Hello Non-Fungible World

Non-Fungible Tokens may be mainstream, but do you know what an NFT actually is? I have heard them described — from concrete works of digital art such as Beeple’s EVERYDAYS: THE FIRST 5000 DAYS to vague, semi-technical definitions focused on the concepts of uniqueness vis-à-vis economic value and fungibility — on a spectrum.

While NFTs may appear to have been an explosion of creative expression, this wide spectrum has been shallow: the vast majority of them are static, two dimensional images. They are often referential of each other and internet culture (i.e. memes), created with Photoshop, style transfer, or generative techniques, and seem to lack any tangible purpose. Indeed, many creators solely intend to make a quick dollar with poor facsimiles of past projects that were fiscally successful¹, hoping that buyers will recognize the similarity and gamble on a hype-driven price appreciation.

The success of CryptoPunks, one of the first NFT projects, spawned a cottage industry of punk-derivatives. As of writing, the cheapest CryptoPunk is for sale for 19.89 ETH. None of these copycats have sold.

With any mass adoption of a new, consumer-facing software, applications are distant abstractions from 1s and 0s and are popularly conceived of in familiar, analogous terms — Airbnb for X and Snapchat for Y. Static, two dimensional images require low-to-no technical skill to create, can capture the familiar, and don’t require an extensive imagination, making them the lowest barrier to entry for a non-technical masses² who want create an NFT.

This low barrier to entry and the resulting wide, shallow use-case — The NFT Digital Art Movement – is the hallmark of NFT Epoch 1.5, the third-ish evolution of NFTs. As we live through it now, it may not seem as such, but 1.5 is a passing fad. To explain this, let’s look at the history of NFTs.

Epoch 0: Pre-Ethereum (2012 – Q1 2017)

The first NFTs emerged as crude abstractions on top of Bitcoin that, due to technical limitations of the Bitcoin protocol, required parties to agree on their worth off-chain. These were shortly followed by Counterparty, a purpose built blockchain that made up for Bitcoin’s inability to natively represent non-fungible value. Andrew Steinwold provides an excellent history of the many Epoch 0 projects in The History of Non-Fungible Tokens.

Epoch 1: Ethereum (2017 — 2020)

The emergence of Ethereum as the dominant alt-chain (not Bitcoin) ushered in Epoch 1. Early innovators CryptoKitties and CryptoPunks designed scarcity into their NFTs which resulted in collectibility and high prices. This was shortly followed in Q1 of 2018 by the creation of ERC721, a standard protocol to which all subsequent NFTs should conform. This new standard meant that websites didn’t need to know anything about the specific content of an NFT to interact with it (application-layer interoperable) and gave rise to marketplaces like OpenSea, Rarible, and Nifty Gateway.

Epoch 1.5: The NFT Digital Art Movement (H2 2020 — ?)

Characterized by combination of relevance and curiosity, NFTs entered the mainstream at the end of 2020 and coincided with renewed interest in the potential of Bitcoin and Ethereum³. Easier purchasing of cryptocurrencies (Moonpay, Wyre) and creation of NFTs (OpenSea, Rarible), cultural primacy (NBA Top Shots), populism/tribalism (Foundation), curation (Nifty Gateway), and headline-grabbing sales (Beeple’s $69m hammer price at Christie’s) led everyone to want a piece of the action.

Epoch 2: The Real-World-to-Crypto Bridge (Q1 2021— The Singularity)

Software and hardware, when they work, enable humans to more richly experience the joys found while living in the physical world. Yet, the physical world often feels divorced from crypto. What gives?

Blockchains, cryptocurrency, and NFTs are evolving from a mainstream curiosity into foundational part of our everyday lives. Like that of their predecessors — internet browsers, relational databases, apps, and cloud computing– their adoption is a natural, inevitable progression. Today⁴, however, there is a missing middle necessary to bring this future to fruition.

Construction of the Golden Gate Bridge, 1935. Underwood Archives/Getty Images

On one side, the Real-World-to-Crypto Bridge is being built by the traditional finance crowd. They use buzz-words like “Distributed Ledger Technology” and “Fourth Industrial Revolution”, “Digital Disruption” and “Industry-Wide Collaboration”, and are primarily focused on building settlement systems for banks and their ilk in order to replace reliance on trusted intermediaries like SWIFT.

On the other side of this bridge are engineers and entrepreneurs who are building the technology to scale Blockchains for more use-cases (e.g. Ethereum 2, Layer-2 solutions such as Polygon, cross-chain interoperability bridges such as Polkadot) or to squeeze more digital-value out of it (e.g. DeFi, most NFTs in 2021). However, these are still niche and don’t consequentially matter in the lives of ≥99.99% of Earthlings.

There is a popular belief that cryptocurrencies cannot be used to pay for things that people actually want. This is partially true. You may want a coffee, but are you going to sell your Bitcoin it? Why would you? Would you sell your shares in Tesla or Disney to buy a coffee? No⁵. This is more of a won’t than can’t: the opportunity costs (not to mention the transaction costs) are too high.

However you would consider selling these shares to send your kids to college debt-free, to buy a house, smart a small business, or to purchase commercial real estate. You would consider selling if the return — not only monetary but emotional, cultural or reputational — is greater or equal to the expected monetary return from the alternative of not-selling. This is the future of NFTs and neither the institutions nor the eng-trepreneurs seem to be getting us there.

Most of the big-ticket assets that we purchase in our lives, the ones we obsess over — everything from a house to a car⁶, a college education to a Picasso, Rolex or Charizard — are non-fungible. Yet today these cannot be purchased using cryptocurrency, and there is roughly $1.4T of wealth locked up in Bitcoin and Ethereum alone, which account for two thirds of the aggregate market capitalization of all cryptocurrency ⁷. But what if they could be? At the beginning of 2021, Julien and I set out to answer this hypothesis.

A few months later, in mid-March, we launched Duchamp’s. We digitized the property titles for physical assets as NFTs on the Ethereum Blockchain, making those NFTs the legally-binding records of provenance and ownership. In 3 weeks, accepting only Ethereum and USD Coin, we sold $200k worth of physical, culturally-valuable assets to buyers located in North America, Europe, and Asia. We can now say confidently this is the future.

In this future, you will be able to instantly buy and sell big-ticket assets from anywhere in the world and be sure that the other side will deliver. The entire process will use zero-volatility cryptocurrencies (e.g. USD Coin), smart contracts, game theory, and legal frameworks to prevent fraud without trusted intermediaries.

Duchamp’s is the missing middle and our auctions are our first contribution in the Real-World-to-Crypto Bridge. We invite all of you who think differently, you who ignore the noise and create originally, to join us. What you see today is just the beginning and we are collaborators.

Will Holley

Co-Founder & CTO, Duchamp’s

April 2021

Notes

  1. In our Instagram, formulaic, share-for-likes, design-for-attention world, this initial use case seems inevitable.
  2. Semi-technical may be more appropriate when compared to my grandmother, but from my vantage point as a software engineer, non-technical is apt. Compared with the skills required to create a website or mobile app, non-technical is the most appropriate.
  3. Resulting from inflation fears caused by American/European Central Bank monetary policies of “helicopter money” in response to COVID-19.
  4. Between 2010 and 2020 there were many “too early” failures while attempting this bridge.
  5. Unless you are a nihilist or are stubbornly proving a point. In either case, kudos to your conviction.
  6. The two most expensive purchases most people will ever make in their lives.
  7. As of writing.

We know you’re not selling your cryptocurrency to buy milk, so we bring you the rare, the valuable, and the exclusive.