The Over-Financialization of NFTs

P.S. Is your wife's wedding ring for sale?

You climbed Mount Everest?! That’s amazing, how did you prepare? What was it like?

No, I bought a NFT of a certificate that says I climbed it though, how cool is that? 

I guess that’s cool, how much was it?

So cheap, basically free, 0.5 ETH

Isn’t that like $1,400? Sort of expensive for a certificate that wasn’t awarded to you.

You don’t get it, bro, it’s a collectible. $1,400 to say you climbed Everest is a steal. 

Not all affection can be bought (or at least should be)

There are a lot of resources going towards making NFTs more financialized. The main focus of companies in the NFT space today is to make NFTs more liquid through enhanced tradability, fractionalization, and collateralization (e.g., lending against NFTs as a way to borrow funds). The co-founder of Ethereum, Vitalik Buterin, was recently on a podcast and succinctly explained why it’s problematic that NFTs have been “over-finanicialized”. The takeaway is that there is value to building and owning NFTs that aren’t meant to be sold at a moment's notice. 

Some goods become cheapened, and sometimes useless, if they can be bought and sold at all times. 

A certificate from climbing Mount Everest, if it was an NFT (which I think it should be), should be a non-transferrable NFT. Vitalik calls these “soulbound” NFTs, as they should be non-transferrable when they represent accomplishments for that particular person. NFTs in the “soulbound” category are valuable to the ethos of NFTs because they represent a way for individuals to participate in the NFT-ecosystem, owning digital property, without a financial investment necessary. All you need is your skillset, and you can earn NFTs that allow you to show the digital world what you earned, not bought. The potential for digital programmable assets that are verifiable but not transferable are endless. 

Imagine if a Mount Everest certificate was minted every time someone climbed Everest and it was linked to a data set of the climbing conditions of the mountain on that particular day. When conditions are brutal, the certificate turns a hue of red, and when good, green. Anytime the climber checks their NFT, they feel a sense of connection to the other climbers thousands of miles away as they drink coffee in sunny Los Angeles, daydreaming about suiting up and summiting one again. 

Mopping the Floor

The value of most NFTs today are described by their “floor price”. For virgins, the “floor price” is the lowest priced NFT in a given collection.  Price aggregation metrics, such as the floor price, can sometimes be a helpful measure. For example, the average house price in a specific zip-code is a telling indicator of the health of that housing market. However, price aggregation metrics would never make sense for soulbound NFTs which aren’t designed to be sold. 

Furthermore, even for NFTs that should be tradeable, the “floor price” metric falls into the trap of Goodhart’s law: 

"When a measure becomes a target, it ceases to be a good measure”¹

Floor price has become the cardinal target for manipulation in NFTs. Join any Profile Picture NFT Discord community and hear the Clarion Calls of “raise the floor” echo the halls. 

This mentality has spurred countless NFT bashing blogs and videos, and rightfully so. While none of these bashers are my friends, it upsets me that NFTs are defined by flipping, fast money, and scamming. The critique that NFTs are about getting rich quickly has minted countless NFT-dilettantes. It’s saddening when you spend all your time imagining the world of possibilities for digital programmable and verifiable assets. There are a various parties to blame for the shortsighted NFT thesis, such as the news which constantly advertises big sales figures to drive clicks. This isn’t all bad of course: Beeple’s $69M sale practically put NFTs on the map… C.R.E.A.M., I suppose. 

Wedding ring goods

Now that we have a foundation of two categories of NFTs: ones that are extremely tradeable and those that are “soulbound”, I want to explore the middle ground. The physical world is far from black and white, as are NFTs. 

If you’ve read my newsletter before, you’re used to rambling analogies, so I'll make you feel right at home:  

If your wife’s wedding ring could be bought at any time on the open market, there would be a lot of scared husbands. Imagine if there was a floating price tag we could all see with our VR Glasses as we walked down the street above every married woman’s wedding ring. The price would be based on what the market believes the current value is, determined by an amalgamation of macro and microeconomic factors.  

In the “real world”, when times are tough and a married woman wants to sell her wedding ring, she has to go to a pawn shop and sell the ring for a steep discount. The ring isn’t immediately tradeable, but it’s certainly liquid after going through the trouble of finding the right buyer.  

Some examples of assets that fall into this gray category of “wedding ring” assets that aren’t immediately-sellable, but could be sold at some point, and can be transformed by the NFT technology, include: 

• Land / property deeds

• Patents

• Memberships to social clubs 

• Business licenses (e.g., liquor license)

Let’s use social club memberships as an example of how “wedding ring” NFTs work in practice. 

Let’s pretend that Soho House memberships were NFTs instead of plastic cards (pay attention Dustin Hoffman). 

On day one of joining, you pay your initiation fee to the club and mint an NFT with your member number. Every time you walk into the club, they scan your NFT, and you waltz in. Not much different than having a plastic membership card in terms of flow. 

Now, let’s say you want to leave Soho House. You’ve moved on, and decided you’re cooler than Soho House, and you want to join a new social club like Zero Bond NYC. Assuming the NFT can be resold, the NFT is a form of equity in Soho House. However, Soho House shouldn't allow the Soho-deserter to sell it to Joe Schmo because Mr. Schmo is willing to pay for it. The cache of the club has to be maintained, and it starts with a selective membership process. 

The solution: Sell the membership NFT back to Soho House for them to redistribute to a new member that they approve, priced at the new market rate. This can be a profitable endeavor for the ex-member. Let’s pretend that when they joined, it was a $2,000 initiation fee, and now it’s $5,000. Soho House can program exactly what percentage of the NFT the ex-member gets from the sale. For example, if Soho House decided that the NFTs have 50% equity, the ex-member would get back their initial $2,000 plus $500 more (aside from dues).  

The wise reader asks: why would Soho House choose to offer their members equity in the membership? It both aligns incentives and increases Soho’s potential for scale.

Aligning incentives: This encourages Soho members to make the club as great as possible, as the value of the membership goes up for clubs that have buzz based on the experience they offer to their members. For example, if you hold court by teaching Nietzschean philosophy every Tuesday, that’s a pretty cool perk for other members who are interested. Want to listen to a soliloquy on why Alfred Hitchock’s The Rope, a Nietzschean commentary, is an under-appreciated gem? Join the Soho House, plebeian. 

Increased potential for scale: If the initiation fee is partially refundable, there is potential for Soho House to charge a higher upfront initiation fee, meaning they can build more perks for the club with the upfront capital. The downside is of course that this could limit the financial threshold of the members, but if you take this a step further, Soho House could offer new members financing assistance, presenting yet another revenue stream opportunity for the club.

In summation, NFTs get the reputation for being get-rich-quick schemes, because a lot of the time they are. Some of the most useful NFT applications have hardly been explored, and choosing to ignore them only limits the addressable market of the technology. 

Talk to us!

If you are looking for an expert* opinion on your NFT project, or want to talk generally about the market, please reach out for a no-obligations 20 minute phone call. We have a number of technology partners at En Passant Digital that help us bring your legacy IP to the blockchain.

Email: bryce@enpassantdigital.com

*Anyone who claims to be an expert is a charlatan. They are generally snake-oil salesmen who probably also told you to buy OneCoin. From the last 4 years of our experience, we’ve realized that there are no experts in the space, as it changes by the second.

About the author: Bryce Baker is the co-founder of En Passant Digital, an NFT-strategy agency bringing innovative market guidance and actionable projects to companies.

Our other co-founder, John Tabatabai, has led investments for Crypto VCs and consulted for projects across the NFT space. He recently had an active role in advising, designing and creating the mechanics and infrastructure for the famous B20s, aiding in creating more than $250,000,000 of value in less than 45 days.

1. Goodhart’s Law: https://en.wikipedia.org/wiki/Goodhart%27s_law