NFT Ouroboros
closing the loop in digital asset ecosystems or, how not to kill your own project
2021 was the year in which digital assets emerged from the backwaters of MMORPG gamer-consciousness and niche on-chain fanclubs to the hub of mainstream social media attention — and experienced their subsequent, inevitable financialisation. A type of token that can represent unique and provably-scarce data enabled the ownership of information, a resource that hitherto had been either distributed to a degree that rendered it valueless or locked behind centralised firewalls and barriers of social consensus. (“You are not allowed this data, it is *private*.”)
NFT’s solved a problem the vast majority of individuals did not believe existed, which presumably explains some of the scepticism that many felt upon initially encountering the concept. Heretofore data could not be publically-experienced yet privately-owned, and therefore data producers could not publically work without being also publically funded, essentially rendering them digital beggars. Furthermore, data that was privately-owned was by definition not able to be publically-enjoyed. NFT’s enabled the creation of assets that could be owned by a specific individual, while the data that was represented could be enjoyed by all. In 2021 this data was usually image-based or video, with “generative art” taking the helm of digital high-culture.
However, over the course of the year, something strange began to happen. Many assets began to fetch premiums well over that which a digital artist would usually be paid for their work. NFT “Art”, if we can call it that, began to receive valuations on a metric that was completely alien to many of whom were experienced in the digital art ecosystem. Even after the high-volume bubble died out, some NFT pieces still fetch extreme valuations in comparison to the actual labour spent on the piece, which traditionally has been how digital artists are paid.
Mythos
This gives rei grounds to suggest that the addition of an NFT component to the art has provided a fertile base for growth of an additional value metric. rei would call this “mythos” - it is the collective belief in the value of a specific piece, tied to authenticity and the social significance of a particular artist or cultural movement. In the summer of August 2021 there were many projects, which lacking an understanding of “mythos”, sought to provide “value”. The misattribution of early NFT project success to “value creation” rather than “myth creation” led to a bizarre amalgamation of projects seeking to provide the most “value” to their token-holders. Promises of P2E games, their own “metaverse”, and occasionally even the purchase of real-world clubhouses were all bought and sold by starry-eyed investors.
Projects that chase authenticity will never, themselves, be authentic. This is why no derivative project is ever successful, because neither the team nor the holders really believes that they have created, or hold, anything of any value. On the other hand, projects that manage to inspire a myth of their own value - and by that merit, allow people to trade tokens with an inherent understanding of how individuals in that community collectively value them - can truly inspire a form of value capture in the tokens that they have produced. Perhaps this is what NFT fanatics mean when they mention “community” — a group of individuals that, regarding a certain type of token or object, collectively engage with its ‘mythos’, or idea of its value. rei would like to stress that although appearing similar to game-theory based ponzi schemes, this dynamic often extends beyond just a pattern of co-operative behaviour to pump prices.
Successful mythos is more akin to a form of ‘soft power’ or a type of brand that imbues certain endorsed items with a common idea of value. It is an organic effect that can grow, live and die, getting stronger or weaker with community trends or societal habits. Mythos is most stark when a group that engages with it is juxtaposed with a group that does not, which presumably explains much of the social media discourse over 2021. To take a non-digital example, traditional collectors items such as stamps and model trains have also been subjects of mythos. These items are often very difficult to buy but simultaneously very difficult to sell. People are typically reluctant to sell their items to others who observe the mythos to a lesser degree - and therefore vast stamp collections or train sets fall into the hands of descendants who struggle to offload them at prices anywhere near what they were believed to be “worth”. The benefactor, deceased, has carried the mythos with him to the grave, leaving the work of true price discovery to an “out-group” — his descendants. This is an example of one way that mythos dies. It simply evaporates.
Artist-Collector Relationships
Mythos is something that successful artists wield to imbue their works with cultural significance and societal relevance, and often their works will retain this significance even after the death of the creator. In past times artists may not have been producing their works for the consumption of “the market” but nevertheless laboured over artifacts that were to be scarce, unique and often seen as valuable creations from their very conception. In modern terms, the artist-collector relationship is a little similar to the founder-investor relationship for startups and projects. Artists and founders both produce works or products that to a degree have some baseline of appeal to the conglomerate human need, whether this is a need for art or a need for useable products. Collectors and investors, take on a role of stewardship over the value of their works, in many cases acting as marketing figureheads and champions of their specific protocol or work over others. They display their preferences by owning a specific work or project rather than currency, thereby indicating a level of support of a valuation higher than the one it may currently be trading at. To the more artistic-minded this may seem like crude financialisation of a sophisticated craft, but often the process is a two-way one. In many cases, investors are as much tastemakers as they are seeking a return. Particularly in crypto, preferable funding and attention is often given to projects that fit the ethos of these tastemakers, and financial valuations tend to fly far away from fundamental analysis. “Mythos”, therefore, accrues not only to art in this respect.
The role of tastemaking in collector circles has always been an important one and was often afforded to the most affluent or influential individuals who took part. In many ways the process of collecting, rather than investing, can also be seen as a process of gathering mythos. What then is one purchasing when one purchases ‘art’? To some degree there must be an element of authenticity that gets transferred to the owner themselves, with every purchase of a highly valued object. It would make sense that as speculative vehicles such as NFT’s gather value, their proponents and backers simultaneously gather mythos. To the especially rich or to those who are not investing for a financial return, the game of mythos is often a more interesting one than simply flipping for currency. There are indeed methods to exchange collector-mythos for currency and these are often viewed as “selling out”. There is often no direct harm being committed by the entity selling out, yet the loss of mythos can be easily perceived by anyone. An interesting example here is the financialisation of Etherrock #72 on 25th August 2021, when it was put in a fractional.art vault and split into 72 billion pieces. There was no misrepresentation of the newly available product and no investors were forced into purchases. However, the move was widely disdained and can definitely be read as a loss of the mythos Sisyphus had as a tastemaker in NFT’s. His conversion of mythos to currency came very close to the peak of the Summer NFT craze and therefore from a currency-optimised perspective was likely the optimal move. “Mythos” is hard to quantify, and arguably less effective with fewer eyes on a particular sector. It’s very possible that this mythos can be re-accumulated under a different pseudonym at a different point in time and therefore from a pragmatic perspective, it was the right thing to do. Mythos however should not be underestimated when dealing with the perceptions of individuals as artists or collectors, and in the case of Sisyphus it is likely that his reputation is permanently marred.
Neo-investing
With the advent of mythos in digital markets, the process of “investment” itself also changes. Capital allocators studying different projects now place less importance onto fundamental analysis and cashflow than they do “narrative”, or likelihood of a certain idea to gain in mythos. Being able to play “narrative” or “metagame” resembles much more the process of playing a video game or engaging in chan culture than it resembles performing cashflow analysis on traditional companies. In web3, projects are valued according to how interesting their idea is. Despite the 4th iteration of a tokenised options platform with a slightly different token model theoretically producing more revenue than a memetic on-chain store-of-identity, one is a far more interesting and original idea. The aim of the neo-investor is to maximise his market share of ideas that show promise of becoming interesting.
The point of neo-investing is not that fundamental analysis has become irrelevant or that revenue-producing companies no longer deserve their valuations, but rather that investments themselves can become imbued with a mythos that renders higher returns than any company could on its own merit. Venture funds no longer need their portfolio companies to succeed, but simply require the idea of their success to accumulate enough mythos, and to be able to effectively sell this idea to other investors once their tokens unlock. Often this dynamic can be quite predatory although there are examples of this mythos being used in a positive-sum fashion as well. Chainlink from 2018 to 2020 provided outperforming returns leaning heavily on the backs of a dedicated group of supporters through the years-long bear market. This mythos that the project was imbued with was regularly converted to team funding with gradual selling of project tokens, and now provides some of the most important and reliable services in DeFi to numerous different projects, as well as providing those investors who bought into the mythos with approximately 100x returns.
How to kill an NFT project
Mythos not only relates to community spirit and veblen-isation of the good being marketed, but also uncertainty about said good. Uncertainty is a critical component of mythos, as expectations and hopes for the future leave a large uncapped upside available to be taken by a project able to gather enough mythos. One way of killing an NFT project is removal of this uncertainty. Allowing your community a way to price your NFT with strict and predictable metrics (e.g. providing a certain % yield from volume to be claimable every week/month/quarter) is one way to diminish if not kill outright this mythos.
Prediction is downstream of maths and uncertainties are taken as certainties during the raging bull. Valuations balloon as certain projects’ successes are used as grounding for successive projects to be aiming for. Mythos is built through a form of suspended disbelief of the fact that prices reflect value rather than the other way around. When you tie a particular work to a definite stream of income or predictable yield, you not only destroy the mythos of that object (by so crudely financialising it) but also provide a framework against which it may be devalued.
Volume-scalping or cash-yield NFT’s provide holders with a direct reference as to how much monetary value that product will provide over a set period of time, and from there are free to be sold until they reach that mark. The most brutal loss of mythos occurs when the function of said NFT is previously unknown, allowing the community to substitute mythos in place of a definitive value framework. Mythos has infinite upside whereas cash-yield has a flat ceiling. Readers will note that evidently, USD itself has mythos as part of a strict financial framework and extension of power of the most influential state on earth, yet that mythos is so massive compared to even titans such as BTC or ETH that it appears to denizens of the crypto-sphere as firm reality.
It should probably be noted that yield or airdrop of a related and yet-unvalued token frequently works in a converse manner. Rather than the token providing a framework against which to value the NFT (as would a more directly USD-linked yield), the airdropped token itself inherits a part of the mythos of the NFT project. (For instance, the recent BAYC airdrop of $APE.) Mythos flow tends to go from high→low concentrations, and in a bull market connections that are drawn become increasingly desperate as the cycle proceeds. This is perhaps why money flows from large caps down to small caps, as inflated valuations are used for justification for buys further along the risk curve, and so on until the buy pressure runs out.
This article was not meant to judge the ethics behind this specific structure of valuation, but offer perhaps a framework for approaching it in subsequent cycles with a more accurate view of market behaviour and insights towards how best to play this well. It has become clear that the nature of investment has changed, especially in digital marketplaces. It remains to be seen whether many of the ‘unique’ or ‘grail’ NFT’s hold their valuations years from now when they come to be resold. It is likely that much of the mythos percolating during the 2021 cycle has evaporated when the masses next cast their eyes towards on-chain economies, although the persistence of digital communities should never be underestimated. 💯
great read!