NFTs as a Social Network: An Investment Thesis
Are Punks, Penguins, and Apes the next blue chip asset class?
Did I Just Buy the Penguin Top?
Probably yes. Yes, I likely bought the top.
Hold on a second, let me stand corrected. Turns out I can chart Pudgy Penguins (aka “Pengus”) and in fact, they’ve had a nice dip against ETH over the past week or so. Maybe … just maybe … this is a buying opportunity.
HA! I wouldn’t put my money on that.
But then again, I did … yes, I bought into these damned Pudgy Penguins, dropping thousands of dollars on what many people are happy to right-click and save.
The following is my attempt to rationalize Pudgy Penguins (or more broadly, NFTs) as an investable asset class.
This piece is 1 part serious, 1 part humor, and 0 parts investment advice.
The NFT Market
It seemed that everyone on Twitter was calling the NFT top back in March and for good reason: CryptoPunk #7804 just sold for $7.5m and Beeple made global headlines with his record-setting $69m sale of EVERYDAYS: THE FIRST 5000 DAYS.
But counter to all those shouting BUBBLE!, NFTs didn’t die. Quite the opposite…
The NFT market continues booming. Absolutely melt-your-face-off booming. OpenSea, the leading NFT marketplace, has facilitated over $1.5b in sales for the month of August. Of that, ~$240m in sales hit the books just this past weekend. And today, Monday, we’re at another $105m+!
Hell, even Visa is in:
Now stepping back for a second, yes, I think 99%+ of the NFTs on the market will be worthless in the long run. Those that do survive won’t be without massive volatility and the occasional 70-95% pullbacks that young frenzied markets tend to enjoy.
The thing about bubbles though is that directionally, they’re usually right. The dotcom bubble wasn’t for nothing and any instances of bitcoin or Ethereum historically being in a bubble weren’t without reason.
Sure they pop and crash, but that doesn’t negate the underlying impetus for speculation in the first place.
Bubbles — at least with regard to technology and innovation — typically bubble because something revolutionary lies underneath.
NFTs as a Social Network
So before writing NFTs off as a worthless bubble mania, let’s consider an investment thesis for why they might be booming in the first place. And I find the most compelling angle to be that of NFTs as a social network.
To put this into context, take this excerpt from Squad Wealth, a short essay by Sam Hart, Toby Shorin, Laura Lotti:
Squads are reemerging today as a potent cultural force that rejects a strictly individualist market philosophy.
…
Today's squads are expressions of digital locality and the new squad era forces us to reconsider the individuated logic of early social networks. Contrary to early visions of hypertext, the internet is not a singular World Wide Web, traversed by individuals. To be online today is to enter the global arena. Mass social media are hazardous PvP zones no one should traverse without team support.
NFT squads are quickly emerging as influential accounts update their profile pictures to one collection of NFTs or another. Some choose Bored Apes, others CryptoPunks, Pengus, or thousands of alternatives.
In doing so, there’s a dance at play with the NFT acting as both status symbol and insider club (squad) membership.
Given a floor price somewhere around 68 ETH ($225k at the time of writing), a CryptoPunk as one’s online identity makes a statement:
The same can be said for Bored Apes, currently selling for at least $80k a piece.
You might compare the cultural roles of an NFT to buying a Rolex for status or joining a high end country club for the network.
Packy McCormick, author of Not Boring, suggests that NFTs lie one level up in the social networking stack:
NFTs are starting to feel a lot like a new kind of social network that sits above other social networks and communities -- something of a Superverse.
For example, the Bored Ape Yacht Club (BAYC) interacts publicly on Twitter but then things get private in The Bathroom. Per the BAYC website, “It contains a canvas accessible only to wallets containing at least one ape. Like any good dive bar bathroom, this is the place to draw, scrawl, or write expletives.”
It does make you wonder what a bunch of people with 80-thousand-dollar jpegs are writing on the bathroom wall…
In his piece Status Monkeys, McCormick goes on further to reference Eugene Wei’s idea of Status-as-a-Service and succinctly summarizes two key principles:
People are status-seeking monkeys
People seek out the most efficient path to maximizing social capital
See the connection here?
What’s a more optimal way to efficiently acquire status and social capital than to drop $80k on a digital monkey that you can then immediately broadcast to the world?
The concept is abstract and maybe tough to grasp, but I think it’s here to stay: NFTs are an added layer to the social networking stack, establishing like-minded squads and fulfilling a fundamental human desire for status.
Three Types of NFT Buyers
NFT buyers come in a few categories.
First, there are those that have no plans to flip the sale for a profit. These are the true, deep appreciators of the art and/or community. For many in this category, the money doesn’t really matter.
Second are the speculators: those scooping up NFTs with the plan to sell at a higher price.
Third, and maybe controversial to suggest such a thing, are the investors. I try telling myself that my move falls into this category, taking a calculated risk/reward measure as I consider the long-term success of a particular NFT collection.
Investing in NFTs (quite possibly the most speculative market in the world right now) does sound like an oxymoron. But hear me out…
Buying the Floor and Driving Yield
My move into NFTs was informed by this video from Justin Bram, detailing a strategy to buy into the floor (lowest current selling price) of a particular collection and even drive yield on the purchase.
I’m a big fan of market making and yield farming — just about anything that can put idle assets to work. So the yields at NFTX caught my attention:
NFTX enables a tokenized representation of NFTs that tracks the floor price of any particular collection.
For a full understanding, watch Justin’s video linked above. For the Cliff Notes, here’s a (slightly technical) walkthrough:
Alice has a CryptoPunk that she bought on OpenSea.
She deposits the CryptoPunk into a vault on NFTX and receives 1 PUNK token in return. Unlike the NFT, this is a fungible ERC-20 token that can be sold in part or in full. 1 PUNK token entitles the token holder to 1 CryptoPunk from the CryptoPunk vault on NFTX.
Alice can then provide liquidity on SushiSwap to the PUNK-ETH pair, generating fees from all swaps.
Further, she can stake her SushiSwap liquidity token to earn fees from usage of the NFTX platform. Learn more here.
The yield is paid out in the token corresponding with the NFT collection (i.e. staking in the PUNK-ETH pool earns PUNK).
Of course, these yields will change in time and most can be expected to fall. Regardless, they offer at least some means to offset downside risk.
The yield component, along with their sizable pullback in price, prompted my recent entry into PUDGY, the token for Pudgy Penguins.
With my PUDGY yield, I can either cash it into stablecoins, compound the yield into the PUDGY—ETH pair (get an even higher APY), or simply save my accrued PUDGY and apply the balance toward an eventual Pudgy Penguin purchase.
Now let’s be clear: there are a lot or risks associated and I wouldn’t recommend this unless you can afford to lose your invested funds. There’s of course smart contract risk, there’s the risk that the NFT sector collapses, there’s liquidity risk, and more.
Despite these risks, what’s happening here is compelling and I’ve deemed worth some small level of portfolio allocation. It’s easy to imagine a future where NFTs are widely tokenized for fractional ownership or even to be used in DeFi.
Closing Thoughts
Is this all a bubble about to implode? Perhaps. I don’t know.
But I do know that I won’t go proclaiming a bubble when there could be something revolutionary underway…
NFTs might be the next layer on the social networking stack: communal squads atop the legacy networks that have been mostly individualistic in nature.
If the NFTs as a social network thesis plays out, to ignore what’s happening amid this NFT mania could be a costly mistake.
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Thanks for reading and as always, I’d love to hear your thoughts. Don’t hesitate to reach out to me via an email reply, comment below, Discord @Kryptik#9597, or a message on Twitter.