The recent explosion in interest of NFTs by predominantly new adopters of blockchain begs the question, why? What value beyond price drives new users? There have been many opinion pieces asking these same questions. How can a “rare digital picture of a cat” hold value if you can copy then save the underlying jpeg-file? Or even why would something unique have value in an illiquid market?
Essentially the argument is that intrinsic value is fundamentally irrational, NFT markets are irrational because they don’t have wildy accepted use-value. They are non-fungible, they, generally speaking, require sufficient user action to determine the initial price—much less continued price action when market liquidity is not guaranteed.
The argument that a uniquely coded MoonCat is not functionally different from a JPEG of the same cat—or another MoonCat with equally rare traits—is valid. Its “unique” quality has no use-value in the real world. A picture would suffice for any reasonable digital use it may have. Thus the value of MoonCat NFTs are irrational in nature because they don’t have any reasonable use. This is a correct assertion. But this is not taking into account the very real inarguable value that the macro-social landscape has agreed:
- Mooncats are one of the very first NFT projects in the world.
- Mooncats are cute.
- Mooncats predate the ERC-721 standard in design.
So it comes back to the idea that a rare item is only one axis to judge value. Its timestamp, and cultural significance in Ethereum history add to the base value.
Most people apply emotionally-based intrinsic value on things regardless. Though rarity can have a play, a new Charizard Pokemon card will still fetch a good price simply because Pokemon is a beloved cultural phenomenon. Fans have collectively decided that Charizards hold more legitimacy and thus monetary value than other cards.
It’s important to accept that not everyone sees value in monetary terms. Art on your wall may just be some reproduction painting of the Mona Lisa to fill space, but many others want an original piece that they will likely never sell. They have a different system culturally by which they derive value—generally, most people make emotional decisions rather than rational—in contrast to profit maximizing.
In fact, the Mona Lisa only has monetary value through its cultural legitimacy and constant reproduction; its popularity is enough for someone to put a price on the original. Its intrinsic value extends far beyond itself because of its history and cultural significance. It is in the very fabric of cultural life for many people, largely western audiences. This mechanic can be applied to music. If someone sells their song as an NFT, the owner of the song is actually incentivized to both give away copies and market the song’s playing in the hope that it catches on in legitimacy within a cultural fabric.
Differentiating factors that drive cultural furver around NFTs are very likely going to be meta-data or meta-associative in nature. Like people buying a house once owned by a celebrity, this parasocial relationship will eventually extend to historical address ownership of an asset, like homes with historical past owners. Paris Hilton has an Instagram to show off her NFT art and Marc Cuban has a simple web platform for others to show off their NFT art. The fact is, culture will likely value an NFT well if it is widely known that a particular NFT was once owned by Snoop Dog.
What if that NFT happens to be an NBA Top Shot moment purchased because it reflects that celebrity’s court-side attendance to the game, watching the game-winning slam dunk? This idea of “owning a moment” reflects a monetary value, on-chain, valued by its meta-associations and culturally intrinsic significance. Its value is relative to the group of people interested in it and reflected externally via price, in a universal way that many audiences can interpret, only adding to its legitimacy.
Known artists typically cultivate fanbases. If an artist can cultivate enough fervent fans, they will often buy, collect and trade works amongst each other—referred to as the 1000 true fans theory. Zora’s platform is designed to specifically address this and provide tools for artists to further cultivate their community of fans. At the same time, they are incentivized to provide value for their fans, not necessarily being monetary in nature. This community acts as a market for the artist’s brand, incentivizing them to grow both the community and their brand. The game theory here is that mainstream culture changes over time and the bet is on an artist’s staying power in an internet space that is generally global and diverse.
Eventually some of this value can be reflected in a traditionally rational form like an index of its base value. An index is helpful as it can be used externally by a wider audience showing basic fluctuations in price and thus markers of legitimacy. Just like, for example, the value of a DAO governance token that is also reflected in its price in fungible form for use in DeFi. There are technical factors that can lever a price up or down, like supply or liquidity, but ultimately the social value—whether marketed or not—is tied to the density of its participant network of the index. More culturally-intrinsic value by a community = more incentive = more participation = more use value via the index.
Because art NFTs are generally intrinsic, there are opportunities for community-designs to include curation roles. Naturally over time, ancillary activities such as reviews, influencers and “tastemakers” will help to transmute a dynamic environment of “illiquid art” to rational on-chain value, pushing mainstream adoption of rare digital goods.
So why do NFTs have value? Because by design they mirror human’s inherent nature to assign personal value to things on a network many people can access. It’s a medium that generally non-math people understand.
If on-chain “markers” of historical moments and cultural legitimacy are future drivers of accessible sources of “useful value”, via NFTs—on a network with money-like properties, specifically Ethereum—then the future will be far less siloed, far more accessible and more dynamically connected. A world outside of existing socio-economic frameworks, globally.