NFTs and CBGBs: How’s that for a clickbait title

David Byrne, from the Talking Heads, wrote a book recently called How Music Works that’s filled with interesting insight into the mechanics and the detail of how music gets made, and how scenes get formed. As usual, you can tell he’s a real professional by the degree to which he can explain the micro-details of these things, and frame them for the reader so they can understand why they’re so important. One section of the book goes into great detail on a fun topic: the floor plan of CBGBs. 

As a former touring musician myself, I can totally vouch for how important this is: there’s great value in people knowing where to go. Not only knowing to go to CBGBs (on the Bowery in New York City, one of history’s legendary music venues), but even inside the venue; knowing where to go to see specific kinds of people and have specific kinds of conversations, down to the mechanics of the floor plan. These tiny details facilitate a specific flow of information and exchange of cultural ideas, and they’re part of why gathering points are so important. 

CBGBs was a great example of a Schelling Point. 

I remember first hearing about the concept of “Schelling Points” a couple years ago, when suddenly a critical mass of my annoyingly smart friends started all dropping this new word in conversations. I’ve since come to admit that it’s a really useful idea, and it’s especially helpful in understanding one of my perennially favourite topics: why bubbles are so good for innovation. 

Schelling points are “Focal Points” in game theory, and they answer the question: ““Where do people just naturally go, in the absence of explicit communication?” The classic story to demonstrate the idea goes: you and a stranger, who you’ve never met and can’t speak with, have to find each other in New York City. Where do you go, and when? 

There’s no single correct answer here. But if you think it through, you’ll ask, “Okay, what is a place and time that the other person is likely to pick?” You might reason an answer like, “The information kiosk at the middle of Grand Central Station, at noon.” (Unfortunately, you can’t try CBGBs at 10 PM, because it’s a Patagonia store now. Talk about a downgrade.) There’s nothing particularly special about that spot; but it has a few benefits: it’s easy to get to, it’s universally known but also small; but most importantly, it’s an obvious meeting spot. It seems like somewhere you’d expect a stranger would pick; and you hope the stranger will think the same thing about you.

The focal point did something important: its presence alone allowed the two of you to communicate, in a sense, even though actual communication was impossible. This is neat. In a meaningful sense, the kiosk did some useful work. 

You could rephrase this game that just took place in terms of costs. Communicating has a cost; and the rules of this game made explicit communication infinitely costly. CBGBs itself was an immense rock of cultural capital. Even our original example, just by being there and being an obvious meeting place, did some communication for you. It acted like capital, just like CBGBs was a kind of capital: it lowered a cost of work being done, from prohibitive to not-prohibitive. 

This idea of “Schelling Points are a kind of capital” is a little weird. But let’s think about, let’s say, SAFE Notes. SAFE notes are a simple, straightforward template for early-stage startup investment, which Y Combinator published in 2013. Anyone can use them; and in the early stage Silicon Valley tech community, most people do. You know why? Not necessarily because SAFE notes are a superior deal structure; but because they’re easy, they’re expected, and they’re what everyone else does. When a founder and investor shake hands and agree to do a pre-seed round, there are both probably just assuming it will be a SAFE note. The SAFE note is a Schelling point; it’s where people just go; in absence of explicit communication otherwise. 

If SAFE notes did not exist, the startup and the investors would have to find a deal structure, and hammer out details for convertible debt or a small priced round. That takes communication, which is work; and it takes lawyers, which cost money. But if everyone agrees ahead of time to just meet up at the SAFE note, the cost of getting a deal done goes down, at a pretty critical moment in the startup’s early life. 

I’m not sure how you could go about calculating the total economic value created by SAFE notes, but it’s gotta be immense. The note itself didn’t really create much of the value; I mean, SAFE notes are fine, but convertible debt is fine and priced rounds are fine. But SAFE notes as a Schelling Point created a huge amount of value, in terms of work that did not have to happen. Their value is mostly in the fact that everyone just agrees on them, so the founders get some valuable time back.

Part of why Y Combinator has been so wildly successful is that they really understand the value of these Schelling Points. They’ve created three: SAFE notes, Hacker News, and Demo Day. (Not Demo Day as an investment forum, but Demo Day as the preeminent social event in the tech community, which is more important.) All three of those creations have become a default place where people meet. They are forms of organizational and social capital that meaningfully lower the cost of getting things done, and that everyone in the community gets to use. 

Now, if you’ve been following me for a while you’ll know that one of my absolute favourite topics to talk about is the magic of financial bubbles. We’ve talked about this plenty: bubbles are moments where we temporarily lose our minds and put our time and money towards ridiculous, speculative excess. But bubbles leave something important behind: capital. A lot of investors lose their shirts in the process, but bubbles help do the impossible, which is focus our attention, our imagination, and our money into building the un-financeable future. 

I think most people reading this already get that idea pretty well. But the idea extends beyond the traditional concept of “leaving behind capital” in tangible forms. Take the 1999 bubble, for instance: the dot com / telecom boom and bust left behind a lot of critical infrastructure, particularly broadband cable, that made the next phase of internet building possible. This is Technological Revolutions and Financial Capital 101 stuff here. 

But you know what other kind of capital it left behind? It left behind a scene; specifically, a scene of web developers. The human capital created by the bubble likely exceeds the tangible assets like broadband cable that got left behind, although it’s harder to explicitly measure. And it’s not just like we got a lot of web developers; we got a lot of web developers who very specifically were nerds who lived and breathed a specific kind of nerd culture. As with all bubbles, the run up to 1999/2000 created a crisis of undifferentiation: all of a sudden, everyone cared about the same thing. Everyone needed software engineers; and we created a new job called “web developer” that turned out to be really important. So the the natural gathering places of these nerds, whether physical or conceptual, became super valuable. 

In these crises of undifferentiation, where we get a critical mass of people all caring about the same thing and all rushing in to participate, we get a lot of Schelling Point formation. Some of these points are geographical, like Palo Alto and Mountain View becoming places where you could ask zero questions, just show up, and it’d be the right thing to do. Some of these points are technological, like web development norms and conventions. Some of these points are financial, like the established template for how to do VC investments. Founders and VCs could show up to meet and expect, without any prior communication, what the capital structure under discussion would look like. It’s where everyone just goes, without having to be told. 

Which brings me to today’s current obsession, NFTs. One of the recurring complaints I hear about Bitcoin and crypto-related speculation more or less goes as follows: “If this is such an important technological breakthrough, then why aren’t these speculative bubbles (i.e. 2017, or also now perhaps) leaving behind any sort of meaningful capital?” The answer is that, aside from mining rigs, the capital being created in these bubbles isn’t tangible assets, or even the protocols. It’s mostly human capital; these bursts of fun speculation create scenes, and focus, and ambition. And it creates gathering points. 

I think it makes more sense to think of NFTs not as a product, or as a technology, but as a gathering point; like a part of the CBGBs floor plan. This current burst of speculative interest around owning LeBron dunks or whatever is really cool, don’t get me wrong. But it’ll conclude, at some point, in its current form. But something really important got created in the meantime, which is a shared understanding and a common gathering point for creatives and developers who want to creatively represent digital scarcity, for any use case now. 

So whether we’re talking about product traceability or authenticity; multiplayer digital art; or any new application we haven’t thought of yet, having NFTs as a Schelling Point for discussion is a fast and powerful way to get lots of different people – developers, artists, merchants, influencers, whoever – to a common gathering place. These are groups of people who, normally, do not speak the same language, and would not find each other at the same parties. So the fact that we now have a common, obvious, and fun gathering place that everyone knows about, in and of itself, is very cool. 

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