The Fastest Way to Lose a Lot of Money: NFTs
As blockchain technology becomes more heavily adopted, human behavior becomes accentuated and more perverse. In the case of NFTs, the activity on the secondary auction market demonstrates a lot that was taught in class. While NFT auctions are different than your normal in-person auction, the NFT secondary market has an ascending auction structure, which means that the highest bidder wins the digital asset he or she bids on. Moreover, just as we demonstrated in class that it is a dominant strategy to bid if the bid is less than its future value. In the case of NFTs, these auctions move at more frequent speeds at all hours of the day and can close at any point in time. When the seller accepts a bid, the NFT gets immediately changed for the given price. The properties of these exchanges are mirror images of mass auction houses.
So how is it possible for an NFT to be worth almost three million dollars, and in a matter of minutes lose all monetary value? To answer that question in short… it is the power of networks and mass markets that can create hysteria. In the case of this Jack Dorsey NFT, people saw its value to be millions. As a result, people did not hesitate to bid on this asset because it was a dominant strategy for the participant. However, when it is a dominant strategy for thousands to do the same, this quickly becomes hysteria. Whether or not people having this evaluation for the NFT is correct is irrelevant, because, at the time of bidding, they were willing to pay that price. From the seller’s perspective, it is a dominant strategy to sell one’s own NFT for millions when there is no guarantee of what you can get for it in the future. It is the fact that an asset can be seen as worth millions or on the contrary, nothing, which results in participants making and losing a lot of money. That being said, participants are participating in a faster-paced game in which, each player acts in their own best interest.
In conclusion, why does a Digital Asset auction have anything to do with Networks… the article demonstrates how even with innovation, how principled and predictable humans are, which we learned in classes on Game Theory and Auction Theory. What demonstrates this the most is that when people realized there was no actual value, the dominant strategy for thousands was to remove their bids, causing the price to go from millions to just a few thousand. On an individual level, it is a basic game theory that explains why the price rocketed, then plummeted. What is unique about this specific auction is the speed of these price changes unlike those seen at standard auction houses. The digital nature of these auctions corroborates and correlates with the principles learned from Game Theory and Auction Theory. It just happens a lot faster in this case. Overall, one should understand the theories taught in class before even attempting to make money in NFT auctions. Fortunately, I do not think it can get much worse than the man who learned the hard way on a Jack Dorsey NFT.
Sources:
$2.9 million NFT of Jack Dorsey’s first-ever tweet plunges in value (cnbc.com)
The Network Effects of NFTs – Global Digital Assets (gda.capital)