NFTs are Mostly Fungible (and That's a Good Thing)
July 12th, 2022

We all know NFT stands for non-fungible tokens. Technically, that’s true. If you have two Bored Apes and want to give one to somebody else, you have to specify which one. You can’t just give somebody 1 Ape of your 2 Apes.

But practically, most community/roadmap-based NFTs are quite fungible.

NFT Markets work because NFTs are mostly fungible

Every major NFT marketplace has rolled out offers on entire collections: Make a bid on the collection, any holder can accept. All you know is you’ll get an NFT of that collection. But you don’t know which. And neither do you care. These offers have proliferated. They make markets more liquid. And they show us that to humans, most NFTs in a collection are quite fungible. They don’t care which one they get.

This is interesting. People want to buy ERC-721 tokens as if they were ERC-1155s (in which editions are inherently fungible for each other).

And for good reason: Many NFTs, especially PFPs, are bought not because the owner loves the artwork of that specific NFT, but because they want to join a community, signal status or get access to other utility.

To the blockchain, fungibility is binary. It’s either non-fungible or fungible. To people, fungibility is a sliding scale. That’s because in our preferences, most NFTs are pretty fungible. And since our preferences determine our buying behavior, this determines how the NFT market works in practice.

This is evident when you look at buying behavior. If NFTs were 100% practically non-fungible—you’d have preference for one specific token, not a group of them. And yet, we rarely shop for NFTs with a specific token number in mind. This is not a fluke, but fundamental to working NFT markets—if everybody only desired a specific NFT (perfect non-fungibility of preference), markets would move much slower

When most people buy into a project, they’re looking at the floor: Whatever is at the floor price (or around it) is considered. Only within that category will you have a preference for one specific NFT—and only based on aesthetics.

This is most obvious in membership passes. All 1000 Proof Collective membership passes are identical in utility and aesthetics. There’s no reason to buy one over the other. They’re perfectly fungible and could be an ERC-1155 token. You’d lose some of the signaling value you get out of having others see it in your wallet, but that’s it.

What makes some NFTs more non-fungible than others?

But there are clearly NFTs which are less fungible than others in the same collection: An Alien Punk would never sell for the floor price. Because of its rarity, it’s not interchangeable for every other Punk. The same applies to Golden Apes, M3 Mutants and any 1/1 NFT (it’s right in the name).

But rarity is an arbitrary metric determined by the project’s creators. Even at its extreme, it’s a decision somebody made. It doesn’t teach us how to build better projects. Things get interesting at the extreme of non-fungible.

Because even Alien Punks and Golden Apes aren’t at the extreme. If you decided you wanted a Golden Ape, you’ve still decided on that category, not on one specific Ape.

But what brings an NFT to the extreme of non-fungibility? Let’s look at three examples:

1. Stolen Apes
Many Apes were taken from their rightful owners by fraud, scams or carelessness. These Apes are often resold at lower prices—and restricted from trading on some marketplaces. Whatever the background story is, most will prefer to buy one that is not restricted from trading.

Not only is your NFT much less liquid, but you’re also unlikely to be embraced by the community when you buy this Ape, which was taken from one of theirs.

If you were to buy it, you could likely buy it at less than the non-tainted Ape floor price because the scammer likely wants to get rid of it. But when marketplaces restrict trading of these NFTs, they’re also harder to get rid of.

1. Punk6529

He might be the most famous pseudonymous writer on Crypto Twitter. 6529 is as non-fungible as it gets. Even though the NFT isn’t very rare, 6529 would be exceptionally expensive—if it ever went on the market.

Even though the artwork itself isn’t 1/1, the NFT has become 1/1 because of its cultural significance.

3. Jenkins The Valet (Bored Ape #1798)

A company called Tally Labs bought Bored Ape 1798 last year, aimed him Jenkins The Valet, did an NFT drop and hired 10x NYT bestselling author to write the book with the community.

The book „Bored and Dangerous“ is out and the community is further expanding the story with additional media.

The Ape itself is way in the bottom half in terms of rarity. And yet, you’d expect it to fetch a high price if this Ape were to go on the market. If you were to buy it, you’d have to specifically want this one Ape. In other words: It’s on the far end of the fungibility scale.

(I’ve written at length about Jenkins in this article)

What this means for creators and collectors

These three examples give us two core insights:

  • NFTs can move from being practically fungible to being completely non-fungible.
  • When an NFT moves to full non-fungibility, the expected sale price changes (implying a change in value) and liquidity gets much harder (because of logistical challenges or higher prices).

But where do these changes come from? We’ve seen the same effects (change in expected price & lowered liquidity) from three different causes:

  • Stolen Apes changed their owner without the correct owner knowing.
  • Punk6529 attached lots of non-fiction writing and some NFT collections to his Punk.
  • Jenkins the Valet added fiction writing to their Ape and started telling its story.

What do all these have in common? A story. A narrative. The Mona Lisa famously rose to significance after it was stolen (and returned much later). The bigger the story attached to your NFT, the more non-fungible it gets.

Let’s explore what it means in practice for the future of NFTs and increasing the value of decentralized IP. There are three main conclusions for IP-driven NFT projects:

What does this mean for growing the value of your NFT (project)?

First, it means you can apply this to an NFT you own. Nobody’s stopping you from building your own pseudonymous account using the name of your NFT. Attaching a story and/or content to it turns it into a brand that’s worth more than the IP itself.

Second, it means NFT creators should explore either fictional or non-fictional world building and lore to create a vibrant ecosystem and increase value. Telling a story is hard if you have zero guidance or guardrails. It’s much easier to tell a story if some parameters are predefined. Mario Gabriele writes about this in „The Fox with 1,000 Faces“

This also enables network effects: Multiple NFT characters can build on each others’ stories and make it progressively easier for others to join them.

Third, and this is the caveat to all of this—the storytelling that enhances the value of your NFT needs to actually be attached to that NFT.

If 6529 listed „Mike Tyson - Actor Punk #88“ (an NFT he also owns), you wouldn’t expect a giant premium because there’s no writing attached to this NFT. As trite as PFP projects have become, this is where they shine.

Wrapping Up: How to make your NFT less fungible

As we’ve seen, most NFTs are pretty fungible for one another. That’s a good thing: It makes markets more liquid and enables simpler transactions.

But if there’s a story (good or bad) attached to the NFT, it becomes less fungible, meaning it becomes less liquid and sees a change in expected price. You can effect this as an owner by proactively attaching additional IP (e.g. writing) to your NFT. As a project creator, you can help your community do this (and thus increase overall project value) by proving them with basic world building.

And that’s it for today! If you learned something today, please follow me on Twitter and give this article a retweet:

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