NFTs are here to stay
Thu Jun 02 2022
There are many instances of first mover advantage not being enough to guarantee continued success. For example, Facebook was not the first social network, Google was not the first search engine. For many companies, first mover advantage is eroded when a new upstart with better talent beats you at your own game by not repeating your mistakes. Bitcoin has first mover advantage. It is able to attract talent to improve its protocol, it has network effect through the existing user base, and it has no competitors for store of value (yet). NFTs have only been around for 2 years. Its feature is enabled by a type of smart contract which runs on Ethereum and other smart contract blockchains. NFTs are a concept that is general enough and useful enough that it will not be made obsolete anytime soon. I believe that NFTs have the first mover advantage and are here to stay.
NFT culture is rife with scams, get rich quick schemes, and naively optimistic youth (much like the rest of crypto). This creates an environment that’s dynamic and self-destructive at the same time. These are the qualities needed for success: it must challenge conventional notion, make old people annoyed/angry, and be able to explode with content and variation. Inclusivity means that everyone is allowed to participate no matter how non-conventional their point of view is. Scams and unrealized optimism will certainly cause many people to leave, but the cultural energy (if it continues) will drive more people in.
NFTs can exist on many blockchains, Ethereum being the most popular. As Ethereum fees skyrocket, many NFTs are looking to other chains including 2nd layer chains for Eth to cut down on their minting and transfer fees. The same NFT could theoretically exist on infinite chains, in the same way that anyone can copy bitcoin code and create another bitcoin clone blockchain. Blockchains derive value from users so NFTs living on a chain with no users is irrelevant. Most likely Eth will continue to be the chain with the most valuable NFTs because the Eth is the most valuable chain that supports NFTs. 2nd layer ETH can help with fee congestion and most NFTs which are execution heavy will likely migrate to 2nd layer with some price discounts. 2nd layer is still another chain and could have problems that don’t impact ETH so the value of the NFTs that run on 2nd layer are not as valuable. All but the most exclusive and expensive NFTs will most likely move to 2nd layer.
For many Eth owners, buying an NFT is a store of value and a social signal. In the minds of NFT owners, bored ape signifies high social status and is worthy of admiration and respect, confounding the expectations of non-NFT owners. This culture, like any others, has its own rules that help to propagate and validate its underlying mechanism. A counter factual would be if NFT owners did not view early adopters and their NFTs with admiration, the system would quickly collapse. Not that this system is guaranteed to continue, the counterfactual simply suggests that this system is self-perpetuating and unlikely to collapse. This confounds the expectations of those not in the NFT world and makes it hard to understand why NFTs have value at all.
In the physical world, signifiers of social belonging and status are all around us in the form of fancy cars, fancy houses, and how you dress. In the digital world, we have silo’ed implementations of status in the form of badges or points in each system we interact with. Our digital identity is fragmented. NFTs are the first chance for digital identity to persist across the digital worlds we move between. Creating a cohesive ‘you’ for every interaction means that you can carry your status from social media to gaming to dating. This brings richness to interactions where on reddit, you might notice someone on a thread is also really good at Call of Duty and possibly a future teammate — much like real life. As NFTs become more pervasive, platforms will race to implement integration with them and bring the richness that users have come to expect. We’ve already seen this with Twitter and will soon see Meta embrace NFTs as NFTs are key to persistent identities in the Meta-verse.
Vitalik, along with others, recently released a paper outlining Soul Bound Tokens (SBTs). SBTs are non-transferable and are issued by others. SBT are a subset of NFTs which allow for richer digital presence. SBTs can represent your education background, credentials, credit score, etc. They are the persistent historical you. This is a powerful extension of NFT capability, more aligned with how we think of digital identities than transferable NFTs. SBTs are not without problems. SBTs can be viewed by anyone and issued by anyone without your consent. Prosaic SBTs abuse is in the form of spam and you can’t get rid of, the more egregious is in the form of defamation. And because it’s on the blockchain, there’s no authority to appeal to if you want to remove it. SBTs hopes to solve this through SBTs where the issuer’s reputation could be tarnished should it issue false/incorrect SBTs. This is like mob rule where reputations swings through heresy could not only impact individuals but also tank the reputation of otherwise host issuers. Perhaps a solution can be found with Reputation DAOs specifically tasked with issuing ‘no-confidence’ SBTs based on group evidence viewing. This would be like having S&P acting as civil court. Could work in the short run, but a weird world to move into that doesn’t seem to solve the problems of the real world any better.
When people joined the internet, new possibilities in collaboration and knowledge storage was unlocked. Humans have invented many ingenious systems to improve our social interaction. These systems do not have digital equivalents in the early days of the internet and began to develop with instant messaging (communication), social media (social status comparison), bitcoin (monetary system), DAOs (group financial decision making and community organization), NFTs (personal identity and digital ownership). Each of these steps adds an important dimension of human needs in the digital world and satisfies a deep biological need.