Doc's Daily Commentary
Mind Of Mav
NFTs: The Tragedy Of The Commons
In the 1950s, the Grand Banks off the coast of Newfoundland was, as it had been for centuries, one of the richest fisheries in the world, home to a massive and endlessly replenished population of cod. The fishery provided food for people across North America, and jobs to tens of thousands of fishermen and fish plant workers. But new technology — radar, sonar, electronic navigation systems, and massive drift nets — was allowing trawlers to fish for longer, and to take more fish with every trip. The result was that cod were being pulled from the ocean faster than they could replace themselves. In the early 1970s, the cod harvest collapsed, and while it rebounded temporarily, by the early 1990s the Grand Banks were effectively fished out. The Canadian government shut the fishery down, putting more than 35,000 people out of work.
What happened to the Grand Banks fishery was an example of what the ecologist Garrett Hardin famously called “the tragedy of the commons.” If there’s a common resource that everyone has an individual incentive to exploit, it will eventually be used up in the absence of regulation or communal norms. It’s a problem that’s not unique to fisheries. It helps drive deforestation and the depletion of water resources. And now we can see the tragedy of the commons at work in an unexpected place: the market for non-fungible tokens (or NFTs). In this case, though, instead of people aggressively taking as many fish out of the sea as they can, people are aggressively adding as many NFTs as possible to the market, trying to cash in before the bubble bursts. And just as the fishermen trying to catch as many fish as possible helped destroy the Grand Banks fishery, the people and institutions producing NFTs by the minute are only hastening the end of the NFT boom.
History suggests that oversupply is a reliable way to end a collectible boom.
The signs of oversupply are easy to see. A Brooklyn film director sold an NFT of an audio clip of a year of his farts. TIME magazine has put out NFTs of three variants of its famous 1965 cover, “Is God Dead?” Charmin is releasing NFTs of its toilet paper ad. And everyone else, from digital artists to musicians to journalists, is minting NFTs as fast as possible. And why not? When demand is high, it only makes sense to try to take advantage of it. The problem is that just as with the Grand Banks fishery, what’s individually rational is collectively destructive.
That doesn’t mean that the NFT bubble is going to burst tomorrow. But history suggests that oversupply is a reliable way to end a boom, particularly for collectibles. In the 1980s, for instance, baseball cards started to be seen as good investments, with the Wall Street Journal calling them “inflation hedges” and the New York Times suggesting “A Grand Slam Profit May Be in the Cards.” Card prices soared, as did the number of card dealers. (At one point there were 10,000 baseball card stores in the U.S., according to Dave Jamieson, author of Mint Condition: How Baseball Cards Became an American Obsession.)
But even as this was happening, card companies were cashing in on the frenzy by printing huge numbers of cards. According to one estimate, by the early ’90s, they were printing more than 80 billion cards a year, with annual revenues reaching a billion dollars. At first, this didn’t have much of an impact. But eventually, people realized that the expensive rookie card they had spent good money on and placed under plastic wasn’t ever going to become the next 1952 Mickey Mantle, because there were literally tens of thousands — if not hundreds of thousands — of that exact same card. And as quickly as it started, the baseball card bubble burst.
Between 1985 and 1994, Marvel more than tripled the number of titles it published, while also publishing more copies of each title. The result was a massive glut of content, far more supply than the market could handle.
You can tell a similar story about comic books in the same era. They, too, saw prices and interest skyrocket, as first older comics became increasingly valuable and then new comic books saw their prices rise steeply. The number of comic book dealers proliferated. Kids started worrying about the condition of their comic books and stocking up on acid-free boxes and Mylar bags. And comic book publishers responded predictably, by massively increasing the number of copies they published (and raising prices). Between 1985 and 1994, Marvel more than tripled the number of titles it published, while also publishing more copies of each title. The result was a massive glut of content, far more supply than the market could handle. Again, people realized that they had been paying premium prices in expectation that comic books would keep rising in value, but with so many copies out there, there was no way prices were going to keep going up. Speculative demand waned, and the combination of higher prices and too many titles alienated ordinary readers as well. Within a couple years of the peak, sales were down 70%, and Marvel was bankrupt.
Oversupply also played a role in bursting more consequential bubbles. The Internet stock bubble of the late ’90s saw hundreds of companies cash in on the frenzy by going public despite having flimsy economic fundamentals. And while initially, demand was such that nearly every new IPO could count on a hefty bump, over time the market became saturated. One academic study suggests that the reason the bubble burst when it did — in the spring of 2000 — is that a host of companies had their lockup periods (periods when company insiders can’t sell shares) end around that time, flooding the market with shares just as investors were beginning to question how long the good times could continue. Similarly, the housing bubble of the 2000s led to an extraordinary building spree in much of the country that left places like Las Vegas dotted with empty homes, constructed in anticipation of buyers who never materialized. And all that extra supply helped bring the party to a screeching halt.
With NFTs, the risk of oversupply is especially acute, because there is no one in charge, and the barriers to issuance are so extraordinarily low — you can literally create a new NFT in a matter of minutes.
If you want to keep prices high, then what you need is some way to restrict supply — just as, with a fishery, you need some way to restrict demand. With something like a fishery, you can do that via regulation, limiting the size of each fishing boat’s catch (although even that is not easy — there were regulations in place to limit the cod catch on the Grand Banks, and they mostly failed because they allowed the catches to be too big). Or, as the Nobel Prize-winning political scientist Elinor Ostrom showed, you can do it via community management, where the people actually doing the fishing work together to sustain the fishery. The problem with most asset bubbles, though, is that neither of these systems really work, since the temptation to overproduce is nigh impossible to resist, and there is no real “community” that can collectively decide to manage supply.
With NFTs, the risk of oversupply is especially acute, because there is no one in charge, and the barriers to issuance are so extraordinarily low — you can literally create a new NFT in a matter of minutes. And, unlike comic books or baseball cards, NFTs don’t fall apart or get discarded. In other words, the only thing we really know about NFTs is that there will be more of them a month from now than there are today.
The real paradox here is that while NFTs and cryptoassets are plainly intertwined — you need to use Ethereum to buy or make many NFTs, and crypto-fortunes are funding lots of NFT purchases — NFTs are precisely the opposite of something like Bitcoin when it comes to supply. One of the things that has made Bitcoin successful as a speculative asset is that its supply is strictly limited, and everyone knows that after a certain point there will be no more of it. The supply of NFTs, by contrast, is unlimited (even if the supply of any one NFT isn’t). And at some point, that endless flow of supply will almost certainly drown demand. That doesn’t mean that the price of every NFT will fall — truly rare or inherently appealing items may well hold their value. But in the end, this boom is headed the way of the Grand Banks fishery. Even if the Canadian government won’t be stepping in to shut it down.
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