Often the first application of a technology turns out to be its worst proving grounds. During the 2021 crypto craze, NFTs have achieved dubious notoriety as one of the more inane use-cases of blockchains. Pixelated images of primates trading for outsize sums invited comparisons to the Dutch tulip mania. Once prices crashed many of the so-called “collectors” were left holding the bag as schadenfreude spread in other quarters. As difficult as it may be to suggest resurrecting NFTs with a straight face today, there is a good case to be made for ticketing. This application has not been tried on any commercial scale outside of limited trials. More importantly recent landmark litigation officially labeling Ticketmaster a monopoly may finally provide an opening for new entrants in an otherwise concentrated industry.

Solid foundations: fungibility and on-chain tokenization

Sometimes the first application of a technology an industry gets wrapped around the axle on turns out not to be the optimal one. (See QR codes before the pandemic, secure-elements on mobile devices for NFC payments…) The original enthusiasm around NFTs for digital art follows that pattern. Before NFTs, there were FTs— fungible tokens, without the leading negative. As one of the earliest standards building on Ethereum, these had already proven useful in the issuance of secondary assets on the Ethereum blockchain, especially those intended mirror an existing fiat currency such as the US dollar. Tether and Circle already boasted billions of dollar-equivalent stablecoins as ERC-20 fungible tokens in circulation before the pandemic. With the passage of the GENIUS act officially recognizing and regulating stablecoin issuers, these tokens are ever more tightly coupled with the traditional financial system, much to the chagrin of cryptocurrency detractors.

Stablecoins are meant to be fungible in the same way cash is: a dollar bill in paper currency has no unique properties to differentiate it from another bill. That also holds for bars of gold or shares of stock. But there are other types of assets where this is not true: real-estate is an example. If there are two adjacent houses in some suburban planned community with cookie-cutter construction that are identical in every aspect including their selling, the titles for those houses are still not interchangeable. The buyer of the house on the left can not legally move into the one on the right by arguing they are indistinguishable. Non-fungible tokens standardized by ERC-721 took the next logical step for tokenization— mirroring real-world assets on-chain— by introducing a variant of ERC-20 intended for one-of-a-kind objects. There is nothing fundamentally unsound about this step. It still requires the present of a trusted third-party to enforce the correspondence between on-chain representation and real world possession, but this is no different than stablecoins. One USDC stablecoin is accepted as a substitute for one traditional dollar on DeFi markets because of the belief that Circle— the company issuing USDC— is willing and able to exchange the virtual dollars for real ones in a bank account. That belief is not enforced by any consensus rules of Ethereum: it requires positing the existence of those dreaded trusted-third parties that blockchains were supposed to eliminate. Putting aside the irony, it is clear that network participants have been willing to make that leap of faith— even in the presence of evidence suggesting the stablecoin issuer has less-than-stellar reputation. Once that level of confidence exists, it is only an incremental jump to believe that some other trusted third-party can also enforce the connection between real-world property ownership and their virtual representations on chain.

Nonexistent scarcity

It was not the failure of a trusted-third party that resulted in the first NFT gold-rush turning into an easily ridiculed tulip-bulb craze. (At least, not a failure in the traditional sense of failing at their primary responsibility: maintain the correspondence between the real-world and its on-chain reflections. Investigative journalists have uncovered plenty of cases of digital art purveyors acting with less than stellar ethical standards in marketing and price-manipulation.) The fundamental problem with encapsulating public digital art in an NFT is that by definition such art has no scarcity. There is exactly one authentic instance of The Birth of Venus. It is located at the Uffizi. Laying eyes on the original involves a non-virtual trip to Florence. Any one can create a copy of that original, complete with the appearance of age by using paint and materials approximating their 15^th century equivalents. Those copies are decidedly not interchangeable with the original. An art museum could conceivably create an exhibition out of replica paintings to spare visitors the inconvenience of having to travel to Italy. But no one could mistake that for actually seeing the real thing by Botticelli, any more than walking down the Las Vegas strip qualifies as having “visited” the pyramids, the Eiffel Tower and the Statue of Liberty all in the same day because simulacrums of these objects have been recreated there.¹

What the proponents of digital-art-as-NFT have struggled to articulate is the answer to the question: what distinguishes one copy of the image from another? When anyone can visit the same web-page to view the exact same image— pixel for pixel identical to what all other viewers are observing— what benefit does “ownership” of the associated NFT exactly confer? It is not even bragging rights about patronage of the arts or demonstrating refined personal aesthetic, even if one takes the cynical view of modern art as a Veblen good. Having an original Picasso on the wall creates an experience that is not available to anyone else not in possession of that specific artwork, for example being able to admire said painting while having dinner with friends. If the painting is later sold, that experience is no longer available. What benefit accrues to the present “owner” of a digital-art NFT that is not accessible to anyone else who accesses the same image and downloads it locally?

Artificial scarcity

When there is no intrinsic scarcity, producers are motivated to artificially prop-up prices by creating the appearance artificial scarcity. This is why new mints of NFTs must be carefully controlled in quantity: there is no reason a batch of NFTs could not feature a million variations on the same theme, but justifying sky-high valuations is (relatively) easier when the marketing collateral can drum up FOMO by predicting the “limited run” will sell out in a matter of hours.

Other NFT projects attempted to sidestep this problem in a creative fashion: make-up new benefits exclusively available to holders of their NFT line. For example, events where attendance is conditioned on current ownership of a BAYC. While this type of red-velvet-rope treatment certainly creates a distinction between the NFT-haves and have-nots, it raises a question on what digital artworks have anything to do with the benefits. Why not simply auction off attendance rights to the event directly? Having a low-resolution simian image attached to the on-chain representation of that right does not appear to add any value, certainly not one to justify the large difference in price based on the exact characteristics of the same image.

Ticketing

That bring us to the pedestrian business of event ticketing, back in the headlines briefly after a federal jury in New York official branded Ticketmaster/LiveNation an illegal monopoly. It is unclear whether any structural remedies will follow from this decision but there is a fighting chance that new entrants may be able to challenge this incumbent monopoly now operating under the watchful eye of regulators. Ticketing turns out to be a much better fit for NFTs for several reasons:

1. Real scarcity. There are only so many seats at Madison Square Garden and so many calendar days in a year when Bruce Springsteen can perform. This is the ultimate constraint event promoters must contend with, even if they are constantly trying to create additional scarcity to squeeze even more profit. (Why are there only 100 “VIP packages” that come with mass-produced souvenir schlock when one could just as well have made 1000 copies? Why is that benefit a function of seating close to the stage when it could have been decoupled from location and made available to all fans even in the nosebleed sections?)
2. Unsolved trust problem. It is difficult to resell tickets in a peer-to-peer manner without a centralized platform to coordinate the transactions. Direct sales between individuals would be rife with fraud because the recipient can not verify the authenticity of what they are paying for. Anyone can create a PDF or even print a piece of paper that looks like a valid ticket to a highly-coveted World Series game. But can a seller convince prospective buyers that this piece of paper is authentic? Even if it is authentic, what if they had already “sold” the same ticket to multiple people already? (This is the real-life version of the double-spend problem that bitcoin has solved elegantly.) In economics this type of information asymmetry between buyers & sellers is known result in an inefficient dynamic called “the market for lemons” inspired by the used-car sales dynamic. Buyers artificially discount the price they are willing to pay for a car when there is a significant chance it will turn out to be a lemon worth much less than the asking price— a condition that only the seller has visibility into. This is the problem SeatGeek, Stubhub and other online market places for ticket resales solve for. It allows buyers to transfer the risk: they will be made whole for the occasional counterfeit ticket purchased from the platform, a guarantee that does not exist when directly transacting with the buyer.
3. Lack of transparency in secondary-markets. While Stubhub and its ilk have built lucrative businesses around this risk-transference model, consumers are worse off from a pricing perspective. These secondary markets thrive on opacity: while a buyer may know exactly which seat they are paying for— and thanks to federally mandated all-in pricing, how much the platform is earning in fees— they have no clue about the original face value of that ticket, much less its resale history. Is this a professional scalper charging triple price for a random batch of tickets they purchased mechanically using a bot? Or die-hard fan trying to recoup the cost of their tickets after some unforeseen life-event derails their plan to watch their favorite artist live? The distinction matters even when we acknowledge the supply/demand dynamics: artists often deliberately underpricing tickets for good-will result in a secondary market closer to fair value. Opacity props up the demand side: knowing that they are about to get ripped off by a seller demanding a ridiculous multiple of the face-value is likely to influence how much one is willing to bid. (Of course Ticketmaster and Stubhub have zero incentive to “fix” that problem and make the market more efficient: buyers getting ripped-off is good for business when the revenue depends on collecting a fraction of the sale price.)

What NFTs can and can not solve

Looking at each of the structural problems with the market, NFTs obviously can not solve the intrinsic scarcity problem: minting more NFTs on-chain does not create more seats in the stadium. Virtual tickets can only mirror this scarcity. But they solve for the trust problem in a very robust, cryptographic manner, far better than what paper tickets or animated QR codes can achieve. It would be trivial to check that a given address is the official holder of a particular NFT. Since each NFT is associated with a URL, it is also possible to look up exactly what that NFT corresponds to in real life: attendance rights for a specific seat at a particular event. Crucially that URL may hold the piece of information Ticketmaster and its ilk desperately strive to withhold from consumers: the original face-value. With some standardization around how tickets are encoded, it becomes possible to index inventory on-chain and track distribution in real-time.

To be clear: there is still a trusted third-party involved— the issuer of the NFT must be authoritative for real-world allocation of those tickets. They are in a position comparable to stablecoin issuers: they guarantee interchangeability between the virtual construct on-chain and the real life privilege of sitting at that seat. Initially this role may well end up being the same Ticketmaster/LiveNation monopoly, resulting in no structural market change for primary sales. (Just because tickets can be issued on-chain does not mean the Boss will throw away all existing distribution channels and farm out this crucial side of the music business to random upstarts.)

But the existence of tickets in NFT format could drastically reshape the secondary sale market. It is no longer necessary to have Stubhub sitting in the middle of every transaction to guarantee the authenticity of tickets, or more accurately, to refund buyers in case those tickets turn out to be counterfeit. This lowers the barriers to entry for creating true peer-to-peer marketplaces, including potentially ones operating entirely on-chain. Just as decentralized exchanges allow trading cryptocurrencies directly with a smart-contract, a decentralized ticket resale platform can enable buyers to bid on inventory. Interestingly none of the usual criticisms of DeFi platforms—that they are too slow, too expensive per transaction and susceptible to front-running compared to centralized exchanges— apply to this scenario. On-chain transaction fees are significant for an automated strategy executing thousands of trades with gains/losses are measured in cents. There is no high-frequency trading of tickets; if anything, introducing additional friction to handicap professional scalpers is arguably a feature. It is not possible to arbitrage across different markets: there is no “hedging” one’s exposure to holding Bruce Springsteen tickets by “shorting” Taylor Swift tickets for a different date.

Limits of transparency

For all these advantages, there is still no guarantee that NFTs can bring about full transparency or efficiency around secondary-sales. There are two reasons, one that is fundamental to all unregulated peer-to-peer sales and one contingent on the exact structure of these hypothetical marketplaces that emerge.

The intrinsic limitation is around the possibility of manipulating prices with bogus sales. Seller Alice can collude with her friend Bob to “sell” her ticket at an artificially inflated price, paying Bob under the table for his costs. (If all activity is taking place online, there is no need for Bob the co-conspirator: Alice can just create a second wallet address to bid on her own listings. This is the standard practice for artificial pump-and-dump schemes.) Bob can then list the ticket himself or hand it back to Alice: rinse and repeat. Or if Alice has a batch of tickets in the same row, inflating the price of one may now justify a higher price for the others. No money has exchanged hands and no meaningful economic activity has taken place here. But this fraudulent transaction distorted the price signal, by creating the appearance of those tickets being worth more than their fair market value. In regulated markets this type of activity is strictly illegal; the market operator is tasked by law with surveilling their platform and reporting on questionable trading patterns. Ticketing already plagued by a class of professional bottom-feeding scalpers, is unlikely to merit any significant scrutiny around market integrity.

The second limitation is a function of how much transparency the new platforms choose. Even today there is no reason that Ticketmaster could not disclose the entire transaction history associated with a ticket: issued at this face value, resold on such date for a second price, that buyer then turning around to sell it again later for a different price. To the extent that such prices are known to platforms, they are not surfaced publicly. It is possible that no single platform has necessary visibility to reconstruct that timeline: in a competitive marketplace, each of those transactions could have taken place on a different service, each one jealously guarding its internal hoard of transaction. In reality, given the highly concentrated oligopoly that exists today, chances are a single ticket spends its entire lifetime within the confines of the same platform. The challenge is not lack of information; incentives favor keeping consumers in the dark. Those exact incentives operate even when tickets are represented as NFTs: while the object being traded exists on-chain, the transaction itself can still take place off-chain on a garden-variety website. This is very similar to how NFT sales were often conducted: buyers escrow their NFT with the platform, buyer pays the platform which arranges for transfer. While the blockchain will record the change of ownership, there is no guarantee that it will also reflect exactly how much money changed hands in the other direction. Such transparency is more likely if the platform operates entirely on-chain and each NFT transfer is accompanied by some other visible record of cryptocurrency movement in the other direction.²

CP

1 In fairness, the Vegas simulacrums are not identical in dimensions or construction to the real object either.

2 It would be possible to hide the payment using smart-contracts if buyer and seller can agree on a specific condition to be enforced by the contract for releasing the NFT. This is not quite the same as outright price manipulation. It can makes sense for both parties if the seller is trying to save face and move inventory without signaling declining prices to the broader market.