Silicon Valley Wang Chuan: Why is it said that high-quality NFTs have far greater potential than physical collectibles?

This article was published on the public account investguru, original title: "Wang Chuan: Why Quality NFTs Have Greater Potential Than Physical Collectibles (Part One)"

1/ On March 12, 2021, under the gaze of 22 million live-stream viewers worldwide, the famous auction house Christie's auctioned an NFT (Non-Fungible Token) of the work "Everydays: The First 5000 Days" by the 80s internet artist Beeple for a staggering $69.3 million (equivalent to 42,329 Ether at that time).

2/ This auction price ranks third in the historical record for the auction of a single artwork by a living artist. The first place is held by Jeff Koons' (born in 1955) "Rabbit," which sold for $91.1 million in 2019; the second place is David Hockney's (born in 1937) "Portrait of an Artist," which sold for $97.1 million in 2018. Traditional old artists clearly have not yet realized the challenge posed by the young upstarts from the blockchain world. Covid severely impacted the offline business of traditional auction houses, and Christie's eagerly entered the NFT auction market out of necessity, but the results far exceeded expectations.

3/ Beeple's real name is Michael Winkelmann. He has been creating a piece of art every day without interruption since May 2007. Thirteen years of accumulation have earned him 1.8 million followers on Instagram. In 2019, his work was adopted by the fashion brand Louis Vuitton. In 2020, his work was showcased during the halftime show of the Super Bowl in the United States.

4/ In October 2020, he created an NFT for a piece of work as a trial, auctioning it on the online platform Nifty Gateway for $66,666. In December, he sold twenty more pieces as NFTs, totaling $3.5 million.

5/ No one can succeed casually; the desire to create an NFT out of thin air and quickly auction it for a sky-high price without any accumulation or foundation is a dream that can wake up now.

6/ The first reaction of ordinary observers to the purchase of such virtual artworks is disbelief. All digital audiovisual works can be easily copied; why can your NFT be worth so much money? Are the buyers all fools?

7/ The buyer of "Everydays: The First 5000 Days" is Vignesh Sundaresan, an Indian entrepreneur from Singapore, known online as MetaKovan. According to his account, he started from scratch and had previously run a Bitcoin exchange while studying in Canada in early 2013. In Sundaresan's words, he participated in this auction and created history; the NFT he purchased will become an important object in art history. The concept of NFTs needs time to be understood by more people; the medium of art is quietly shifting towards blockchain, and thousands of creators will join this ecosystem. The future of NFTs will include many low-value items and a small number of highly valuable collectibles. As the new owner of the NFT, he will find ways to gain profits in the virtual world.

8/ According to Beeple himself, buyers do not own the traditional copyright of the work but only the ownership of that NFT. However, the relationship between artists and collectors is symbiotic and mutually beneficial; everyone is in the same boat, collaborating and supporting each other, allowing artworks to continuously appreciate in value. This ownership is recognized by many through the public auction process. Of course, anyone else can also copy the original work and create another NFT, but they will not gain the recognition of the majority.

9/ The traditional art collecting world has long been plagued by the issue of forgeries. The director of the Metropolitan Museum of Art in New York was once asked, "How many of the artworks hanging on the wall do you think might be fake?" He replied, "I don't know." The Netflix documentary released in 2020, "Made You Look: A True Story About Fake Art," discusses a female con artist in New York who, starting in 1994, paid a street painter from China with the surname Qian to replicate famous works. She paid less than $9,000 for each forgery and then spun stories to sell them to major art dealers. The ultimate loss caused to collectors by fake paintings accumulated to $80 million. The 165-year-old art dealership Knodeler also closed its doors in 2011 because of this. Many buyers believed Knodeler was part of the conspiracy and filed various lawsuits against its executives, which dragged on until 2016. It has been 22 years since the first fake painting entered the market in 1994.

10/ Art dealers typically rely on third-party experts to authenticate the authenticity of artworks. However, the appraisers always serve the interests of the boss who pays them. If your negative appraisal would cause the boss who pays you to suffer a huge loss, would you dare to poke that hornet's nest? Therefore, art buyers who rely solely on the appraisal documents provided by the seller's hired experts bear greater risks. Knodeler sold fake paintings from 1994 to 2003 without any issues. It wasn't until 2003 that a buyer from Goldman Sachs hired a third-party expert to authenticate a piece and discovered that it used dyes that did not exist at that time, which slowly began to expose the scam. Usually, if a cockroach is found in the kitchen, there are definitely several more that have not been discovered. Knodeler has closed, but how many other dealers are still selling fakes that have not yet been uncovered? We can never fully know.

11/ In the world of collectibles, there is a term called "Provenance," which refers to a complete written record of the origin, resale history, and storage history of an item. NFTs are "Provenance native" because they are recorded on the blockchain, automatically documenting every transaction from the origin to each resale, which anyone can publicly verify, leaving no ambiguity or room for forgery—something that physical collectibles cannot match.

12/ A typical skepticism from ordinary people is: I can touch real paintings and art collectibles, but I cannot touch a virtual NFT; why should I say it has value?

13/ If you remember the author's old article, "Wang Chuan: The Key to Success = Network, Network, and Network," there are two examples in the fourth section: one is a piece in a museum that everyone initially thought was a genuine Rembrandt, but then suddenly an expert claimed it was a copy by a student of Rembrandt, and the crowd immediately dispersed. The second example is a collection that suddenly skyrocketed in price after being authenticated as a genuine Da Vinci by several authoritative experts. This illustrates the instability of centralized authentication.

14/ The counterpoint from this perspective is: today, if an expert presents evidence that your physical collectible is a fake, its value could immediately drop to zero. Conversely, it could suddenly become very valuable. Are you truly enjoying the art itself, or are you enjoying the "evaluation given to you by experts"? If you believe that the expert's evaluation is far more valuable than the visual and tactile experience of the art, then an independently verifiable, tamper-proof NFT on the blockchain is surely more credible than letters from a few experts?

15/ Why is it that in the traditional art collectible world, people feel at ease about the risk of purchasing artworks that may later be identified as fakes by other experts, while they are terrified of NFTs, which seem unfamiliar but have almost zero cost for authentication, potentially rendering authentication experts unemployed?

16/ So, regarding NFTs, how do you prove that this work is a genuine piece certified by the original author? The common practice is to simultaneously publish news on major social media platforms before releasing it on mainstream auction sites as a form of corroboration. For Beeple, who has millions of followers on Instagram, Twitter, and Facebook, this is very simple. Therefore, it is essential for the original creator to maintain a long-term presence under their real name (or corresponding artistic name) on major social media platforms, which is a task that must be completed in advance. This cannot be accomplished in just a day or two. If an account is opened and registered only for a few days with only a few hundred followers, the audience cannot know if this is a fake account registered by a scammer.

17/ Once an NFT is registered on the blockchain and publicly sold, all data can be independently verified, and no one can tamper with it, making its authenticity unquestionable. As time passes, this consensus of authenticity becomes irreversible, just like the confirmation of BTC after exceeding six blocks, solid as a rock, even the original creator cannot change it. You also don't have to worry, as in the case of purchasing physical collectibles, that a "so-called" expert suddenly jumps out to say that a certain painting is not an original Rembrandt but a copy by his student! This nightmare that physical art collectors may face is not a problem for NFT collectors. This is the advantage of decentralized consensus.

18/ The core of NFTs on the blockchain consists of two things: one is the address of the smart contract on the chain (currently mainly Ethereum), and the other is the ID corresponding to that smart contract. For example, the NFT of Beeple's "Everydays" uses a smart contract called MakersTokenV2, with the corresponding ID being 40913. On Ethereum, you can see that this NFT was transferred to the new owner's wallet on March 13.

19/ The mainstream standard for NFTs is the so-called ERC-721 (later there was an improved ERC-1155 standard, which is not detailed here). A universal standard means that theoretically, the same NFT can easily switch to different platforms for auction as long as you authorize and link your controlled address through wallet software.

20/ Currently, the largest NFT platform on Ethereum, Opensea.io, claims to have over four million different NFT items for sale. Artists who are unwilling or unable to program can easily use platform tools to convert their artworks into NFTs.

The image below is the first NFT that I am publicly auctioning on opensea.io. You can find it by searching for "svwangchuan" on the website. The auction will end within 45 hours after this article is published, and interested readers can check directly on opensea.io.)

21/ The core issue is not where or how the image of the artwork is stored. This is actually the same underlying logic as physical collectibles; the key is the expert's authentication of authenticity. If the expert says it is a fake, it doesn't matter how beautiful it is; if the expert agrees it is genuine, even a banana taped to the wall can fetch a high price.

22/ Currently, purchasing NFTs on mainstream platforms requires buyers to have a certain amount of Ether (ETH) and the corresponding wallet software Metamask (commonly known as "Little Fox" in the Chinese community). Considering that most people in the world have not even come into contact with BTC, and Metamask had only one million monthly active users in October 2020, the potential for expansion in the NFT market is actually very, very large.

23/ Besides being able to publicly trace and verify authenticity, the biggest difference between NFTs and physical collectibles is that NFTs can incorporate program logic and can create endless combinations with various software programs or smart contracts.

This includes, but is not limited to:

Creators can set program logic within the NFT, allowing them to automatically extract a certain percentage of commission each time the platform resells it (the upper limit set by Opensea is 10%), so creators can also enjoy a portion of the future appreciation of the NFT.

NFTs with high liquidity, frequent trading, or a long trading history can be used as collateral for rapid lending within the DeFi ecosystem; (traditional finance also allows art collectibles to be used as collateral for loans, but the costs and cumbersome procedures involved are several orders of magnitude higher than DeFi).

Because NFTs and their owners can be precisely identified by addresses on the blockchain, any smart contract in any application scenario can set program logic to grant NFT owners certain special rights. Once a smart contract is deployed on the chain and widely used by the community, the original author of the contract cannot tamper with it, and the stickiness of usage and the accumulation of value stem from this.

24/ Unisocks can be said to be a representative of this programmable NFT. Initially launched by Uniswap in May 2019, Unisocks only has 500 pieces, and the only right is to exchange the NFT for the corresponding 500 pairs of socks. The trading price of Unisocks in the liquidity pool is determined by a formula called Bonding Curve in a smart contract. The initial selling price was only $12, but today the market price is around $80,000, an increase of nearly 7,000 times in two years. Over the past two years, 185 buyers have exchanged their NFTs for socks (presumably regretting it). Observers are puzzled by the current exorbitant price. However, from another perspective, a baseball signed by Bill Clinton can sell for $900; Uniswap, as the world's largest decentralized exchange with a market value exceeding $10 billion and only a few dozen employees, selling a pair of decentralized limited edition socks priced by smart contracts for $80,000 is actually not outrageous?

25/ NFTs are essentially a software protocol. The value of a software protocol lies not in its individual isolated characteristics but in how many nodes adopt and connect to this software protocol in the future, and how large the network it can form is. People in the canal network cannot understand the value of the railway network; the network of traditional newspapers cannot understand the value of search engine networks and social media networks. Chickens and ducks cannot communicate; ultimately, whoever has the larger network has the greater argument. The value of NFTs does not lie in the art pieces they are tied to but in the community recognition behind those pieces and the potential for future development of the community network.

26/ For those who criticize NFTs as intangible and merely air, the response is quite simple: thirty years ago, when the internet first emerged, weren't domain names also seen as air? But recently, voice.com was sold by its original owner Michael Saylor for $30 million. Over the past twenty years, a few enterprising individuals have accumulated immense wealth by registering a large number of scarce domain names, their gains far exceeding those of most engineers who have worked hard on the internet frontline but ended up with nothing. Refer to my old article "Wang Chuan: The Legend of Domain Tycoon Ye Yun - Why Investment is More Than Just Buying Stocks."

27/ Indeed, most ordinary NFTs may not have high value, but a very small number of quality NFTs, relying on the rapidly growing community consensus connected by the underlying software protocol, may absorb and carry far greater value than physical collectibles.

28/ Conversely, even if a museum today owns a genuine Picasso, how many people in the blockchain community would recognize its authenticity if the museum's experts or Picasso's descendants also wanted to follow the trend and turn it into an NFT for sale? Experts may be able to authenticate the materials of the oil painting, and Picasso's descendants may indeed carry his DNA, but if there are no large numbers of followers on social media like Instagram, Discord, and Twitter, who would care to pay for it?