Can Digital Scarcity Compare To Physical Scarcity?
Are 1-of-1 NFTs as rare as unique physical items? Can they be valued in the same way? Rob takes a look!
One of the common criticisms levelled against NFTs is the argument over how rare a 1-of-1 NFT truly is. That is, just because something has been minted once, doesn’t make it as scarce as is implied. This is occasionally followed up by the Screenshotting JPEGs Gang, but this simply isn’t interesting to discuss anymore.
What grabs me about the former question is it’s a larger, fairer, and more philosophical claim, and one that isn’t necessarily straightforward to answer. What’s more, unpacking the issue reveals the question behind this article: can digital scarcity replicate the effects of physical scarcity?
There are many effects of physical scarcity: it generally makes the item more desirable, more valuable, and more interesting. This appears to carry over to the digital world, but with some caveats.
Firstly, a rare physical item has a number of inherent risks attached: it could be destroyed, it will likely decay overtime, it could be lost, and so on. Digital items can also (sometimes) be destroyed, and they can certainly be lost by the owner losing access to the wallet or passing away. However, they do not suffer the risk of decay, which means their existence ought to be less precarious.
There is an overarching misconception about this discussion though, and that is digital scarcity being something new.
Digital Scarcity Isn’t Unique to NFTs
The criticism of NFTs that the rarity is somewhat arbitrary has strands of truth, but the angle of digital scarcity being novel, and a result of digital items, is patently false.
Scarcity of anything has been a known value-maker for millennia in all probability. If demand outweighs supply in just about anything, prices go up.
Genuine physical rarity is a reasonably cut and dry discussion. Many naturally-occurring elements with brief half-lives like Francium or Astatine are so rare that they would fetch billions of dollars per gram if you could somehow sell them.
In 1999, NASA estimated that the price of antihydrogen would be $62.5 trillion per gram; antimatter is naturally occurring, but too reactive to bottle and sell, so to speak.
When it comes to man-made items, abundance is a known enemy of value and it’s been exploited since written history began.
A modern example is Rolex, who make 1,000,000 watches per year (or fewer) and despite backlogs of orders, do not increase production to maintain their desirability. The demand must stay higher than the supply.
This is artificial scarcity; they could make more watches, but the extra sales would likely damage the brand in the long-term.
Another example of this is the “diamond cartel”. The De Beers Group is said to have purposely bottlenecked diamond distribution in collaboration with other companies so that the price of diamonds stays high. Fundamentally, these sorts of examples show artificial scarcity in the same way a 1-of-1 NFT does.
The question is, does the reason for rarity matter?
How Much Does Scarcity Influence the Value of an NFT?
It appears that why something is rare or scarce does not impact the effect it has on that item’s value. When companies make a one-off product, particularly if it’s a desirable item, they sell for more.
To return to Rolex, they made just one 1970 Daytona 626 in 18-karat white gold, and it was nicknamed “Unicorn” as a result. This singular piece sold for $5.9 million 2018 because it’s unique and it’s rare. Could Rolex have produced 100 of these? Yes – in the same way the creator of a 1-of-1 NFT could have minted 100 of them instead. The creation costs may differ in this instance, but the outcome stays the same.
Asides Pak’s ‘The Merge’ NFT, which acts as a true anomaly, the top 10 most expensive single NFTs to sell are all 1-of-1’s, even if they’re within a themed collection, like CryptoPunks.
CryptoPunks became valuable in part because of their age, given as they were handed out for free, but each Punk had its features decided algorithmically and is thus unique, with a single Punk selling for as much as $11.75 million (7523). We’re seeing the same outcome for Bored Ape Yacht Club.
Scarcity is far from the only dictator of price, both inside and outside of NFTs, but it accounts for a lot.
Beeple’s auctioned 1-of-1 NFTs achieved their staggeringly high prices in part because there is only one of them. Like the Unicorn Rolex, Beeple’s Everydays NFT that sold for $69.3 million at Christie’s is a unique creation from a desirable creator. That Beeple could have minted more is as irrelevant as the fact Rolex could have made more Daytona 626s in 1970, for example.
The final looming question is whether future recreations devalue the original.
This is a common criticism of NFTs as it would be easy for creators to mint more of the same 1-of-1 NFT in future, at least visually. For instance, a piece of art minted into a single NFT could then be used again – the exact same artwork – to mint millions more if the creator wished. I do think this will happen somewhere down the line and will start some legal battle, but is it really different to physical creations?
Rolex could recreate exactly that 1970 Daytona Unicorn tomorrow, but it certainly wouldn’t be worth as much as the original. It will be the same for NFTs, except with blockchain technology, we can at least verify which was the original.
Can the digital scarcity of NFTs replicate the effects of physical scarcity? I believe it can.
We’ve already seen that artificial scarcity is everywhere – from mined resources to Rolex’s – and it comprehensively predates NFTs. It doesn’t seem to matter why something is rare, only that it is.
The only question that could undermine the scarcity of NFTs is whether we continue to value digital items as highly as we do physical ones. I’ve not found compelling evidence for why we wouldn’t, particularly with how much of modern life has made the commute from physical to digital.
So, enjoy your rare NFT, and don’t let detractors devalue it by suggesting that NFT rarity is man-made – as if that hasn’t been a staple of production and sales for time immemorial.