Where does the value in an NFT come from? Is it utility, rights, provenance, democratization, exclusivity or inclusivity?
NFTs represent a cultural shift toward a creator economy. [It’s also] software that represents your rights to something. The non-fungible part is the fact that your painting is not equivalent to my painting — they differ from a rights perspective. Yes, you can take a screenshot and copy it, but the digital signature that says it's mine can’t be copied. That's powerful because digital ownership is a fundamental concept we're moving towards in the metaverse-driven world.
Artists selling digital representations can participate in a new economy. But can we create a decentralized economy out of NFTs? Can artists bypass traditional markets and make money based on provable digital ownership? In theory, you don’t need a central marketplace; you can use a person-to-person model. For example: You send me a text message asking if I want to buy your digital baseball card for $1,000. I send you bitcoin. You send me back an Ethereum transaction, which transfers that NFT to my public key, and it's now encapsulated with my private key. The result is that I own it, and I can prove that I own it.
For now, most people in that ecosystem are still going to central marketplaces, so we'll see how it evolves. But this idea of decentralized rights for different types of collectible assets is extremely compelling and has a mind-boggling number of use cases when you get into smart contracts. Potentially, this is going to change everything.
Should there be limits to what these NFTs can do?
I'm a capitalist, so I see the value of something as what others are willing to pay. While I don't necessarily want regulators and governments to be the arbiters, marketplaces tend to cancel people who aren't ethically participating, and hopefully, they'll police themselves over time. eBay does that with buyer/seller ratings, and it's very effective. You do get fraud, but relative to transaction volume, it's very small.
NFTs are another form of capitalism. People assign value and extract the value when somebody else wants it. It's supply and demand – it's collectibles. I actually think it's great. I collected baseball cards as a kid, and I don’t see the difference.
How do you feel about fractionalization within NFTs, which looks a lot like equity and opens up new avenues of sales?
It's going to happen. There are two issues – the first issue: fractionalized ownership of a non-fungible asset. You're taking one non-fungible asset and breaking it up into pieces, which in and of themselves probably are fungible. That's super interesting conceptually and from a business perspective. Now, you might have some rights worth millions of dollars that are accessible to people in the same way as mutual fund shares.
The second issue: This sounds a lot like securities. And, as soon as you start offering securities in the U.S., the U.S. Securities Exchange Commission [SEC] steps in. I haven't heard of any large-scale legal tests of that. But I'm sure it's happening. We'll see what governments decide what their role should be.
You've been very vocal in your criticism of the SEC and its overall approach to crypto. What would you advise the regulatory authorities do to encourage mainstream adoption of NFTs?
Get out of the way. I think the biggest problem with the regulatory bodies today is inconsistency. When it comes to the federal government – if you look at the way we regulate commodities, securities and so on – it's an overlapping mess and was an overlapping mess before crypto. Federal laws previous to the Infrastructure Bill don't recognize the existence of cryptocurrencies, and it’s unclear how the Infrastructure Bill will be interpreted.
My desire as an American, and when it comes to politics, is do no harm. And since capitalism – to my mind – is the only tide that raises all boats, [we can] at least create open, fair markets with the free flow and exchange of information enabled, and then get out of the way.
We haven’t spoken about GameFi. In two years, will NFTs be a subset of GameFi, or will GameFi be a subset of NFTs?
The NFT-ization of games is happening for sure, and I think we’ll need a new nomenclature for this. These gaming platforms are way more sophisticated than the NFT platforms associated with art and digital collectibles.
The funding that's going into Web 3-oriented gaming companies behind the scenes is astounding. Developers are really excited about this, and where the developer goes, so goes the future.
Several Abra customers [outside the U.S.] buy their ethereum and use XRP to move the money around to trade at Axie Infinity because the fees are lower than ethereum.
There’s going to be a phenomenon around gaming economies that becomes decentralized, and people will look for arbitrage opportunities. The question is: How will it make its way back into the real world and non-gaming environments, and what will we learn from it? We come back to people assigning value to digital ownership and that value being transactable.
Can NFTs find a use case in other industries?
Luxury goods companies are looking at this asking, “How do we keep what we're doing physically in the digital world?” I've been contacted by handbag manufacturers who want to use NFTs to help with the resale of handbags. It makes a lot of sense. It’s a multi-billion-dollar industry – not the primary sale, the resale. It comes back to what we were saying right at the beginning about the creator economy.
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