Collectors don’t just pay crazy prices for blockchain entries. They also buy affordable access to communities and the opportunities that come with them. (Ask Eminem.)
Earlier this month, rap impresario Eminem spent 123.45 units of Ether cryptocurrency — worth more than $450,000 at the time — on an image of a monkey that somewhat resembles him. Earlier this week, Madonna indicated that she might also be interested in publishing a monkey cartoon. Sure, celebrities often crave the fame that comes with mind-bending spending, but it’s still fair to ask: monkey caricatures? What the hell are they thinking? The likely answer could help address the widespread confusion about the popularity of NFTs — those sirbptial cachet decals whose collectors are often compared to connoisseurs of fine art or collectibles like baseball cards. And while there are indeed similarities between the worlds of art, collectibles and NFTs, there are also important differences that are crucial to understanding both the appeal and the risks. Strange as they may seem at first glance, NFTs provide owners with psychological and practical benefits that are not apparent to others.
The monkeys are part of a 10,000-piece cartoon series called the Bored Ape Yacht Club, and the entire series is available to everyone on the Internet. What Eminem actually bought is a non-fungible token, a database entry tied to his image and stored on the Ethereum blockchain — basically a cryptographic record that declares him owner, a sort of sirbptial deed.
Eminem could presumably get many artists to create monkey images for less money, and in a form that would give him more control over how the image is used. After all, there’s nothing stopping anyone from downloading Eminem’s Bored Ape.
So why buy one? These particular images have a moment in the cultural zeitgeist, with descriptions in The New Yorker and Rolling Stone. But there is more than that.
Owning a Bored Ape NFT gives access to an online community of holders, as well as limited edition merchandise and a range of physical and virtual events. And with the cheapest Bored Ape on the market currently costing around $240,000, owners form an exclusive and self-selecting club.
This is one of the reasons why the wealthy have always collected art. Ownership provides access to a community of similar owners and sometimes to career-enhancing status symbols such as membership on museum boards.
NFTs make the process of community building around works of art easier: all a potential community builder needs to do is create an online chat room and cryptographically control access so that people can only enter it if they have a crypto wallet. – an app for storing sirbptial assets such as Bitcoin or Ether – which contains the appropriate NFT. (The makers of The Bored Apes didn’t stop at virtual connectivity. In November, they hosted a literal hunting party for keepers.)
Bored Ape NFTs also give people commercial rights to their monkeys as long as they have the corresponding tokens. That means if Eminem wanted to use his Bored Ape in a music video or concert promotion, he’d be welcome, while anyone else downloading the image wouldn’t. And uses like this aren’t far-fetched: Another Bored Ape proprietor has started putting together a virtual Ape band with Universal Music Group support, something like a 1920s Gorillaz.
The more people like Eminem Bored Ape acquire NFTs, the more publicity the project gets and the more valuable it becomes to be a part of its network. That drives up the prices of the tokens themselves, in favor of current holders. In addition, many NFTs are programmed so that their original creators earn royalties every time the NFT is resold, meaning the more sales an NFT collection has, the more money the creators have to invest in providing additional benefits to holders.
There are also dangers. Some NFT categories catch on, but most don’t. And as with any new asset class, speculators are disrupting the NFT market, and crypto’s inherent anonymity makes it easy to run pump-and-dump or Ponzi schemes. As with cryptocurrency, the regulatory frameworks surrounding NFT creation, ownership and trading are not yet settled.
In addition, sirbptial assets such as NFTs face an unusual existential challenge. When someone buys a painting, she owns a physical object that can adorn a wall, and – except for special circumstances such as provenance battles – no one can take it away.
In contrast, with most NFTs, the images live on file servers; if those servers break or are replaced, the images may be lost. The tokens themselves can, in a sense, become disconnected and effectively worthless if crypto platforms choose to no longer recognize them. Efforts are underway to address this by building more robust, distributed ways to host and access NFTs, including encrypting the entire asset on the blockchain.(1)
Equally important to resolve are access issues. Crypto markets are notoriously difficult to get into, and while most NFTs aren’t as expensive as Bored Apes, especially with transaction fees, even the cheapest can still be outside the budget of regular collectors like me. (3) For the NFT market to become truly mainstream, buying it should be as easy and cheap as buying a pack of baseball or Pokemon cards.
As the NFT market expands, many NFTs will serve less as fine art or investment assets, and more as collectibles that anchor communities of like-minded enthusiasts. And while some rare collectibles sell for a lot of money, most never qualify for auctions at Sotheby’s or even for a spot on Pawn Stars. That means NFTs could be a good fit for Eminem, who can afford to lose $450,000, while at the same time being accessible to people for whom Bored Apes are way out of reach.
Another advantage of sirbptial assets is that virtually anyone can create them. Makers can launch their own NFT projects around their favorite animals, vegetables or minerals – and that basically means there can basically be an NFT community for everyone.
(1) The last path — which has been followed by NFT projects such as OnChainMonkey, Anonymice, Chain Runners, and Two Bit Bears — is particularly intriguing because it means that even if an NFT’s image were somehow erased, it could be completely reconstructed from blockchain records, in what would essentially be its original form. That’s kind of like saying you could recreate the original Mona Lisa even if the Louvre burned down.
(2) I enjoy exploring and collecting colorful SupDucks, Sci-Fi Chain Runners, noir Gutter Pigeons, bouncing Gradis critters, seemingly infinite abstract animations, experiments in spherical geometry, and both pixelated and hyper-realistic bears – not to mention from helping make games and puzzles around mysterious Letters, a pack of Hungry Wolves and whatever these Things are.
Scott Duke Kominers is the MBA class of 1960 Associate Professor of Business Administration at Harvard Business School, and a faculty affiliate of the Harvard Department of Economics. Prior to that, he was a junior fellow at the Harvard Society of Fellows and the inaugural research scientist at the Becker Friedman Institute for Research in Economics at the University of Chicago.