Twitter has begun allowing its users to showcase NFTs, or non-fungible tokens, as profile pictures on their accounts. It’s the latest public victory for this form of … and, you know, there’s the problem. What the hell is an NFT anyway?
There are answers. Twitter calls NFTs “unique digital items, such as artwork, with proof of ownership that’s stored on a blockchain.” In marketing for the new feature, the company offered an even briefer take: “digital items that you own.” That promise, mated to a flood of interest and wealth in the cryptocurrency markets used to exchange them, has created an NFT gold rush over the past year. Last March, the artist known as Beeple sold an NFT at auction for $69.5 million. The digital sculptor Refik Anadol, one of the artists The Atlantic commissioned to imagine a COVID-19 memorial in 2020, has brought in millions selling editions of his studio’s work in NFT form. Jonathan Mann, who started writing a song every day when he couldn’t find a job after the 2008 financial collapse, began selling those songs as NFTs, converting a fun internet hobby into a viable living.
NFTs have become both memes and marketing, too. Taco Bell sold “iconic and original artwork inspired by our tacos.” Gap made NFT pictures of Gap-branded hoodies. The first edit to Wikipedia got the NFT treatment. NFT-native collections, such as the Bored Ape Yacht Club’s generated images of ugly primates, have become so popular that an individual ape might sell for millions of dollars.
But it’s not terribly helpful to conceive of NFTs as a new form of digital art or ownership or even technology. Owning an NFT doesn’t confer any rights in the intellectual property underlying the thing owned, which anybody can download for themselves. Those who purchase NFTs end up with nothing but a digital record—the deed for a thing that can be copied at zero cost, with zero repercussions.
Forget the hype around all things crypto. Set aside, for a moment, whether it makes sense to spend a fortune on an ape picture. Those matters are distractions. Let’s call things what they are: NFTs represent a first step in the securitization of digital assets. They turn digital data into speculative financial instruments. That shift has enormous implications because computers are in everything, and that makes anything a digital asset—your bank records, your Fitbit data, rings of your smart doorbell, a sentiment analysis of your work email, you name it. First the internet made it easy for people to conduct their lives online. Then it made it possible to monetize the attention generated by that online life. Now the digital exhaust of all that life online is poised to become an asset class for speculative investment, like stocks and commodities and mortgages.
NFTs might burn out, the crypto-collectible equivalent of Beanie Babies. But the more likely scenario is weirder and scarier: a securities market for digital data. Financiers, who previously turned everything, whether loans or hurricanes or payroll data, into bets, will likely go to town on all this fodder. But ordinary people may also become fledgling financiers of their—or others’—computer records. It is, in a way, the most honest turn of the internet epoch. From the start, online businesses have presented themselves as making culture, even as they really aimed to build financial value.
Now, at last, the wealth seeking is printed on the tin.
Imagine if you had a collection of artwork or jewelry, and you wanted to get it insured. To do so, you could make a list of the items—a signed edition of a limited-run print, maybe, or your grandmother’s jeweled brooch. The entry grandmother’s jeweled brooch is not the same as the brooch itself. But the record refers to the brooch—you could even attach a picture to clarify matters in case you had to make a claim against it later. As a proxy for value, an NFT isn’t much different from the words grandmother’s jeweled brooch on a list in your safe-deposit box or your insurer’s filing cabinet. It’s just stored on a blockchain where anyone can, in theory, look it up.
Consider Beeple’s $69 million NFT. The art—or the thing an everyperson would construe as art, the picture you can look at with your eyeballs—isn’t in the NFT at all. Instead, the NFT points to the place where the art can be seen. That creates some problems. The art—the picture file—could vanish if its URL is moved or the server that hosts it goes offline. Also, anybody who can load a URL can view or download the picture file. Someone with access to the server that houses it can alter or even delete the image.
Some have compared NFTs to receipts. If you’ve ever watched Antiques Roadshow, you know that a vintage Rolex presented with its packaging and original sales receipt helps validate it as authentic and establish its value. When your house burns down in a fire, you present a certificate of authenticity for your limited-edition print or an appraisal of your grandmother’s brooch to claim reimbursement. But it’s just as easy to sneer that NFTs are merely receipts, and that buying one is akin to buying the packing slip for a Rolex without ever getting the wristwatch itself.
Both positions have merit: Paying thousands of dollars for a receipt is stupid, and yet receipts have always exerted substantial value in cultural affairs. In art, horse breeding, real estate, and countless other human affairs, provenance and ownership have always been bureaucratic matters: You own your house because a deed says that you do, and a traceable record of title affirms it. It’s somewhat disconcerting to apply this principle to, say, computer pictures of ugly apes, but perhaps only because those pictures seem so new. One can, after all, own shares of a company, a practice once recorded on physical stock certificates but long since delegated to electronic bank records. Such ownership is entirely symbolic; the owner of stock cannot claim a portion of a company’s inventory or a measure of office space in its headquarters.
So NFTs aren’t strange or novel because they make appeals to value, provenance, and ownership via collective fantasies of paperwork. That’s old news. They feel strange and novel because normal people don’t usually construe monetary value in mere references to everyday things, like a cash-register receipt, or computer data.
Belief in such value is, however, completely normal in the financial sector. In that context, an instrument that confers ownership, which can be bought or sold and which holds monetary value, is called a “security.” Stocks are a type of security called equities, which represent an ownership interest in a company. When a firm goes public in an initial public offering, it takes a portion of the ownership of the company and divides it up into shares of stock, which it sells as equity securities to the public. Once bought, the new owners can exercise some limited rights in the operation of the company, for example via shareholder votes. But mostly, people buy stock to speculate in the future value of the company, with the hopes of later selling the security for a profit. The same thing can be done with bonds, which are securities made from debt rather than ownership, or commodities securities, which are financial instruments derived from the market value of raw materials.
In each case, ownership refers to an underlying asset, such as a company or a commodity, rather than the literal possession of that asset. That arm’s-length relationship allows financiers to manipulate value without having to store agricultural products or manage companies. A commodities trader, for example, can bet on the declining demand for corn or pork or oil by trading a futures contract.
The asset that underlies a security typically has some obvious, intrinsic value. A company has value in its physical plant, its cash holdings, its inventory, and its future sales. Corn and pork and oil have use-value as food and fuel. But in the 1970s, finance started to invent securities with less obvious intrinsic value. The most infamous of these were pooled home mortgages, which backed investments that banks sold as “mortgage-backed securities.” The collapse of this type of financial instrument, which hid the exposure of high-risk loans, is widely credited for bringing about the financial crisis of 2008.
But even mortgages have some obvious use in the world. Since home loans became popular targets for securitization, all manner of assets have become collateral for securities. There are weather derivatives that allow shippers to hedge against delays or damage caused by storms. Goldman Sachs issued a bond backed by future royalties from the Bob Dylan song catalog. Movie box-office futures were briefly authorized for commodity-market trading but then prohibited due to fears of insider trading. Regulation notwithstanding, anything that can be construed as an asset can become the basis for a security. And if anything can become the basis for a security, then why not JPEGs? Before software ate the world, finance already had.
Today, some technologists have included NFTs in their vision for a third age of the internet: Web3. It’s a hopeful moniker, a name-it-and-claim-it theology for the brave new world of crypto-driven applications—the securitized internet.
Let’s revisit Web1 and Web2 from a similar financial perspective. The first online age was that of marketization. The web got its start as a noncommercial, distributed publishing system that researchers, nerds, and hobbyists could use to communicate with one another. Then, in the mid-1990s, companies learned to move their businesses, and the brick-and-mortar world of retail, online. They built a marketplace that would sell the same products and services in a new way, or else they speculated on the potential to do so. We got Amazon and eBay and Craigslist—and also Pets.com and HomeGrocer and the dot-com crash.
By the mid-aughts, online life was an end in itself. Blogger and WordPress made it easy to publish text; Flickr and YouTube did the same for photos and videos. MySpace and Facebook and Twitter provided social diversion. The smartphone pulled the internet away from the desk and into the pocket and purse, where everyone could partake of it at any time, and then all the time. But these Web 2.0 companies, as they became known, generally gave away their services for free. So how could they make money?
By amassing data on the real and inferred behaviors of millions, then billions, of users, Web2 companies developed a foundation for selling ads, or charging modest fees, against people’s attention and engagement. Now the web was “monetized.” And the act of monetizing, once an esoteric aim of straight-laced bankers, became an everyday activity—and a natural goal for regular “creators” like, well, you and me.
The huge success of Web2’s giants shifted the center of American business aspiration from Wall Street to Silicon Valley. At the height of Web1, Microsoft was the lone software firm among the 10 largest global businesses, and big investment banks were the kingmakers who took fledgling tech firms public. Two decades later, the top five were all technology companies. Though some lamented the decline of manufacturing, nobody felt too badly about financial institutions losing status. Bankers and financiers always had a somewhat dark reputation as swindlers, but technologists reframed them as indolent parasites who made nothing and preyed upon the inventions of others. Web entrepreneurs, on the other hand, were builders, making tools for work and leisure and entirely new ways of living online.
But even if the social-media and search tycoons could use the popularity and apparent utility of their products as a cover story, they optimized their work for wealth and power, just like the bankers and the hedge funders did. The only difference was, they also claimed that they were changing the world for the better.
That facade is finally crumbling. Web3, the nascent third age of the internet, represents a turn away from Web2’s goody-goody idealism and back toward Wall Street’s brazen greed. Sure, some hints of the old content-expression-oriented web have stuck around; some NFT creators have found a way to make some good money from their art, even if the gold rush might not last. But overall, the tech founders who are building crypto platforms and tools, like the users who are buying and trading blockchain assets, are trying to produce wealth via rapidly appreciating speculative value.
When Twitter’s founder and former CEO, Jack Dorsey, sold the first tweet as an NFT for almost $3 million, that digital content’s distinctiveness helped underwrite its value. But like any security, an NFT’s worth has less to do with what it is than what it might be worth. Just as the pork-futures commodity trader is not principally interested in taking delivery of pig meat, so the NFT trader is not necessarily concerned with the usefulness or even the symbolic value of an ape. NFT traders are betting on the underlying digital assets, but they are also betting on the whole asset class—the idea that people, and maybe lots of them, will find ongoing and growing value in securities collateralized by digital data rather than material goods, corporate equity, or government debt. They’re also counting on the prospect that cryptocurrencies and blockchain technologies will have huge value potential on their own.
As a part of that gamble, blockchain purveyors are re-creating some of the esoteric names and structures that made finance require specialized expertise. Technically speaking, if you just want a record of a digital asset, you can accomplish that feat with an ordinary database. Web3 proponents insist that the blockchain is necessary to produce a public account of the records, which no one agent controls. Or, in the case of smart contracts and decentralized autonomous organizations, computer code that automatically enforces rules. But that decentralized aspiration is already devolving to centralized control, as NFT marketplaces such as OpenSea (which serves Twitter’s profile-pic feature) and crypto wallets such as MetaMask achieve Web2-style scale. Whether Web3 really ends up being decentralized might not really matter, so long as enough people believe in the speculative value it purports to create.
As that value continues to accrue, and Web3 grows in scope and influence, it would be prudent to reflect on the history of securitization in the financial markets. In short, things got only weirder: first corporate ownership, then debt, then mortgages, then weather, then Bob Dylan. Today, digital art makes up the collateral of most NFTs—pictures, music, sometimes even little software programs that run on the blockchain itself. Others are even more bizarre: NFTs of colors, of national parks, of stars (like, in the sky), of references to recorded songs, of derivatives of evidence of consumed chicken wings.
What if that’s just the beginning? There’s almost nothing that exists today that doesn’t also have a digital shadow side—each tweet and text message you send, and every photograph and email. But also: all of the banking transactions you carry out, each phrase you dictate to Alexa, each scan of a UPS package en route to your door, every record of a COVID-19 PCR test in your Labcorp account, every bucket of wings you DoorDashed. Everything we possess or do is digital or can be represented digitally. Even things that aren’t yours, or anyone’s, can be captured as conceptual collateral thanks to digitization. A group of Olive Garden fanatics started selling NFTs of references to individual Olive Garden restaurant locations, for Pete’s sake.
You might find these new digital assets exciting or terrifying. Either way, the absurdity is only going to grow. The natural endpoint of blockchains and NFTs—the golden promise of Web3—is that every aspect of human life, as recorded by computers, will be collateralized. Just think how excited or terrified you’ll feel then.