The difficulty in predicting the value of something brand new opens the door for scammers and grifters. The average buyer is prone to fall for these because they haven’t had time to understand what separates low effort projects from legitimate ones.
1/ Are NFTs ponzi schemes? Some people make this argument, so let’s take a look.
2/ First let’s ignore the fact that a ponzi involves actual fraud and that the definition doesn’t fit 99% of cases when people use it. What they really mean is something like “greater fool theory” or selling overpriced assets completely detached from fundamentals.
3/ To be more specific, critics see 1) People trying to convince others to buy NFTs that they already own (shilling) 2) These NFTs appear to have no inherent value (zero fundamentals) 3) Some NFTs crash, confirming #2
4/ Let’s start with #1 – is “shilling” new? @balajis had a great line that went something like “all startups begin with the founding team pre-mining equity”
5/ Founders then go out to pitch their equity to investors, who buy at increasingly higher valuations as the business grows. Outside of that, they market their product to the public in order to grow their brand, and in turn their valuation.
6/ The difference with web3 is that ownership is decentralized. Instead of founders going out to pitch, it can be thousands of people with tiny shares. And because the blockchain is public, valuations are more readily seen (and criticized).
7/ “number goes up” exists in private markets too, most people just don’t notice. They think it’s grotesque when actually it’s how the world has always worked.
8/ But still, shilling is bad when you’re tricking people into buying something with no value. And so here we get to the crux of the debate (point #2): People think NFTs are ponzis because they don’t see any value, they’re all scams….
9/ But here’s what some of us see: NFT collectibles are seedlings with potential to turn into massive brands. Some will be entertainment brands (video games, tv shows), some will be streetwear brands, others will be social clubs, and so on.
10/ These brands can eventually become huge cash-flow generating businesses and they CAN return value to NFT holders. We’re in the early stages of developing these models now.
11/ Beyond that, people obviously have a desire to own these even outside of cash flow – Neymar didn’t buy a BAYC to flip it for profit. Provenance, community, owning pieces of digital culture as we all migrate online, these are going to be huge value drivers going forward.
12/ How about #3? When NFTs crash in price does it prove they had no fundamentals? First off, people lose money in all markets. Netflix is one of the biggest tech companies in the world, it’s down 36% in a month. Expectations get ahead of reality and people buy the top.
13/ So this can happen with a mature business with detailed financials in the most sophisticated exchange in the world. NFTs in contrast are brand new. They’re half collectibles, half ownership stakes in growing networks. Community owned brands have no historical comparisons.
14/ We know they have huge addressable markets and we know the value propositions will keep evolving, but we can’t realistically price these based on financial models. As a result people can disagree wildly on valuation, and this leads to sharp volatility.
15/ The difficulty in predicting the value of something brand new opens the door for scammers and grifters. The average buyer is prone to fall for these because they haven’t had time to understand what separates low effort projects from legitimate ones.
16/ People will learn over time, just like we learned to stop responding to Nigerian prince emails. But in the meantime many NFTs will go to zero and many people will lose money, there’s no way around this.
17/ Over time however I think we’ll see this as a revolutionary channel for new brands to emerge. Some of these will be massive – at the same level of Pokemon, Supreme, but we’re not there yet. Also, regulation will change and more value capture will be possible.
18/ So as you might’ve guessed, no I don’t think these are ponzis. I do think we have a big grifter problem, and NFTs are still incredibly risky even with legit creators. But I’m more confident than ever that there’s something very transformative happening here.