Why NFTs are Great (even as a non art-person)
NFTs (non-fungible tokens) were one of the biggest new things in crypto over the past few years, especially from the perspective of mainstream people outside the “traditional cryptocurrency industry” (which is a crazy thing to think about, but I guess the industry has developed to that point now!). I was initially pretty dismissive of NFTs as a class (especially for art), but I’ve come around in my old age.
NFTs get used for several things right now, but by far the most successful application has been digital collectible art. I know not very much about the art world, but art is a large a diverse domain. Some of the NFT art is “traditional artists” seeking new ways to monetize their art — the traditional path to monetization didn’t work for all kinds of art, and a lot of stuff (e.g. installation art, such as my friend Alexa Meade’s amazing stuff) was disrupted heavily by covid restrictions, so NFTs became a lifeline.
There’s a large pool of digital artists creating new art specifically for NFTs. Some of this is broadly generative art (where a program permutes inputs and creates a bunch of outputs — AI). Some are collections based on pre-drawn elements, assembled in a programmatic way: cryptokitties was the first of these to hit it big, and there have been many other projects since then, most famously Bored Ape Yacht Club and Cryptopunks. These have some game elements to them, but are primarily trading cards from a set.
There are plenty of non-art NFT use cases as well — NFTs are the technology behind ENS, the Ethereum Name Service; they’re used to represent items in some digital games; they’re used for access control gating to things like Floor; they’re used by the Proof of Attendance Protocol (POAP) to provide digital swag and mementos of attendance of physical events. I’ll do a post on non-art (“interesting”, at least to me…) use cases of NFTs later.
NFTs are not without their critics. A lot of this is just pushback against commercialism in the art world. Many NFT art issues were viewed as exploitative and low-effort cash grabs, sometimes rug pulls (the money was collected and then the art was deleted from servers, or the art was stolen from artists, sold as NFTs, and never properly licensed!). Some is due to the spammy promotion, especially in places like Twitter (where mentioning “NFT” will get you a bunch of reply spam messages about whitelists for minting scam NFT projects…). Some pushback was also specific to the computer games industry and linked to previous attacks on microtransactions shoehorned into games by major publishers (EA, Ubisoft…)
However, I’ve learned to stop worrying and love the NFT, for 4 main reasons:
One, they bring a new and generally distinct set of users to the overall crypto ecosystem. To some extent, crypto tokens otherwise are a relatively saturated market — after 14 years, most people who are potential direct users have heard of at least Bitcoin and possibly Ethereum, and usually many other projects as well, so there’s less space for each new project without cannibalizing others. NFT users are an entirely new world, people who are into the system for the end user application more than the underlying technology.
Two, they present “new facts on the ground” to regulators. Much of the difficulty in crypto is that many use cases look like securities and investment contracts, and there is a lot of law in that area. To some extent, projects have to avoid doing certain things (which would otherwise be very good to do) because they may bring unwanted legal or compliance exposure. When combined with the national and regional level laws around the world, this gets even more complicated. NFTs, especially as digital collectibles, are generally not as likely to be treated as investment contracts, and will fall under different and more amenable regulations.
Three, there’s a lot of innovation in applications. NFTs might be relatively light in features today — primarily a way to do provenance and creator-compensation in selling digital art — but they can be used for an amazing variety of one-off (“non-fungible”) financial contracts, asset representations, digital assets, etc. They’re really just a fundamental contract type.
And finally, tools and infrastructure. The NFT use case brings in many new users, with different regulations, and innovative applications, but this all depends on new kinds of software and infrastructure to facilitate everything. These users tend to be even more demanding of the software, as they might not be experts in the underlying software systems, so the quality bar is raised. As userbase goes up, a problem which requires any manual intervention to resolve becomes non-viable, so all the rough edges need to be smoothed. The interesting new potential use cases for non-art NFTs require even more complexity in the software, but it needs to be hidden behind an easy to use interface.
Overall, I’m very excited about NFTs, especially the uses where they get operated on programmatically through APIs and other software.