exist, but it is coming. Someday soon, every place and thing in the real world — every street, lamppost, building, and room — will have its full-size digital twin in the mirrorworld. For now, only tiny patches of the mirrorworld are visible through AR headsets. Piece by piece, these virtual fragments are being stitched together to form a shared, persistent place that will parallel the real world.

Do you wonder what the mirrorworld would look like? Take a look at this short clip from the Snap Partner Summit 2020:

We have now established some key facts about the metaverse concept. But what does it have to do with NFTs you may ask?

NFTs role in the Metaverse

The internet (web 2.0) offers an endless stream of opportunities. Almost any activity that you carry out in the physical world can be replicated somehow in the digital realm. But one thing that web 2.0 does not offer is true ownership for its users. In addition to the double-spend problem (digital work can easily be copied and sold indefinitely), ownership of digital assets is dependent on the platform.

Packy McCormick describes this issue by using Fortnite skins as an example:[10]

“Currently, for example, I can buy a skin (or outfit) on Fortnite, and maybe it’s the only version of that skin that Epic sells. That’s non-fungible, but it’s mediated by Epic. They could decide that they’re going to make more of the same skin (which, incidentally, they did with a Skull Trooper skin that they had originally only given to early players), that they’re discontinuing that skin, and certainly, that you can’t take that skin with you to other virtual worlds, like World of Warcraft.”

Same point can be made about Kindle books, a follower base on Twitter, or a library of liked songs on Spotify. Who really owns it — the user or the platform? NFTs on the other hand, allow users to claim ownership to digital items regardless of the platform. In other words, NFTs are, or at least should be, platform agnostic.

An NFT includes the genealogical tree of the artwork, so the artwork can always be traced back to its provenance. However, as I mentioned at the beginning of this post, NFTs can also provide additional features and grant rights that are unique to the holder. An NFT can be the deed to your digital property, but also the house key.

Let’s say that you take a high-quality photo of a painting you have made on a physical canvas and mint it to an NFT. You now have two representations of the painting, one physical, one digital. Both versions are original, and you own both of them.

You can display the physical painting in an art gallery or the digital representation in Decentraland. You can sell the physical representation, and keep the digital one, or vice versa. You can move the painting to another platform, or another country as you please. You can include a copyright in the NFT, and make sure that you receive a percentage via a smart contract each time the digital representation is sold. Or you can include a legal term in the NFT that states that the digital representation should always follow the physical representation whenever the painting is sold to a new buyer. As long as the painting is under your disposal, you may even burn both versions, so the painting is no longer in existence.

In this way, NFTs have the potential to be building blocks for “the metaverse” in whatever future form it may take. If anything, that gives the NFT-movement, and any individual NFT, a non-obvious, but immense value.

[1] https://news.bitcoin.com/early-bitcoin-developer-recounts-weird-interactions-satoshi/ (29–03–2022).

[2] https://bitcoinpizzaindex.net/ (29.03–2022).

[3] https://www.bitcoinprice.com/ (29.03–2022.

[4] https://www.buybitcoinworldwide.com/price/ (29–03–2022).

[5] https://www.nasdaq.com/articles/can-shiba-inu-repeat-its-2021-return-of-43800000 (29–03–2022).

[6] See Matthew Ball (Jan 2020), The Metaverse: What It Is, Where to Find It, and Who Will Build It -> https://www.matthewball.vc/all/themetaverse.

[7] Steven Levy (2021): ‘AR Is Where the Real Metaverse Is Going to Happen’ https://www.wired.com/story/john-hanke-niantic-augmented-reality-real-metaverse/ (27–03–2022)

[8] John Hanke (Aug 2021) The Metaverse is a Dystopian Nightmare. Let’s Build a Better Reality. -> https://nianticlabs.com/blog/real-world-metaverse/ (27–03–2022).

[9] Kevin Kelly (Feb 2019), AR Will Spark the Next Big Tech Platform — Call It Mirrorworld -> https://www.wired.com/story/mirrorworld-ar-next-big-tech-platform/ (30–03–2022)

[10] Packy McCormick (Jan 2021), The Value Chain of the Open Metaverse -> https://www.notboring.co/p/the-value-chain-of-the-open-metaverse?s=r (30–03–2022).