Fri. Apr 16th, 2021


NFTs may be frothy right now, but they reveal a new type of price discovery for a new type of value, which could change business models.

With NFT talk flying at us from all corners, I was tempted to write about how, yes, there is a lot of hype but the main message is the cultural shift supported by technology. And that is the case – our lives are now digital, so it was inevitable our cultural spending would be, too, and for younger generations the concept of ownership is more about experience than possession.

But while that’s interesting, and ties into what I’ve written before regarding the massive impact the younger lens will have on our concept of investing, there is more going on here. So instead of a cultural/generational take, I’m going to look beneath the froth to what this trend says about how markets are evolving. It matters.

It’s not just the new markets springing up for digital artwork, video clips, music, tweets, etc. It’s not just the new types of financial assets that can benefit from the NFT tailwinds, such as tokenized securities and liquid insurance contracts. Those are all potentially transformative, but what I’m especially intrigued by is the emergence of a market for something that hasn’t been possible to value before: emotion.

This could give rise to much more than a new market as well as a new way of communicating and relating to peers. It could change entire business models, not just of culture but of any service, and could solve some of the inequities and vulnerabilities of the current web stack.

Getting frothy?

First, for a primer on what NFTs are, check out my colleague Ollie Leach’s excellent explainer, and Jeff Wilser’s compelling synopsis of the cultural forces at work. In brief, they are non-fungible blockchain-based tokens that can represent just about anything digital that has unique characteristics.

CryptoKitties ignited mainstream interest in 2017 with collectible and breedable cats, and the concept’s developer Dapper Labs has recently been making headlines with the success of its NBA Top Shots packs and its recent $250 million raise at a $2 billion valuation. Just over the past seven days, we’ve seen athletes, fast-food joints and mainstream media join the expanding throng of NFT creators. And on Thursday, a digital masterpiece was sold by the 250-year-old auction house Christie’s for over $69 million.

Many have likened this level of froth to the initial coin offering craze of 2017, which saw crowdsourced token sales hailed as the next revolution in capital markets. With projects raising millions on ideas that hadn’t even made it to the back of an envelope, who needs stock markets or bank loans?

Although reminiscent of those hectic times, with the same aura of disbelief from some quarters and excitement from others, this froth is different. It isn’t about blockchain, tokens and functionalities we barely understand. It’s about culture, and the mainstream market is paying even more attention on a relative basis than it did three years ago.

Why? In part because art, music and sports are much easier to relate to than new technology crowdfunding. And, in part, because blockchain and cryptocurrencies are not the totally foreign concept they were back in 2017.


Another way this trend is different from that of 2017 is in what is being tokenized. Here things get even more interesting.

The range of assets is broad, but most attention so far is on digital art, video and music. Why would people pay for something they can probably look at for free online? It’s not that the original is better – there may be some resolution or feature differences, but probably not enough to justify significant prices. These are driven by the desire to “own.” Art has drawn from this well for centuries but has not had a liquid marketplace on which to trade. And in the physical realm, often part of the appeal is being the only one to be able to enjoy a painting or sculpture.

With NFTs, pride of ownership is abstracted from exclusivity.

If I buy an NFT of one of my colleague Nik De’s tweets, for example, I’m not the only one that can see it – my pixelated version is not noticeably better quality than the original. But I have quantified my pride in owning the asset (in this case, the tweet), and have exchanged the relevant amount of currency to do so.

And if one day Nik annoys me (this is a bad example as I can’t imagine that ever happening), then in theory I have a liquid marketplace on which to exchange my pride of ownership for a probably different amount of currency.

In theory, we’re looking at price discovery for feelings. This could give rise to an entirely new business model for platforms and services that could impact how future markets work.

Price discovery for what?

Markets in their purest form offer price discovery by enabling a consensus value to emerge. Never before have we had the technology to be able to abstract intangible constructs and place them on a global marketplace.

If NFTs, in theory, give us price discovery on feelings such as “pride of ownership,” we’re but a step away from price discovery on feelings such as, “I enjoy using this service” or “This platform has taught me a lot,” or “I appreciate being able to connect with my friends.”

This gives us a glimpse of a whole new way of valuing companies, and a potential upending of the traditional ad-based business model of internet services that is the root of so many issues around privacy, incentives, manipulation and more.

Let’s take Twitter as an example. Does its share price reflect the value it contributes to society? No, not really. It’s more a reflection of the advertising revenue. Yes, these are related to the traffic which is indirectly related to the value people glean from using the platform. But a lot of the traffic is from bots and scammers, so the relationship is tenuous.

What if we, the users, could value Twitter? What if Twitter’s market value was the sum of the price discovery contributed by those who appreciate the learning, connections, community, memes and cute furry animals? Some interesting token projects functioning today are shaped around the idea that market value is decided by users. Imagine that elevated out of the niche to everyday utility. Imagine a realignment of corporate incentives.

This has nothing to do with NFTs the vehicle, but everything to do with a new type of “value,” and a way to reach a consensus price, however variable that price may be. And it has a lot to do with growing awareness that this new type of value is quantifiable.