The Case for NFTs

If you make 10,000 regulations, you destroy all respect for the law.

-Winston Churchill

I think crypto investing is mostly fashion. The protocols that run the Internet right now cost essentially nothing. So the idea that the protocols that run a cheaper, decentralized future Internet should cost trillions of dollars is silly. But there’s opportunity.

The rise of crypto investing makes sense as the new incentive structure in place is an innovative token structure that’s 100x better than any ponzi scheme. In a token scheme, the benefits accrue to a much larger, decentralized group instead of to one individual. And if the collective decentralized groups dupe institutions, then there’s infinite money feeding into the system. If history tells us anything, institutions aren’t clever. Regardless of the underlying merits of the asset, institutions simply need something to have had a history of success before buying in, e.g. mortgage backed securities, late 90’s Internet stocks. The token structure achieves this history of success.

My biggest issue with crypto is that our brightest young minds, instead of solving real world problems, are creating fake worlds and solving made up fake problems. Refactoring for the sake of refactoring. It’s mental masturbation at its worst. I’ve heard numerous top investors say this off the record, but they’re too afraid to publicly say anything negative about web3.

Making money laundering legal can be good for parts of the world. Especially for those living under dystopian regimes. But money laundering in general is used for nefarious reasons whether it be child trafficking, illicit drugs, crime, getting stolen money into the financial system, etc. 

Decentralization is more powerful and better for many things. The math works out. But that has nothing to do with any crypto asset being worth money. There’s a reason two dog themed coins with zero utility are worth as much as top coins with supposed high utility. Those who are baffled by meme coins haven’t been paying attention. They were right about the crypto investing trend but for the wrong reason.

That said, regulatory arbitrage with NFTs has potential.

SoFi, Affirm, Lending Club, and other financing companies practice discriminatory lending. They do it at scale. This is their biggest innovation. The same way Uber and Lyft skirted taxi laws. AirBnB bent hotel laws.

I’m a fan of what these companies do. It shows the massive cost regulations imposed on consumers. The fact that multiple billion dollar companies can form by simply skirting regulation is proof.

In theory, web3 can be decentralized. In practice, it’s not. All the incentives lead to centralization with a few groups running the servers and marketplaces as gatekeepers. The main benefit is that there’s less regulation. So there lies the opportunity.

NFTs are a great opportunity to use crypto as an excuse for regulatory arbitrage. Find the worst, bloated regulations and simply ignore them by using NFTs. Imagine a hospital powered by tokens and NFTs that gets around HIPAA. A drug developer using NFTs to develop and distribute a medication powered by NFTs. “People signed a smart contract when they bought the medicine so we don’t need clinical trials!” A home title provider using NFTs. A mortgage lender powered by NFTs that follows its own smart contract. 

Of course NFTs are needless extra steps in all of these. But that’s not the point. The point is that NFTs are an excuse to skirt burdensome regulations.

It’ll come down to whether governments enforce the existing regulations. The question is whether the legal precedent and case law will change or keep up. If there’s enough support like with ride sharing and AirBnB, then the courts may overrule regulations. This is by far the biggest opportunity for NFTs. Overrule regulations by creating “crypto” businesses the same way “tech” companies overruled regulations.

The other upside of NFTs is getting engineers to think about monetization. Video Games are awful at merchandising. Look at the top media franchises. The only game brand that does well at merchandising is Pokémon, and it has the highest revenue of all media brands in the world. NFTs are a way for video games to be slightly better at merchandising. Video game companies can make games to sell NFTs. But in reality, if they made games to sell merchandise (including an NFT or not), they'd make 2x to 4x their revenue.

Crypto is one of the few spaces where not concentrating and chasing the next hot thing can be the optimal move. I’ve seen people rewarded time and again for chasing the next hot thing. Unfortunately, most early people in the crypto investing space aren’t capable of building much. I hope there’s a contingent who keep their eye on the ball and use NFTs as a trojan horse against regulations.