In Defence of NFTs

I remember thinking of myself as a relative latecomer into the Bitcoin space, having really gotten into it in 2012 after first being introduced to it in 2009. My initial impression of Bitcoin in 2009 was “who cares, this is a nerdy demo” and it wasn’t till I saw a project at a hackathon of Bitcoin being passed around in an API call to get access to some data that I truly saw the potential. This was around the time Twitter was killing third-party clients left, right, and center with the justification being that there was no way to monetize the API and it was hurting their ad business (I was till very recently, a devoted Twitter user). The demo really made me rethink Bitcoin. If “value” could be manipulated like software and moved around the internet with minimal friction, the impact could be huge!

For the last 4 years, I have managed a small community of Blockchain/Web3 enthusiasts within Comcast. And while markets do their thing, my focus has remained on the underlying tech, with my initial interest in Bitcoin being replaced by Ethereum which I could actually use to build cool applications. And while I have worked on a few prototypes, some of which I have even shared on this blog, it has generally remained my “20% time” project.

Up until 2022. This year I spent a lot of time in the Web3 space, specifically around NFTs in general. And while I hope to share some details in the future, I wanted to take some time to talk about my own perspective on the space, especially since there seem to only be extreme statements in the space: NFTs are either a complete scam or the biggest opportunity since the internet. My own perspective is fairly moderate, but I do feel NFTs present a huge opportunity to build the next generation of communities and applications. Lately, I keep getting pulled into the same conversations again and again, and this post is an attempt to share my opinions on the topic.

We have had NFTs for a long time

In a purely technical sense, every web app that allows you to log in issues you an NFT, a non-fungible (i.e, unique) token which is some kind of authorization or access token. The difference between these tokens and Web3 NFTs is that

• Traditional access tokens are stored in proprietary databases and NFT tokens are stored on blockchains which are usually shared infrastructure (which is why I don’t understand the point of single-company blockchains, though there is value in consortium blockchains)
• Unlike traditional access tokens, you “own” the NFT which means you can give/sell your NFT to anyone on the same blockchain

IP vs Access Tokens

Though there are a lot of variations here, broadly I classify NFTs into 2 categories

1. Intellectual property NFTs which give you some kind of ownership of the underlying asset. This may be read-only (ie. you can’t actually do anything besides own or sell the asset) or may give you broader rights to use the IP, as long as you hold the NFT.
2. Access token NFTs which give you access to some content or community. The associated image/media here is a nice-to-have but not really the point since it’s more about the access gateway being able to validate your ownership at the entrance to the experience (similar to traditional access tokens)

“I can just copy the image”

Probably the biggest criticism of NFTs is that since the tokens just point to a piece of media on the internet, there is no value to them. Analyzing them in the context of the 2 previous categories of NFTs is kind of insightful:

1. In the case of IP NFTs, this is akin to IP theft which, on a small scale, is no big deal (like downloading a YouTube video or whatever). But no one is going to create a business on IP they don’t have rights to (like the Bored Apes restaurant). Also, IP laws are territory bound. For example, it’s easy to enforce American IP law in the US but not in China. The same goes for NFTs: Web3 apps can easily verify your ownership if they need to but its harder to do that in off-chain products (at least for now, and since there isn’t that much money being lost there, no one cares), so yes, you can copy and use a Web3 artist’s work if you are ok with minor IP theft with no repercussions
2. For access NFTs, since the media is not the point, it’s like copying the cool artwork from a Foo Fighters concert ticket. It’s cool that you now have it but since the point of it is to get into the concert, grabbing the image is pointless

Tokenized Hype

Another criticism is that NFTs are just tokenized hype, and a lot of purchases are FOMO-driven. There is some truth to this but it’s a natural culmination of where we have been going as a society. As we move from fundamentals-based economy to Information Economy to Attention Economy, the Hype Economy seems to be a logical next step. And this is being played out not just in the crypto world but in the non-crypto sector as well, with things like Meme-stocks and companies like Tesla being examples of companies trading way over their fundamentals would justify mostly because they have garnered huge fanbases around them.

I do think there should be some guard rails to prevent people from getting burnt and some amount of regulation is desperately needed in the Defi space.

Copper over Gold

I am not as excited about “crypto-as-a-gold”, something valuable but barely used. I’d rather Web3 technologies be more like copper: cheap so that everyone can use it, and actually useful.

Can’t have it both ways

I also find it fascinating that the same folks who are concerned about the centralization of power and control across the internet among a handful of companies also demonize the most impactful decentralization effort in the last decade. For the first time, we actually have projects essentially kickstarted by communities, and unlike, say, Kickstarter projects, have a voice and role in the growth of the projects. I am fascinated by the ideas of things like governance tokens and DAOs as coordination mechanisms. We have decoupled identity and financial systems allowing us to work with anyone on the planet with a shared vision and be truly inclusive since real-world biases based on identities don’t have to come into play at all.

Where Web3 needs to get better

That said, I acknowledge that Web3 systems need to improve to avoid the constant dings against it.

• Reduce complexity to reduce de-facto centralization: Too many parts of Web3 are still too technical or nerve-wracking (like creating your own wallet to hold thousands of dollars). And while various companies are bringing solutions to market to help here, their centralized+unregulated nature makes the situation even worse.
• Create more forgiving systems: I understand finality is a feature but we need to create systems to be more forgiving to users and developers. We have rolled back the chain when we had major events like the DAO hack on Ethereum. Can there be similar mechanisms or design patterns to prevent accidents on much smaller scales?
• Reduce the possibility of scams and rug pulls: We need more ideas like trustless refunds etc to reduce the possibility of people getting burnt on Web3 products. I like the idea of long-term distribution of crypto funds that prevent FOMO scams.
• Make more things for regular users: There is so much we can do with the Web3 primitives we have today: games, learning apps, community platforms, etc. I hope more efforts go to those and less into recreating wall street on the blockchain