At this point, you probably have your mind made up on non-fungible tokens (NFTs). Most people fall into the following three categories.
Category 1: The Enthusiasts. These are the NFT supporters who can’t wait to invest in new projects. They consider NFTs a great revolution for proving ownership, pushing decentralization, building the metaverse, and boosting the creator economy. They are bullish on new NFT projects across ticketing, merchandising, music, and gaming.
Category 2: The Skeptics. They understand the appeal of NFTs and are well-versed in purported benefits like transparency, liquidity for digital goods, and smart contract capabilities; however, they are not as sold on all their use cases. Cryptography expert Moxie Marlinspike questioned whether NFTs are truly decentralized, and Cointelegraph has noted the dangers of the “rug pull”—a fraud mechanism where NFT creators maliciously remove liquidity from the project, run off with investors’ money, and drive the value of each NFT down to zero.
Category 3: The Bewildered. These are the people who are confused about why people are buying pictures online that they could get for free elsewhere. They want to understand what the craze is but just don’t get why digital ownership of an ape cartoon is worth anything, especially when they could just take a screenshot of it. Some of these individuals have been dubbed the “right clickers", who save images of purchased NFTs and post them on social media in an effort to troll owners.
As seen by the stark contrast among these groups, NFTs may be the most divisive aspect of Web 3.0. To delve deeper into why there is such disagreement in the space, I thought it would be useful to provide context for some of the most recent headlines in the NFT space.
Is the NFT Bubble Bursting?
After a surge in NFT interest in 2021, the market for digital goods seems to be slowing down. As reported by Bloomberg, daily sales were down 83 percent from January 31 to March 3, and the average sale price dipped below $2,000 after hitting a high of $6,900 in early January. Floor prices on major NFT projects like the Bored Ape Yacht Club (BAYC) are down significantly, and the number of accounts involved in NFT transactions has fallen by about 49 percent, according to the Financial Times. That’s right: Even the famed ape themed project touted by celebrities has experienced some turbulence.
It might be a little early to say the bubble has burst, but this is a significant development considering the massive amount of capital from individuals and investment firms that has flown into NFT projects. But maybe this slowdown is a good thing for the NFT market in the long run? Sure, current owners who paid all-time high prices for NFTs are sweating a bit, but lower prices may lead to greater adoption and involvement from the skeptical and bewildered. NFTs aren’t going to achieve the revolution its supporters had envisioned with high gas fees (the network fees charged to facilitate transactions on blockchains) and an average selling price accounting for over 10 percent of the median household income in the United States. Maybe this correction in the NFT market was needed to engage more socioeconomic groups in the ecosystem.
Intellectual Property and Centralization
Despite the recent downturns in the NFT market, the BAYC community may be at one of its strongest points in recent memory after the announcement of parent company Yuga Labs’s recent acquisition of the Cryptopunks and Meebits intellectual property. Before BAYC came along, these were the initial projects that set the market on fire and established NFTs as cool profile photos to proudly display on social media. And just several weeks after this announcement, Yuga Labs raised $450 million at a $4 billion valuation and reported $138 million profits at a margin of 92 percent, according to TechCrunch. These figures probably further confuse the bewildered.
But much of the interest in Yuga Labs has been driven by the company’s pro-owner stance that allows all members of its community to freely use their NFT’s intellectual property for both personal and commercial purposes. This means owners are free to use their NFTs on merchandising, packaging, and in any other products or ventures. As such, the NFT enthusiasts would argue they aren’t merely buying ape cartoons as a sort of status symbol devoid of any intrinsic value. Just as a business might invest money into patenting a logo or design, these NFT enthusiasts can purchase an ape cartoon and now a Cryptopunk to build out their own brands. Yet the following question remains for the skeptics: Does having a $4 billion company at the center for the NFT ecosystem convey “decentralization?” As CoinDesk has noted, Yuga Labs may now have the first NFT monopoly, as it now owns the two most prominent collections in the space, yet we don’t really know much about the company and its founders. Where is the “decentralization” that sparked the move toward digital assets in the first place?
The Problems with ApeCoin
Acquiring new intellectual property wasn’t the only big move Yuga Labs has made over the last few weeks. The ApeCoin Decentralized Autonomous Organization (DAO) launched its own governance token on March 17 and experienced major volatility in less than 24 hours of trading. According to CoinDesk, the ApeCoin DAO is purportedly separate from Yuga Labs, but it is receiving over 140 million ApeCoins to add to its treasury and its two founders have been personally rewarded with about 80 million tokens as well. Together, these 220 million tokens make up about 23 percent of the total allocation. So while Yuga Labs may claim to be separate from the DAO, it is still one of the primary beneficiaries from the new project. Each Bored Ape owner is also entitled to 10,094 ApeCoins, and about 110 million tokens have been claimed. If this seems like a way to create liquidity out of thin air to continue benefiting the BAYC community, you wouldn’t be wrong. And it doesn’t stop there. According to Bloomberg, Yuga Labs’s venture capital backers will be compensated with 14 percent of the tokens, further confirming Block CEO Jack Dorsey’s concern that Web 3.0 will be owned and controlled by investment funds.
Yuga Labs and its founders and investors will therefore be controlling about 37 percent of the total token supply, giving them outsized influence on future projects. DAOs have usually been implemented to facilitate more transparent and democratized decision-making by offering direct voting stakes to all token holders. They were originally a response to the hierarchical corporate structure that only granted power to top executives and high net worth individuals.
Instead, the ApeCoin DAO is another reason for the skeptics and the bewildered to remain wary about the future of NFTs. At their core, NFTs are supposed to be about verifying and monetizing ownership without any meddling from centralized entities; however, we now have a very centralized DAO that will look to protect the interests of its founding members.
The enthusiasts would respond by saying that ApeCoin has utility beyond a short-term financial boon, citing arguments that the token will eventually become a key currency in art, gaming, and entertainment transactions in the metaverse. But there are no guarantees or details about how this ambition will be fulfilled. And as prominent technology writer Kyle Chayka has noted, there is no direct financial tie between the token and Yuga Labs’s profits. The true “value” is only rooted in BAYC’s hype and brand.
Even Ethereum founder Vitalik Buterin is worried about the future of his blockchain, which has provided the infrastructure required for projects like BAYC and ApeCoin to take off. In an email to Time, Buterin stated that the real goal of crypto “is not to play games with million-dollar pictures of monkeys, it’s to do things that accomplish meaningful effects in the real world.”
So for the people who are not in the enthusiast category, it’s okay: even the creator of Web 3.0’s most important blockchain is ambivalent about NFTs.