Ownership and the NFT
In 2015, when I was in the middle of transitioning from an art history major to an econ major, I told one of my comp sci friends that I thought of Bitcoin like I thought of any other high-risk speculative investment. Bitcoin, then and now, isn't really a currency, as it rarely is used as a medium of exchange or a means to purchase. This means its major purpose was to store value. Its bubbly and volatile nature made it a very unstable store of value, thus in my mind it had to be an investing instrument, and since it lacked a dividend or coupon to tether its value to some contractual accrual of cash, it had to be merely speculative. Jerome Powell recently echoed this sentiment. I compared Bitcoin, in 2015, to gold, land, and since I followed closely the contemporary art world, art.
With NFTs, life imitates art! NFTs incarnate my simile above. Let us discuss, then, how the Christie's Art World and the world of crypto blended into one.
What is an NFT
Of importance: the NFT is a nascent technology, and what I write about today concerns NFT marketplaces in early 2021, specifically OpenSea and Nifty Gateway. OpenSea aims to be the "Amazon of NFTs" and Nifty Gateway hosted the (in)famous Beeple NFT that sold for $69 million on Christies. My thoughts address the technology used by these specific platforms. NFTs, as I've learned, represent a diverse set of Blockchain technologies, and so confining my analysis to OpenSea and Nifty Gateway is requisite to any comprehensive or comprehensible analysis.
An NFT stands for Non-Fungible Token. The name does little enlighten those not already familiar with crypto or finance. Fungible is an adjective which denotes that the modified object can be replaced seamlessly with other similar items: a $20 dollar bill can be replaced by another $20 dollar bill, or even with four $5 dollar bills, and we would treat this substitution as uncontroversial. Thus, cash is fungible. An ounce of gold is an ounce of gold. Cigarettes are fungible, hence their usage as a currency in prison. And Bitcoin is fungible: one Bitcoin is always valued at, and replaceable with, any other Bitcoin.
Children, as King Solomon famously proved, are non-fungible. One cannot convert between children, between people. And art is not fungible: we cannot substitute one Picasso for one Vermeer, let alone one Picasso for another Picasso.
The non-fungibility of NFTs is designed to contrast them with Bitcoins, which are fungible tokens. The token part which unites the two is also rather easy to explain. Each Bitcoin is fundamentally a string of numbers, as is an NFT. For the layperson, I would compare a token to a password that you might use for your bank account, or to a person's social security number. These are tokens, little sequences of numbers and letters that are inherently meaningful, and Bitcoins and NFTs are much the same. In fact, if you would like to view an NFT, that is, the actual token that powers the technology, you can look at this tweet.
The password analogy best demystifies what an NFT is. Think of it like the password to your bank account. You are the only person allowed to view your bank account, and the bank enforces this with a username and password.
The bank account analogy actually goes a bit further. With Nifty Gateway and OpenSea, you never actually download the work of art you have purchased. The artwork remains on a remote server, and you can use the token as a password to view the artifact remotely. Since you only have the right to view the NFT on a remote server, if the server is temporarily down, then you cannot view your work of art until the servers are put back up, the same thing that happens when your bank's servers go down, or when Facebook's servers crash. Something darker occurs, too, if something dramatic were to happen to OpenSea and Nifty Gateway. In 2019, MySpace deleted 50 million songs, over a decade's worth of user-uploaded content, while transferring data between data centers, and something similar could happen to OpenSea and Nifty Gateway. If a natural disaster exposed their servers to water damage, or if a programmer did not properly back up a server while transferring data, it would disappear. Darker still is the prospect that OpenSea and Nifty Gateway could go out of business, and shut down entirely. This Twitter thread outlines that, if such a thing were to occur, it is not clear if the owners of the NFTs would have any financial remuneration, or the ability to extract the piece of art from these servers prior to decommission. (The thread, by the way, is also the best deep dive into NFT technology that I have read, and serves as the major technical schematic that underpins this explainer). NFTs hosted on these platforms are fragile. At any moment, like so much digital architecture we take for granted, like those MySpace songs that one day simply evaporated, they could disappear.
Now, there are other ways of generating, maintaining, and selling NFTs that would be less fragile. I am less familiar with these methods, and since the main marketplaces have not adopted them, I do not feel like discussing them at any length. I add this disclaimer so as not to mislead: when someone says they own an NFT, and this ownership is not through the aforementioned platforms, it may mean something quite different, and may present different risks and rewards.
Which brings us to a more complicated question. We have discussed NFTs, but what, really, do we mean when someone says they own an NFT?
Well, it turns out that ownership is an ontologically slippery fish to fry.
More Philosophically, What Is Ownership
I've seen many silly headlines concerning NFTs. Like this one: Jack Dorsey sells his first tweet ever as an NFT for over $2.9 million. This headline feels so foreign, has such a strange mouth feel. What does it mean to sell a tweet? What would it mean to own Jack Dorsey's tweet?
The technical details outlined above demystify somewhat: what Jack Dorsey sold for $2.9 million was a non-fungible token that would allow the purchaser to claim ownership of the tweet. You could use that NFT to view the tweet on a remote server on OpenSea. But, you and I can view the tweet on Jack Dorsey's Twitter account, so what does the person who purchases this token really own?
As I've continued to analyze consumption, I have come to dislike the word "ownership". "Ownership," as a phrase, lumps together many distinct relationships. When we say we "own" something, that relationship depends on the object which we claim to own.
Ownership denotes some set of rights an individual or company has with respect to a specific object. We own a specific home, a specific NFT. But the set of rights denoted by ownership differs greatly depending on the class of object we're talking about.
Concretizing would do us good: when we say that we "own" a piece of software, when we say that we "own" a copyright, when we say that we "own" a home, we mean vastly different things. "Owning" a home or a copyright includes the right to resell that home or copyright at a later date, whereas we do not always have such a right when it comes to owning software. Even seemingly similar objects can have quite different sets of rights that constitute its ownership. When one owns a home one normally has the right to modify it, say, by removing the lawn or by painting it pink. But when one owns a home with an associated home owners' association, one may not have purchased such rights. Strict standards concerning the character of the community would preclude such a right to modification.
Software provides another great example of the slipperiness of the word "ownership." If one buys a video game on disk, one retains the right to resell it. If one buys a video game as a download code, normally one forfeits that right, but one may have the right to copy that software and distribute it on a torrenting platform. If one purchases a video game on Steam, one foregoes the right to copy the software, but in turn receives the right to use Steam's services when playing this video game, such as the ability to screen share or to play socially with friends. Therefore, when we say that we "own" a video game, the nature of that ownership varies greatly depending on the platform that we "own" it on.
Understanding the sets of rights pertaining to "owning" an NFT affords a strong analytical framework for understanding the market for NFTs. Namely, ownership of an NFT, in my mind, affords the owner two key rights.
- The right to log in to the hosting server and view/listen to/experience the NFT.
- The right to resell the NFT.
Fundamentally, I believe the first of these rights explains very little of the interest in NFTs. The person who purchased Dorsey's first tweet earned the right to view a screenshot of something easy to find online. Color me skeptical that this right would animate anyone to spend 2.9 million dollars. Given that the right to log into a server causes the fragility of NFTs I described above, this right almost feels like a disservice more than a service.
So, if we're being honest, it's really the second right that most interests people when it comes to NFTs.
We have a name for what happens when people purchase a good exclusively for the right to resell it, and that's a market bubble! In fact, when you boil down NFTs to their rights, the best precursor I can think of is the Beanie Baby.
When one purchased a Beanie Baby, one received two, maybe three rights.
- The right to look at, play with, and appreciate the Beanie Baby.
- The right to destroy the Beanie Baby.
- The right to resell the Beanie Baby.
Beanie Babies commanded such attention in the 90s not because of the first, or second right. No one found Beanie Babies so aesthetically appealing that they needed to camp out at toy stores. They bought Beanie Babies because they were convinced that they could resell them for a profit, that the Beanie Baby would pay off their mortgage, pay for their child's college.
NFTs are the same. You buy them for the right to resell. Sometime soon, the bubble will deflate, and that right will likewise lose its luster.