CEO Deep Dive - Why NFTs Are Not All the Same

At Pinata, we love all types of NFTs. From art and gaming to digital and physical, we think NFTs have far reaching applications. Since we first launched in 2018, we have seen NFT projects building with us and pioneering the space. Our view into NFTs is unique because we have always understood that any kind of data can be uploaded to IPFS and therefore attached to an NFT. This has given us a very broad view into NFTs and has also presented challenges to us as we think through what NFTs can be in the future. In this post, we deep dive into the nuances of NFTs, breaking down assumptions, beliefs, and memes surrounding them. As we talk through these nuances, we will be using a digital coffee shop for various analogies, mostly because I was sitting in a coffee shop to write this and also because it keeps me grounded as I think through what the future of Web3 looks like.

‍NFTs on a Spectrum: From Assets to Consumables

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Most coffee shops don't own the building. They own an LLC that leases the building, buys the coffee, and then sells it to you. What's confusing is that NFTs can represent the building, the lease, the LLC, and the cup of coffee.

This causes a lot of friction when discussing NFTs because some might only think of NFTs as the building while others might think of NFTs as the cup of coffee.

To eliminate this friction, we’ve created an internal framework at Pinata that places NFTs on a spectrum from assets to consumables. In our coffee shop analogy, the LLC of the coffee shop is an asset while the cup of coffee is a consumable. It’s apparent that an LLC and a cup of coffee are very different in what they require and provide to the person that owns them. Nobody expects a cup of coffee to maintain value or an LLC to be served in a cup. Same should be true for NFTs.

Now, why is this framework so important? It’s important because it allows you to contextualize and frame NFTs in new ways, building towards the next generation of NFTs. This framework forces you to ask whether or not NFT values should go up or down, whether or not NFTs can be used once or infinitely, and even asks what is the useful lifespan of an NFT? Let’s dive in.

‍NFTs can appreciate, but they can also depreciate

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It’s silly to think all NFTs will appreciate over their lifespan. Looking around, it’s apparent that most things actually depreciate over their lifespans. The same holds true for NFTs. In our coffee shop analogy, the building will most likely appreciate over time. However, the chairs and tables inside the coffee shop will depreciate over time. Of course, that doesn’t mean the chairs and tables don’t have value. It just means they had a higher value when new.

For NFTs, this means that some NFTs will certainly appreciate over their lifespan. But, the majority of NFTs will depreciate. And there is nothing wrong with that. The concept of appreciation and depreciation is separate from the definition of being an asset.

As for consumable NFTs, it’s a little bit different. Because, as a general rule, all consumables go to zero. Back to the coffee shop analogy, a cup of coffee loses all of it’s value as soon as it is consumed. The same is true with consumable NFTs. Now, again, there is nothing wrong with this. People pay a lot for things they know will not last. There is value in having something for the here and now. I will tell you my $4 cup of coffee was 100% worth owning for the 10 minutes I drank it, just like my consumable NFTs I purchase will be worth it, too.

‍Ownership and IP Rights

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NFT assets that appreciate over time will most likely come with full ownership or significant IP rights that allow you to build from. For the coffee shop, these are things like the LLC and the roasting IP for the coffee beans. The LLC and the roasting techniques (which the LLC owns) allow them to create the coffee that brings customers back everyday. The more customers the LLC and roasting techniques can bring in, the more they appreciate in value because of the revenue they generate.

NFT assets that depreciate over time will most likely come with limited ownership or IP rights that restrict what you can do with it. For the coffee shop, this would be like the espresso machine that helps them make the drinks. As a coffee shop, they have the right to make drinks with the machine for as long as it lasts. But, as a piece of machinery, it does depreciate in value over time. Additionally, they don’t have the right to reproduce the espresso machine. They only have the right to use it.

As for consumable NFTs, these are more experiential for the here and now where your ownership and rights are extremely limited by time and/or number of uses. For the coffee shop, this is the cup of coffee. That cup of coffee gives you the right to consume the liquid within the disposable cup and that is about it. Maybe a free refill? However, you don’t have the right to the roasting IP or the coffee shop’s brand or the right to use their espresso machine.

Permanence does not equal ownership

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Within the NFT space, people often equate permanence for ownership. The predominant Twitter meme is that if NFTs are permanent, that equals ownership which equals more value which also equals appreciation over time. However, I can own a cup of coffee without it being permanent and I certainly don’t own Mount Everest even though it is very, very permanent. So, it’s important to understand that permanence does not equal ownership, value, or appreciation. With that nuance in mind, it makes you ask, how long should the lifespan of an NFT be? Well, like most things in life, as long as people want it alive.

Going back to our coffee shop, the LLC will only be alive for as long as the owner wants it alive. The building, in most cases, has a lifespan of something like 50 years. If the owners take care of it, maybe even longer. The chairs, maybe 10 years? The coffee, 10 minutes? 20 minutes? I think you get the point. NFTs have a useful lifespan and for most of them it’s not forever. With this in mind, it allows you to start thinking about what could a 1 second NFT be used for? A 10 minute NFT? As a creator, how do you support a 5 year NFT? Can you transfer the responsibilities of the NFT to the buyer? Any of this functionality is possible with NFTs. It just has to be declared upfront in how it works for those looking to purchase it.

‍The Dream of Web3: A Coffee Shop?

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Web3, NFTs, and IPFS provide the opportunity for each and every person to run their own Web3 coffee shops. As a Web3 coffee shop owner, it’s important to understand whether you are selling the coffee shop, the roasting IP, the tables and chairs, or the cups of coffee. When you know the answer to that, you’ll understand how to answer all of the questions above. With those questions answered, those buying from you will understand better what they are purchasing.

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Got some thoughts to share with us on this topic?

Hit us up on Twitter at @pinatacloud and follow Kyle for more interesting thoughts on NFTs at @KyleTut.