NFT Briefing: Pudgies Pumping

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Ethereum’s favorite flightless birds have rallied over recent weeks.

Pudgy Penguins Stages Revival

The NFT landscape gave us mixed signals over the weekend, with some projects pumping while others floundered. We covered BendDAO’s sudden (but arguably predictable) liquidity crisis over the weekend, in which several collateralized Bored Ape Yacht Club NFTs hit their liquidation threshold, went up for auction, and found no buyers. Given that BendDAO only loaned against so-called “blue chip” NFTs—a term borrowed from stock trading that is meant to signify safer plays with steady growth, long-term potential, and high market liquidity—the project ought to raise eyebrows about the idea of collateralizing loans with NFTs in the first place, no matter how “safe” they seem.

The flip side to this saga has been the revitalization of Pudgy Penguins, whose revival has been nothing short of remarkable over the last few weeks. This notably culminated on Monday, when the rarest piece in the Pudgy Penguins collection, #6873, sold for a record 400 ETH—about $650,000 at the time. But what makes #6873 the rarest item in the collection is something so simple, so small, that it’s almost negligible.

#6873 is unique because it is facing the opposite direction to the other penguins.

The NFT market is, to my mind, the most open-ended playing field there is when it comes to discussions of value, and Pudgy Penguin #6873 is an excellent demonstration of my point. What makes something valuable is the source of constant debate among the fiscal dilettantes that make up the world of cryptocurrency enthusiasts, and arguments frequently appeal to the kinds of high school economic theories that we carry into adulthood under the illusion that they are natural “laws” of some kind. These theories—the law of supply and demand, the idea that scarcity equals value, and the religious conviction in the superiority of “hard” money—are all ideas used to justify expressions of value.

But the idea that there is something natural, mathematical, or objectively scientific about how we derive value is to miss the entire point of value formation. Values are normative; they coalesce around people’s behavior, not the other way around. Early Spanish colonizers, who stood aghast at the vast quantities of gold possessed by the indigenous people who populated what would come to be known as Central and South America, couldn’t understand the idea that the gold had little or no value to them. They were more interested in feathers.

Now, sure—one can argue that since gold was abundant, it did not have the rarity necessary to make it a valuable medium of exchange. Perhaps that was a factor. But the important point is that it is not an item’s “natural” properties that make it valuable; there are only social conventions that allow us to guess what something would be worth to someone else.

All of this brings me back to #6873, Pudgy Penguins, and the NFT market more generally. Not since De Beers convinced the world that diamonds were rare by keeping most of them off the market have there been such obvious attempts to engineer scarcity as there is in the NFT market. What could be infinitely reproducible artwork for all to enjoy is instead limited to 10,000 or so items reserved for the exclusive community, and convincing buyers they want to be part of those communities is key.

I’ll wrap up on this last point, which won’t win me any friends but is worth saying anyway: those who fancy themselves sophisticated investors may find it in their interest to think twice about NFT projects that derive their value “from the community.” From my vantage point, that looks an awful lot like using hype from current community members to draw in new members—and new money—to keep the project on the rise. As one holder exits their position at a profit, the new holder becomes part of the club, and the cycle continues. What’s more likely: that most members of NFT communities are there because they “believe in the community,” or are they looking to make a buck? If the latter is the case, there will always need to be another buyer down the road somewhere; I’ll leave it to the reader to sort out how this ends.

Till next time. 

Disclosure: At the time of writing, the author of this piece owned ETH, some NFTs, and several other cryptocurrencies.

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