Right Click, Save: Understanding the NFT Mania
*Disclaimer: this is not financial advice and should not be viewed as recommendations to buy or sell any asset, this is purely educational and the information below is solely my opinion, please do your own research and develop your own conviction*
Sup,
I jumped into crypto for the first time during the beginning of the ICO bubble in 2017, a time when everything I touched, that released a white paper and had a plan for a mainnet, exploded in minutes of being listed on any single exchange. A time when I went on Bittrex, Binance and Kucoin and quickly doubled my money after reading about a project with no product or intrinsic value searching for a problem to solve. A time when everything went belly up a year later with developers abandoning projects and teams quickly converting their Ethereum into fiat like their lives depended on it while new investors, like me, lost everything and sold the lows for a 95% drawdown.
It was the best of times, it was the worst of times.
No, seriously, stupid cliches aside, it actually was. And it was those experiences that I encountered as a crypto normie at that time that I now am able to apply to NFTs as a crypto native years later.
I made the mistake of jumping into NFTs too late and not spending time trying to figure out what the commotion was. It wasn’t until I started paying close attention to what DCInvestor and DeezeFi were doing on Twitter that I realized there was something brewing here that I needed to try and figure out. And eventually, after some poking around, I started to grasp what this space really is and how it is a direct representation of the mania I not only witnessed first hand in 2017, but fell victim to in 2018.
The Hype
It started with Crypto Punks emerging out of nowhere to become the ultimate status symbol for rich people and crypto OGs. A dumb, ugly, pixelized image with no utility, purpose or reason rose up from being worth a couple of hundred bucks to all of a sudden being worth hundreds of thousands, and in some cases millions.
This made no sense to me and left me with a confused feeling of FOMO that I couldn’t figure out or decipher. It drew me into needing to buy an NFT to just say I bought one, to have a piece of history and an involvement in this new gold rush that suddenly was making people rich.
It led me to buy random JPEGs that didn’t appreciate in value and instead, were forgotten by the creators and any potential collectors who never knew they even existed amidst the slew of art pieces and profile pictures that flooded OpenSea on a daily basis.
And so I forgot about them, the allure wore off, and I continued stacking other crypto assets and ignored them yet again, never thinking about them during the May crash when I started to dive deeper into alts again to broaden out my portfolio.
Pudgy Penguins came along and I was even more confused by things. How could a stupid little penguin, adorable as he was, be worth thousands of dollars? It was just a picture on a screen, a digital file that I would have ownership over. Why would I want to spend two ether on him when he didn’t do anything for me and didn’t appeal to the overall art community?
But this is when the wheels started spinning. Pudgy Penguins, alongside Punks, were some of the early collections that I started seeing on Twitter as people’s profile pictures. Crypto natives who I followed closely, people whose podcasts I listened to daily, started making their avatars into these JPEGs and switching them occasionally for their newest purchase. Cool Cats emerged, Steph Curry bought a Bored Ape, and the world kept spinning faster and faster while Genesis Kongz were generating six figures a year in income for its holders through the introduction of “Bananas. ”
No matter how much I tried to remove myself from this niche market that was exploding, I had no choice but to have my face shoved into it. My Twitter feed slowly became littered with non-crypto native people who were exploring these opportunities. Stock people who typically focused on just owning stocks and occasionally referenced bitcoin and ethereum were now changing their pictures to Lazy Lions and Deadfellaz. I was so lost and confused and couldn’t understand what was happening.
Cool Cats were going for 10 ETH, BAYC were worth over 30 and released Mutant Apes that sold out immediately. Lazy Lions saw their floor double. Robotos beep booped and blinked their eyes on my timeline. SolPunks, ThugBirdz, Solarians, Piggies, the world was broadening out and growing more chaotic. Arf. Arf. I had no clue what was going on.
So it hit me, I needed to figure this out and understand why everyone's profile picture (PFP) art was all of a sudden the biggest rage on the internet.
And this is when I reached out to some people I respected and asked for understanding.
A Cloud of Clarity
It took me a while to try and figure out what gave NFTs intrinsic value, and in searching for this understanding, I was able to learn more about the tech side of the art that is driving so much demand for block space.
Creating art on Photoshop and uploading it into OpenSea isn’t anywhere near enough to draw in large swaths of demand and create Discord communities of thousands of people fawning over your collections. Of course there is serious demand for real artists to create digital renderings, paintings and drawings, but for every one of one that’s being sold for multiple ETH on OpenSea, there’s a generative project minting 10,000 NFTs that is raising millions of dollars for its creators. So the question becomes, why? What is so special about these profile pictures or generative art pieces?
And this is when I started to understand why NFTs were becoming a big thing.
NFTs are at the forefront of art and code crashing into each other and ushering in a new era of value creation. When a generative artwork is created, it starts off with its base form that the artist renders, it includes its random lists of attributes that could potentially exist, it includes its different layers and traits, and through a computer code, it is randomly generated and assembled, taking all of the traits, scrambling them together in order to create a unique final product. Some JPEGs possess traits that are more common than others, while some are incredibly rare in the combinations that are generated.
This is no longer just art, but also an artist’s expression of computer code.
But creating art through code isn’t necessarily enough to give NFTs the value they are possessing, the next layer here comes from the way the NFT is stored and preserved.
While the blockchain preserves the rights to ownership for the JPEG you’re spending thousands on, very few files are actually small enough to be completely hosted and stored on chain. As a result, decentralized file storage protocols are in high demand here to preserve the immutability and legitimacy of the NFTs people are buying daily. This is what separates someone like me taking a random picture or drawing and listing it for 1 ETH vs a Robotos that’s listed at the same price. I could have created an absolute masterpiece, but if the file is stored on my harddrive or worse yet, Google Drive, there is no way to preserve the file’s existence, and by proxy, no way to assign any real value to it.
The problem with storing an NFT anywhere but on a decentralized storage solution like Arweave or IPFS is that anyone can take the file, corrupt it, delete it, lose it, confiscate it and remove all of the legitimacy and value assigned to it. No one would be willing to spend thousands or millions on something that exists centralized on a computer somewhere in the middle of Idaho or in a cloud provider who is notorious for removing content that violates their TOS on a whim.
So a lot of the value we see here at a quick glimpse is the result of code meeting art while being hosted on a decentralized server that no one can manipulate or corrupt. However, this now leads us to our next questions of, how do we know whether or not an NFT is actually worth anything, and do they actually create any value for their owners?
The Dichotomy of Art
There are two types of NFTs currently that are making noise in the digital world: digital art and PFPs. Both are representative of two different think tanks and a direct representation of the objectivity that art holds, leaving its value truly in the eyes of the beholders and the associates that orbit that solar system.
Digital art, which we’ll reference as anything that’s not a profile picture, has its value derived in similar ways as it is created in the traditional world. The only differences would be those projects that are generative or utilize artificial intelligence in any particular way.
We see many projects here that have been collected and held in high regard like XCOPY’s, Ringers, and Fidenzas. SuperRare and Art Blocks Curated have become two of the more popular art studios that accept submissions, evaluate their merits and allow them to be minted and sold with the SuperRare or Art Blocks label attached to them, elevating a potentially unknown artist into a higher esteem.
These pieces are typically utilizing technology in some capacity, whether it’s through the use of a generative algorithm, or benefitting from the digital medium to create paintings or animated GIFs. Collectors here are typically buying these pieces due to the potential history of the artist, the uniqueness of the NFT that is being created, the technology behind it, the SuperRare or Art Blocks label attached to it, or the beauty of the image. These NFTs are really the closest representation to what we are already used to in the traditional art world with the only difference being an evolution in consciousness and execution that is allowing new mediums to exist and benefit creators.
Some might view these pieces of art as confusing or uninspiring, but the reality is there has been an attachment created and a niche market developed that is treating these pieces as new cultural artifacts that are worthy of attention, regard and prestige.
When we look at these digital art pieces, it’s pretty easy to at least accept and understand the value attached to them, despite the fact that in theory you could right click save the image or GIF and possess “ownership” over the likeness, which is a flawed ideology and a lazy argument that we won’t really get into today for the sake of time.
But when it comes to PFPs, especially those that are worth five to ten to thirty plus ETH, we see a completely different iteration of understanding. Instead of looking at those NFTs through traditional lenses, we need to look at them through the perspective of the metaverse and the impending digital economy that is developing.
Valuable PFPs are the result of strong communities that come together to build a brand that is furthered along by the utility that developers (and/or the DAO) create. Nathan Roth, who you can follow on Twitter @NathanCRoth, has delivered some great points here about how to evaluate and assign value toward these types of NFTs. As he’s mentioned in the past, the community is directly responsible for the marketing of the project and indirectly responsible for building its branding.
We see this responsibility passed along through community members making these NFTs their profile pictures on Twitter, ENS, and other social media and decentralized services. They further along the DAO or the project’s mission by promoting the legitimacy of the team virtually by engaging in discussions and providing friendly and helpful services to prospective members. They are the window into the souls of the founders who have provided them with the comfort and collectivity to create this bond.
The interesting thing about PFPs vs digital art lies completely in the optionality and expansion beyond the image. The art here is the front door that brings people to the project, allowing them to take the interest and letting its value derive from the community’s willingness to spread awareness, build the brand and trust the roadmap and utility that the developers (and/or DAO) create. People may be drawn to the project because of what’s created, but they stay because of the people they interact with and the long term goals and ambitions laid out in its roadmap.
Which brings us to a very interesting development in the world of NFTs which shows the power and ability we have to leverage art into something far greater and more impactful than ever possible in the physical world.
The Gamification of Art
When I first started learning about NFTs, I thought these were just pictures and gifs that you collected, representing your interests, tastes and desires to stunt on others. I didn’t know much about the community aspect, and I certainly didn’t know anything about the utility and DeFi opportunities that were emerging. And this to me is where the real value and opportunity is present for NFTs.
At its core an NFT is just an instrument of tokenized art that can be traded or fractionalized, however, due to the gamification of that art, we’ve recently discovered and unpacked the potential ability to take that art and leverage it yet again into a yield generating asset with an erc20 token that powers its network and digital economy.
Let me explain using the most successful model that a lot of projects have based their approaches off of: Genesis CyberKongz.
The Genesis Kongz are the only ones that can yield BANANAS which are an erc20 token. This token is then used to incubate and breed Baby Kongz and VX Kongz.
The Baby Kongz have tremendous appeal in the crypto community as both a status symbol, and a resource of information surrounding its Wall Street Kongz Discord channel which is a private offering only available to Genesis and Baby Kongz owners. This is a bevy of information that a lot of people look at as invaluable alpha inside of the trading community.
Now this is the part that becomes very interesting here. The Genesis Kongz are not available for less than 169 ether currently, which is at least half a million dollars today, and only 1,000 are minted and in circulation. In addition to their scarcity and the diamond hands of that community killing turnover and churn, the Genesis Kongz yield 10 BANANAS a day. This doesn’t seem like much of an allocation, to be completely honesty, but it’s incredibly valuable and yields roughly $800 a day for holders.
Why?
Well, it’s really simple, in order to incubate and breed a Baby Kongz, Genesis owners need to burn 600 BANANAS to do so. But when you only yield 10 coins a day by holding, that gives you 60 days of waiting to create a new asset. Baby Kongz are currently going for 7.5 ETH at this moment, but have traded as high as 17 ETH this month alone. So in order to create one, you either have to wait 60 days to do so, or go out on the open market and acquire more BANANAS the way you would buy more ether.
Since only 4,000 Baby Kongz will ever be created, it doesn’t necessarily make sense to wait two months to try your hand at minting one and then waiting another two months to do it again, especially when your peers are likely to go out and buy more BANANAS on the open market to do so first. This inadvertently drove the price of BANANAS up into the $80+ range and has created a sustainable network and economy that other NFT have been trying to replicate.
In addition, through the introduction of the VX Kongz, which is a 3D version, we have a metaverse being built out for VX Kongz holders to gather and participate in the offerings available, which will further develop the tokenomics and utility of BANANAS and pushing or sustaining its value over the long term.
Again, this is something else we are seeing other NFT projects adopt.
The common thing evolving nowadays is a roadmap that offers utility and an erc20 token that creates yield for its holders. But of course, this is a dangerous territory as if it is done incorrectly, it could lead to a massive dilution in the underlying, which we will get into in a little, or, worse yet, the classification of a security which will lead to delistings from OpenSea and potential regulations from the SEC.
In order for this gamification to work fully, devs need to make it clear that 1 token only equals 1 token and any monetary value that is assigned to it is strictly assigned by the community who are letting basic supply and demand metrics take hold. So in order for the yield to be worthwhile, we need there to be demand present and in order for there to be demand present, a strong utility needs to exist that creates a digital economy within this network that is sustainable over the long haul. A lack of sustainability will lead to excessive ebbing and flowing, and, just like in 2017, failed promises and lots of heartbreak.
In a lot of ways, today’s NFT roadmaps are the White Papers of the 2017 ICO bubble and people should be very aware and cautious of the promises they are buying, which brings us to our next stage, which is the evaluation process.
Evaluating PFP NFTs
When it comes to evaluating PFPs, it really is a layered approach that needs to be taken into consideration and tweaked frequently until one’s primer is perfected. Personally, I like to look at the artwork as the front door that brings people into the project while the utility and roadmap is what keeps them there and triggers sustainable growth.
A lot of projects are trying to incorporate utility and tokens into their roadmaps, but if the value of the token isn’t sustainable, and the daily token issuance is inflationary for its utility, it lends itself vulnerable to attracting vampire farmers who will pump the price of the NFT and the value of the token, leading to an eventual rug pull when demand dries up, supply is liquidated and the utility isn’t sufficient to absorb the selling pressure. This will crash the price of the token, and as a result, the underlying NFT. We saw this play out exactly as I mentioned here with StackedToadz, the collapse being exasperated a little by an exploit that drained the staking contract.
The key here is sustainability. Issuance needs to be scarce enough that it drives token demand on the secondary market which relies entirely on the utility being beneficial for holders to care enough to create demand for it. An example of this that I think will play out well over the long haul is the roadmap that Bears Deluxe has put together. As a full disclaimer, I own a Bear and a SupDuck (which I will talk about in a few).
Currently the Bears are upgrading their contract and are in the process of bringing their token, HONEY, and utility to market, but these are their plans thus far: holders of the NFT will yield one token per day; holders will need 69 tokens to mint a beehive which will give them the ability to mint three bees which will yield .13 tokens per day.
Similar to the Kongz model, the issuance will be so low that it will take over two months for people to create a beehive and subsequently bees, which are also yield bearing assets. As a result, this should drive demand for the token and potentially push its price up enough to create a legitimate digital economy within the Bears network.
Another project that takes a slightly different approach to build a digital economy around its network is SupDucks. The Ducks yield 10 VOLT tokens a day for its holders. Currently the VOLT doesn’t possess any utility, however, the roadmap does have the utility coming to market shortly.
Holders will be able to take two KingFrogs (one was awarded per each SupDuck held at the time of the minting for free), upgrade each of them with one of the three products that can be purchased (with VOLT) which will allow the holder to turn them into a MegaToad that can be used to animate your SupDuck. Currently the economics haven’t been released here in regards to the costs of the upgrades and any costs to fuse and animate, but a digital economy is being created that is turning the VOLT token into a utility that should see demand on the secondary market for new holders who do not own enough VOLT to proceed with the operations.
Aside from tokenomics and utility, projects need to be evaluated based on the history of its founders (artists and devs), their relationships, and the quality of their work. The SupDucks, which are one of my favorite projects from not just an art perspective, but roadmap, community and team as well, benefit from having a founder who has experience working at Dapper Labs and Zynga, who has also executed on its roadmap thus far, maintaining trust in the future offerings down the road.
Prospective buyers should try and learn as much as possible about the team involved before buying the desired PFP NFT. Being in the Discord, asking questions and researching as much as possible, is something everyone should do before aping into an NFT which could be an illiquid product in all honesty.
Being in the Discord brings us to our next evaluation metric: community. As mentioned earlier, the community is directly and indirectly responsible for the marketing of the project. A future holder should be interacting with the members, viewing their conversations and asking as many questions as possible to determine the goals and desires of each holder. Being inside of the SupDucks Discord during the most recent NFT sell off that saw their floor drop in half helped me feel very comfortable and bullish on their community, as every question was met with friendly enthusiasm and the overall vibe was one of positivity, calmness and genuine interest in the project, and not the price of its asset.
On the contrary, being in the StackedToadz Discord when the NFT dropped from 4 to 2 to 1.5 ETH was an absolute dumpster fire with people criticizing each other for selling, people complaining about the price of the asset dropping, name calling, trolling and unprofessionalism while the team remained quiet on the sidelines. I had considered buying a StackedToad but because of this experience it prevented me from ever entering and avoiding the rug pull that saw its token go to zero and the price of the NFT drop to .1 ETH.
In addition to just talking to the community, future holders should look into what is being built for the community to bond over. Some products are offering real life clubhouses, like BAYC, while others are building sandboxes and metaverses for people to congregate digitally with the 3d versions of their NFTs. This is something to consider as a good project should be as welcoming as possible for its members wanting long lasting bonds of friendship and community to exist.
The final metric here that needs to be considered is the quality of the art work. Some people will say the art work doesn’t matter, but personally speaking, the art work is what drives me to the project and helps me remain happy and excited for its future. If I can’t put the NFT on my Apple Watch and showcase the artwork, it isn’t something that I can comfortably own with excitement. In addition, that artwork is the key to building the brand. It needs to be vibrant, distinguishable and unique. If it looks like a lazy copycat, it won’t create the cache needed to attract new users which will indirectly lead to the floor dropping, the utility weakening and the investment opportunities fading.
The Evolution of Art and Money
NFTs are an evolutionary asset that will continue to grow and further develop its opportunities. At some point we will see NFTs broaden out beyond just art into the tokenization of real world assets. We will talk about that more in the near future, but at the moment, the use cases aren’t present and the opportunity is more of a one day, rather than a someday soon.
There are a lot of scams and things to be concerned about when it comes to NFTs and people should only take money that they don’t need and dedicate it to these products. NFTs can be incredibly illiquid, especially during times of economic weakness and people should be aware of all of the risks assigned to them.
People should consider developing a game plan and primer for themselves and their interests and goals before investing in NFTs. For some, the art is enough, others prefer the gamification aspect, while some just want to own whatever they like without ever worrying about utility and anything deeper.
Always understand what you are getting into before it is too late. NFTs are a leveraged bet on the Ethereum and Solana ecosystems and should be viewed through that lens when determining whether or not someone wants to dedicate their crypto to a potential JPEG.