NFTs, Coin Collecting, and Expensive Paintings

I‘ve tried to make this post fairly nuanced and with a lot of steelmanning, in contrast to much of the material on this subject. My opinions on crypto as a whole are more complex and deserve a separate, more in depth post. None of this is financial advice, I am not a financial advisor, etc.

When it comes to paintings, people care a lot about having the “original” painting. There can only be one original, “real” Mona Lisa, despite all the hi-res scans you can get. Even if you could make a copy so good that nobody could visually tell it apart from the original painting without painstaking chemical analysis, the original is still going to be worth many orders of magnitude more than the copy. While some people argue that the impossibility of making an exact copy of a physical object is the reason why the original is distinct from the copies (and therefore the crux of why this doesn’t generalize into the digital world), and that therefore the small difference in chemical composition or whatever makes up for those orders of magnitude, I think that this view is pretty silly. A visually indistinguishable painting has the same aesthetic value, and conveys the same historical value to the viewer, and even if you argue that there is some premium to having the original, it seems pretty absurd to suggest that the minor visual differences and chemical composition are worth, within a rounding error, $870 million of the $870 million the Mona Lisa is valued at, and that the actual content of art itself modulo some small errors is worth basically nothing in comparison.

I think it’s pretty clear that people don’t actually care about the chemical composition of their paintings or whatever. Rather, I hypothesize that the reason people care about the original is because this enforces artificial scarcity. You can always make more replicas, but there is only one “original”. By ensuring that more supply cannot ever be added, you ensure an effective monopoly on the painting until you decide to sell it.

This then brings up the question: Why care about the original and not the 15th copy? One might argue that since physical objects cannot (for all practical purposes) be copied exactly, every painting is unique, so if we only cared about uniqueness, we shouldn’t expect to favor the original. I think there are two main reasons behind this: first, the original is a far more natural Schelling point than any other copy. If you made a list of every copy of the Mona Lisa in the world and asked people to pick which one they think everyone else would pick, basically everyone would pick the original. Of course, having the one that everyone else wants bodes well for your selling prospects. And, more qualitatively, would it be more impressive to brag about owning the Mona Lisa or some mass produced copy?

Second, fungibility is relative. To explain this, let’s take a brief detour into the world of coin collecting. As legal tender, a penny is a penny is a penny. If you’re just using it to pay for things, any penny is fungible against any other penny, even if one is rusted more than the other, or they have different years, or one has a special limited run inscription, or so on. However, collectors care a great deal about extremely specific coins and their quality, and so some particular coins no longer funge against other coins because people care a lot about this specific coin. Less popular but still valuable coins are more fungible, with coins within a rough band of assessed quality being mostly interchangeable. The upshot is that whether things are fungible depends a lot on where people draw their reference classes.

Tying this all together, people care about and want to pay big money for the original because there is only one original and because everyone else cares about and wants to pay big money for the original, and non-originals are worth less because the supply is generally unbounded due to fungibility in the context of the people who are willing to pay big money for paintings. Said more pithily, expensive paintings are expensive because everyone thinks they are. There’s no “intrinsic” value in there, or vanishingly little of it compared to the sticker price, it’s simply worth a lot because everyone is willing to pay a lot for it. This definitely isn’t specific to paintings or anything; we see this pop up basically anywhere you can collect things with limited supply, and oh boy do humans love collecting things.

(Some exercises left for the reader, along similar lines of reasoning: Why are some paintings worth a lot more than other paintings, often with little relation to how good the art is? Why are some famous forgeries worth quite a bit, too? Why does art suddenly get more valuable after the artist dies? Why did Banksy’s painting increase in value from being partially shredded? Why is it that forks of bitcoin don’t dilute the market share of bitcoin very much?)

So.. how does this all have to do with NFTs? I think NFTs are essentially the pure distilled essence of what makes expensive paintings expensive. At their core, NFTs aren’t really about crypto; the crypto part is just an aesthetic that makes it appealing to the kind of person that already likes crypto. (There is a bit of a platform risk argument, but putting things on chain introduces a different set of platform risks, which forms a different risk profile that makes it appealing to the kind of person that already likes crypto.) NFTs drop all pretense of pretending to care about the physical continuity or chemical composition or whatever and just flat out creates the scarcity and the Schelling point by declaring, by fiat, that whoever owns this particular digital asset owns the thing, and there can never be another of the thing. Said differently, NFTs are the pure distilled essence of the concept of owning whatever the thing is that differentiates the original Mona Lisa from a copy of the Mona Lisa, independently of any physical constraints. This is why I think all the people who talk about right-click downloading NFTs are missing the point—it’s like the equivalent of making a visually-indistinguishable facsimile of the Mona Lisa. The point of owning the Mona Lisa isn’t to have something that looks identical to the Mona Lisa, the point is to own the Mona Lisa. The fact that digital data can be copied losslessly doesn’t actually differentiate this from the physical art case because for all intents and purposes, nobody really cares about the minor differences between the original and the copy beyond the fact that they serve to delineate the original and constrain its supply.

Also, there’s a whole other rabbit hole about what it means to “own” something when it comes to digital assets. I don’t want to get too deep into this rabbit hole but the fact that you’re owning the intangible essence of scarcity rather than any specific thing or copyright or other rights makes things a lot simpler: the fact that it’s stored on a particular ledger as a ledger entry doesn’t really matter; the ownership of the vast majority of assets is defined by rows in databases. I think all the star registry comparisons are sort of misleading because there is in theory a Schelling point, for each particular NFT, of which registry to trust. In other words, I think the problem of multiple competing NFTs claiming to be the “real” NFT is a solvable problem and not a huge fundamental issue (in fact, less of a problem than with real paintings, since the author can just sign the hash of the one they endorse and cryptographic signatures are more reliable than real signatures or chemical composition).

(also, both NFTs and expensive paintings can be used for laundering money, so they’re functionally interchangeable regardless)

So.. are NFTs good? Well.. I think the whole thing with wanting to own the™ thing is kind of silly when taken too far, for the same reason that I think expensive art is kind of silly or collecting extremely valuable stamps or coins or baseball cards or anything else like that is kind of silly. I simply don’t derive very much pleasure from owning something rare. As such, I am personally not interested in buying or collecting NFTs, though if someone wants to give me a whole bunch of money to NFTize something I wouldn’t say no.

I think the fact that NFTs are crypto-coded is probably a big reason why they’ve become so prominent: partially because it appeals to a base of people who have a much higher risk tolerance than average, and partially because crypto is a huge scissor statement that gets everyone talking about it.

Lots of actual implementations of NFTs are way worse than the theoretical platonic ideals of NFTs that I talk about here, though I’ll admit I haven’t spent a lot of time looking into the details. Also, the vast majority of NFT related things (as are most crypto things) are downright fraud/​scams, so I think that’s a reasonable first approximation when dealing with crypto stuff without an inside view, but that perspective is low hanging fruit that everyone has already talked about a million times before. I also wouldn’t be surprised if NFTs in their current incarnation totally stopped being a thing not long from now—Schelling points are only as strong as everyone thinks everyone else thinks they are. At the same time, however you feel about NFTs, I think there’s a pretty fundamental aspect of how humans think and coordinate in there that might be worth thinking about.