Written by Tal Shachar and Jonathan Glick
NFTs are fun. They are also revolutionary infrastructure to support and scale the creator economy. Yet it’s unlikely the current mania can last. It’s too much too fast, in many ways too blatantly cynical, and it’ll probably crash.
But the frenzy around NFTs right now is instructive. Because much of the hype is pure status-seeking. And that’s a healthy reminder that people will always find value in being early to the next thing, part of the innermost ingroup of something cool. And that’s a feature, not a bug for NFTs. It may in fact be the point. NFTs are evidence of your cultural bona fides. They are proof of passion (PoP).
In retrospect, this is an obvious extension of the social Internet. Social networks made social capital -- that is, popularity and influence -- scalable and quantifiable. We went from vaguely knowing who were the most admired kids in school to knowing who exactly are the most admired people in the world. In doing so, social media commercialized the explicit value of social capital, providing real revenue for influencers, which in turn made the pursuit of popularity more intense.
NFTs take this to the next level. They provide the infrastructure, tools and economic incentives to turn every art form, media consumption and cultural behavior into a more transparent and verifiable status game. It’s easy to focus on today’s eye-popping prices and overlook the feature that will be the most transformative: the record of ownership. Yes, the wallet that buys can be anonymous, but it cannot be hidden. Any purchase on the blockchain is recorded forever. Once that information becomes immutable, verifiable and public, we are in effect creating ledgers of coolness available for all to see. That band? Yeah, well, check my wallet, bro: that’s an NFT of their first hit. This amazing artist, I bought her NFT before she was in the Whitney and here’s the proof.
The social returns to prescient taste and committed fandom just went up dramatically. This dynamic will upend how cultural trends are born, financed, grow and die, change marketing and community building, and turbocharge the value of influence. It will also create a backlash to the financialization of every aspect of creativity, and leave us to grapple with a transformed society.
As Rob says in High Fidelity, “What really matters is what you like, not what you are like.” We have always been able to own cool stuff and show off our ownership to our friends. What better evidence of our good taste? The Frank Miller Daredevil #158 was cool. You bought it the day it came out. Your ticket stubs to that ‘98 Interpol concert, very cool. They are trophies of your taste. Keith Richards and Mick Jagger connected on a train platform because one recognized the Chess Records the other one was carrying, proving him worthy of collaboration. Humans have always exhibited trophies of their accomplishments and credentials. Hunters display animal parts. Doctors frame diplomas. VCs put their exits in plastic in their lobbies. Hipsters show you their vinyl. But unless you’re lugging your trophies around like Mick Jagger, in a pre-digital world and pre-crypto world, this was largely private, unverifiable, and inaccessible.
Even before the blockchain, blogs and then social networks had started to change this. Anyone could be a critic, and use a post to plant their flag on the next big thing. Foursquare let us check-in to restaurants. Twitter let us tweet about the show before anyone else. Instagram lets us post a photo from the undiscovered holiday spot. But these techniques had two issues. First, they required a certain degree of obnoxious spamminess. For someone to notice your coolness, you had to broadcast it to everybody, and, well, that’s not that cool. Second, for the most part, they don’t represent much investment on the part of the poster or much assistance to the creator of the experience. It’s fun to become the ‘mayor’ of a hot restaurant. But what’s really cool is to have been an early customer or even an investor way before it became popular. And it’s especially cool if it was an unlikely success. Why? Because you took a risk.
New creative projects usually fail. Being associated with failure is socially costly. And if you put money in, financially costly also. So being on record as providing ‘skin in the game’ to a needy project is key. Crowdfunding satisfied a lot of these needs, and it’s not surprising it continues to be popular and powerful. But it does have two weaknesses. Projects are usually all-or-nothing propositions. Unless the campaign hits its fundraising target, the project doesn’t happen. And even if it does, you’re not an investor, so there’s no financial return on your investment. There’s not even much social return. Your contribution is essentially anonymous and not time-stamped to establish when you took the risk.
NFTs and tokens in general shift the calculus. They make proof of passion (PoP) verifiable, public, accessible, and in some cases, profitable. The fact that you supported a creator, the fact that you bought into that particular project, the when and what, and for how much all are indelibly and universally established. And while there may be lockups and limitations, you acquire ownership immediately.
It’s way too early to know exactly how, but all of this will have a weird and pronounced impact on our cultural and economic behavior. Proof of passion (PoP) will raise the rewards for accurate prediction-making and early adoption. Cultural fads will trend faster as we all look to jump in early so that we can prove we were there later not to mention profit from it. Volatility will be normal, as people essentially daytrade culture. At the same time, some will be rewarded for steadfast support for an early project even after it has blown up. Before you might have moved on from that band once it became mainstream because the cachet went negative as others climbed on the bandwagon. Now, there’s an incentive for diamond hands. If the cultural ‘basis’ for your investment is sufficiently low, it might make sense to keep hodling and profit both culturally and potentially financially from the increased popularity of your item.
Of course, not everyone will be an early adopter. Some people with greater influence will profitably buy into artists and projects later. They can afford to wait to see which ones gain traction, not unlike how better-funded VCs and private equity funds can be spectacularly successfully investing in later-stage companies, even when their valuation might appear overpriced. It’s not necessarily the sexiest place to be in the life-cycle of creativity, but it’s a winning strategy. We’ve already this dynamic in crypto coins, tokens, and now hot NFT collections. Yes, it costs more to purchase your Cryptopunk in February 2021, but if you’ve got a million subscribers on YouTube, put it in your profile, brag about the coolness of your particular punk, and watch the entire asset class appreciate.
As such, influencer participation will be a cornerstone in the NFT economy. They will generally serve to push the hype hill higher, solidifying and amplifying the cool status of a given project and those with PoP for it. This will also cause deeper dives. Some less conscientious influencers will of course deliberately pump and dump, though, over cycles, there will be reputational backlashes tampering down on this behavior. More interestingly, some influencers will actually make stuff uncool, in part because they are obvious noobs, but also because of how nakedly commercial this behavior may become. There will be counter-cultural movements to not sell stuff to ‘Johnny-come-lately’ influencers. Hodling on even after your NFTs have become enormously valuable, denying coolness to gentrifiers proves passion more than anything else. And the blockchain will also reveal that some social stars only appear to be cool, but aren’t really when it comes to driving commitment. We’ve all heard of influencers with millions of followers who can’t sell a single t-shirt. With NFTs, this may become painfully apparent.
More positively, establishing a track record through proof of passion may finally enable a scalable business model for independent cool-hunters and curators. Those who consistently invest in overlooked and underappreciated items that then wildly succeed will be sought after. Marketers and algorithms will surveil their purchases, swarming in after. Hopeful projects will offer them free or discounted tokens, making their potential upside even higher. And it’s easy to imagine clubs of these culture-sensitive curators banding together, to pool capital, intelligence, and their purchases, something like a group-run gallery or record label. The most successful could go further and tokenize the owned assets, almost like a mutual fund.
Further upstream, PoP dynamics might even change how projects are conceived and produced in the first place. Take a film project. Hollywood has always been an API for creativity, but the endpoints were only exposed to those in “the biz.” NFTs will change that, by democratizing access to the API. In the simplest version, a creative team could tokenize their project at its earliest stage allowing regular fans the ability to prove their passion as buyers from day one. Over time, those tokens could rise or fall in value as community interest builds and the project moves forward or doesn’t. If the project succeeds to become a hit, the tokens would be valuable. They might even receive a share of profits.
But the re-architecture could be still more radical. A creative team could in theory tokenize each stage in the project’s development, creating collectible artifacts all the way along. And while valuable in its own right as a collectible, each item could generate more ownership of the successive asset. Imagine this: The pitch itself is fashioned as a collectible, rare and exciting. Using the money from this sale, the project moves to the next stage, maybe a storyboard. This work product too becomes a collectible, and owners of the pitch receive a copy of it, perhaps several, some of which they could then sell or hold on to, depending on their level of conviction. Each stage would issue more artifacts, each like Russian Dolls, resulting in the next stage item if the project went that far. This is not that different from the ‘products’ a filmmaker must produce today, although most of these are now consumed only by insiders, investors and executives. And spoilers? Some story details might be revealed to token owners, but others kept secret, much as savvy writers and directors hide their most precious secrets from all but the most essential people today. They might even create deliberate diversions, which are collectible too. If the movie is never made, all of these artifacts might be valueless, no matter how scarce they are, or they might have lasting value on their own. A storyboard, for example, can itself be a beautiful expression of creativity and skill. It would be art all the way down.
This may sound improbable. Industries change extremely slowly. Movies will definitely be among the least-likely and last creative projects to be tokenized. But blockchain-based games are already being designed like this today. Creative elements of the game -- characters, settings and objects -- are being sold off early, even before the game itself exists. These revenues are used to fund the creative process. The wonderful Hashmasks project is sort of like this. The cards have been sold -- for thirty-plus million dollars -- but the puzzle of their meaning is only now being revealed. Meanwhile, music producer 3LAU just sold the first tokenized music album, an NFT version of his album, Ultraviolet, for $3.6 million. The NFT is also redeemable for additional perks such as a customized song. Again, it’s possible for creators to tie directly economic flows to these items, enabling holders of assets to receive revenue from the project as it launches. But in many ways, the system works best by atomizing the various types of return, economic, cultural and communal and allowing them to be traded separately. As we see over and over again, there are dozens of valuable derivative assets that extend from any successful creative product.
Beyond specific projects, tokens may reshape the nature of patronage and community building. Tokens can turn fan communities into ongoing financial supporters of a creator. Consider a fan favorite like Beyonce or Zach Snyder, or, more likely, the next up-and-comer who wants to be them. This enterprising artist could create a ‘fan club,’ offering NFTs that provide special privileges, almost like personal seat licenses for a sports team. A creator could release a set number of these fan club tokens, proving fans’ passion and status as a member. They could confer benefits such as private message groups, early access to tickets, the ability to vote on upcoming creative choices or early access to each of their projects’ NFTs like the ones we described above. Of course, fan clubs are not new. But NFTs finally solve some of their main challenges, namely that they are hard to scale and that as they scale, the status associated with being a member diminishes. With NFTs, the creator could require a fee from every transaction, allowing them to benefit from increased fame not by diluting the product and adding more members to the fan club but from the increased value and status of being a member of a smaller group.
All of this erodes the value of ‘traditional’ media companies and cultural institutions since individuals will be more able to provide proof of passion without branded legitimization and artists will be able to fund their creative endeavors by selling proof of passion to their engaged communities. There will also be major downsides to transforming every economic or even artistic endeavor into a tournament model with massive returns to clout, status, and performance flowing to the top. Most creators and curators will not be high status, and they will have to face that fact with proof. People who can’t afford to lose money will lose millions. All this will often be counterproductive to artistic experimentation and diversity on some level. While the funding structures enable more innovation, they may also create incentives to pile into what’s popular and big rather than supporting the new. As more of our passions become explicitly financial, we may turn our love into work, and not in a good way.
NFTs will rise and fall but there’s no denying that the ride is going to be fun. By dumping the ‘middle men’ who mandate taste, we will all get a front-row seat to the world’s largest fashion show. And book fair. And fine art auction. And indie film festival. A front-row seat to gorgeous schemes and cynical scams. To whatever currently unimaginable forms of culture this new platform electrifies. We will all get to be bidder and buyer, agent and advocate, experts in our own niches, promoters of our greatest passions.