NFTs Aren’t Pictures
Fungibility
NFTs are non-fungible tokens. There are two important pieces to that term:
- Non-fungible
- Token
To understand what is not fungible, we must first understand what is fungible! Fungibility describes whether or not an item can be exchange for another similar item without value being transferred. Dollars are a fantastic example of a tangible asset that is fungible. We can exchange dollars without any value being transferred. Bitcoin and Ether are example of intangible assets that are fungible, if we both send each other 1 ETH then no value transfer occurred (other than gas and taxable events and blah blah blah).
Non-fungible assets are all around us. Our homes, cars, clothes, and many other tangible possessions are non-fungible. If you took your child’s favorite stuffed animal away and exchanged it with another one, would they care? We, as humans, are non-fungible. Frankly, the list of non-fungible things is much longer than the list of fungible things. Another way to think about whether something is non-fungible is to ask if it is unique. Unique items are not fungible, they have characteristics that increase or decrease their value when compared to other similar items.
tldr: non-fungible = unique
To understand what it means for something to be tokenized is a greater hurdle for normies. Tokenization is the path to composability.
In 2011, Marc Andreessen told us that software would eat the world. It’s happening now. Composability enables software to build upon itself and upon other software. Standards have been created and adopted that allow tokens to move in and out of many different smart contracts to create other tokens or to execute specific functions. When an asset is tokenized, it gains access to a nearly unlimited ecosystem of places that it can be placed into.
A normie way to think about composability may be to consider how a physical dollar can be placed into various spaces to achieve desired outcomes. A dollar can be placed into a vending machine to access a soda or into the hands of a bellhop to signal appreciation. The dollar has many potential spots and due to all of the places it can be used, it is highly liquid. Tokenization allows composability, composability can enable liquidity for tokens.
tldr: tokenization = highly composable
So what’s an NFT?
It’s a highly composable and unique item.
Current Common Conception of NFTs
How many more times am I going to have to use BAYC as the emblem of what people think NFTs are? At this point, it’s the most high-profile collection and it embodies everything that people think of when you mention NFTs.
JPEG Summer was a blast for those involved. We day traded pictures and speculated on pictures and in the up only market we accepted the limitations of the implementations. Conceptualizing NFTs as pictures, however, short changes the developers operating in the space and the range of potential use cases for tokenizing non-fungible assets.
At the end of the day, normies think that NFTs are pictures and they think we are all pretty f-ing stupid for placing so much value on a piece of bad digital art. The most common pushback from NFT believers will sound like “community” and “utility” and I’ll take a moment to say that I think you are pretty f-ing stupid if that’s your best case for NFT technology.
You can’t just say “utility” and “community” and increase the realness or value of a piece of digital art (at least not anymore). Those concepts need to be unpacked and discussed explicitly to communicate the value associated. Similar to my pushback against the branding of “Music NFTs”, I urge you to not fall back to using “community” or “utility” to justify NFTs. You need to actually explain to others what that community is or does and what the utility is or grants access to.
Novel Implementations
Despite the generally uninformed view of NFTs held by most, there have been some incredible products that utilize non-fungible token technology to do truly innovative things.
Identity: ENS, On-Chain Credentials, & Getting Disco-Pilled
Ethereum Name Service is one of the oldest issuers of non-fungible tokens that stepped beyond the buy/sell pictures archetype of NFTs. Users can use ENS to buy .eth names that allow others to send tokens to them without needing to remember a 42 character alphanumeric string. For example you could send tokens to danner.eth without needing to remember my 42 character public key. Having a .eth makes your public address feel more human and applies a layer of identity to these 0xNames that are easy to forget.
Despite doing a lil dunking on the simpler NFTs, I would be remiss to note that digital identity in web3 spaces is highly informed by on-chain holdings and that pfps matter.
ENS and public key usage in digital identity could go even further if we could like web2 behaviors to our public keys. These interactions don’t necessarily need to be on-chain to be associated with our on-chain identifiers.
An individual’s identity extends beyond their on-chain identity. It is made up of on and off-chain identifiers that come together to provide varying windows into self.
Some organizations have been exploring the usage of soulbound NFTs to demonstrate identifiers such as proof of humanity or proof of skill. Both Rabbithole and Drepute fall into this category.
Disco presents an alternative vision of the digital future and exemplifies the importance of nuance in the discussions that occur at the fringe.
Check out this post for a broader overview of the identity space in web3.
Unique Financial Positions: Uniswap v3 & On-Chain Cold Storage
Uniswap v3 is the most widely known example of using non-fungible tokens to represent a unique financial position. Historically, liquidity providers create a market across all price ranges. In Uniswap V3, liquidity providers can set a range that they want to provide liquidity within and receive an NFT that represents that position. That NFT could then be fractionalized using something like Fractional — it takes on the composable attributes of a token.
For more on Uniswap v3 check out Finematics or this post that I wrote last year.
Unique financial position represented through NFTs feel highly under explored. True Freeze creates an on-chain OTC marketplace for tokens. Through offering on-chain cold storage, market participants can trade baskets of tokens without incurring slippage or impacting the liquidity in pools.
Access as an Asset: LinksDAO, GodMode, & Tokenized SaaS
One of the most interesting syndicate style DAO launches of 2021 was a group that sought to purchase and operate a golf course. LinksDAO launched an NFT that they used to raise funds and allows members to access the eventually purchased golf-course or other events hosted by the organization.
In a similar vein, Poolsuite launched a curated events and experiences NFT that allows holder to access private events or VIP lines at public events. These NFTs strike me as a headless country club memberships. Holders get access to a set of other likeminded individuals and curated events. The value of the NFT is not the photo or brand associated with the token, it’s the access to in-person events. Unlike a traditional membership fee that is paid while a participant is accessing a club, these memberships are owned and can be sold by members.
This type of phenomena is starting to play out in the digital access space as well. Traditionally, users of SaaS products pay a monthly fee for access and can cancel their memberships when they no longer desire access to the product.
Flipside Crypto is launching an NFT that acts like a Fast Pass for users and enables them expanded and priority access to offerings. At Flipside Crypto, analytics bounties are released to the public and are subsequently claimed within minutes. Those who get a claim, earn by learning and analysts can easily earn over $1000 each week by completing bounties. The NFT launched by Flipside will enable holders to claim any Flipside bounty regardless of it being over claimed. Anyone can get in line, but this token ensures that you get on the ride — similar to holding a Poolsuite NFT in a VIP line next to others who may not have the NFT.
Note: I am employed by Flipside Crypto
It seems natural to envision this type of tokenized digital access model expanding to SaaS products. A service provider may only be able to service X clients at a time and instead of managing who has access, they could issue X access tokens and allow holders to use, sell, rent, or insert these access tokens into number of composable contracts. These tokenized memberships could define SLA terms, enable data providers to manage load in new ways, or to simply add another lego to the pile and increase the optionality that we experience in highly composable environments.
Redeemable Tokens & Unisocks
Another class of existing NFTs are those which represent real world items. Unisocks are an ERC20 tokens (fungible) and benefit from the increased composability around fungible tokens compared to non-fungible tokens. That’s not to say that non-fungible token implementations won’t have more options than fungible tokens in the future but based on development trajectories it is the case now. Thankfully, we can convert fungible tokens into non-fungible representations and non-fungible tokens into fungible representations…
What’s Possible?
NFTs aren’t pictures. They are highly composable and unique representations that can act as inputs in a variety of situations, can provide access to digital and physical goods, services, or experiences.
What isn’t possible?
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