In this article, we look at NFTs and artificial scarcity. I’m fascinated by how many NFT projects claim we can only buy or mint 5,555, 10,000 or 15,000 or even just one JPEG, GIF or meme from the collection. You’ll see numbers like these on a project’s OpenSea sales page or its website when minting.
Creators and developers could create more, but they deliberately attempt to control supply and demand. Is this the practice of artificial scarcity ethical or an attempt to extract as much Eth as possible from the free market?
Artificial scarcity describes intentionally limiting the supply of goods or items, even though the owner or creator possesses the tools, raw materials or technology to increase production. It’s an age-old principle of persuasion and one insanely popular with NFTs.
In his seminal book Influence, behavioural psychologist Robert Cialdini describes how the artificial scarcity principle operates:
“…because we know that the things that are difficult to possess are typically better than those that are easy to possess, we can often use an item’s availability to help us quickly and correctly decide on its quality. Thus, one reason for the potency of the scarcity principle is that, by following it, we are usually and efficiently right.”
NFTs and Artificial Scarcity
Minters and buyers can only buy or acquire a set number of non-fungible tokens (NFTs) from a project. The CryptoPunks and Bored Ape Yacht Club are two high-profile blue-chip NFTs employing artificial scarcity.
Only 10,000 of each exist on the Ethereum blockchain. You could have minted the CryptoPunks for free, excluding the cost of gas in 2017, while Bored Ape Yacht Club cost 0.08 ETH to mint in 2021. Today, NFTs from these projects trade hands for six and seven figures.
Anyone can examine a smart contract (hard) or use a blockchain explorer (easy) to see how many assets exist for a particular project. Some collectors use NFT software to examine how limited supply is distributed amongst holders. Typically, if a few wallets hold most of the project, it’s more open to price manipulation.
Read my guide to the best NFT software.
Employing artificial scarcity as part of an NFT project unlocks benefits for creators and collectors. It’s a type of creative constraint. When artists sell their work traditionally via a middleman or gallery, they earn a percentage of sales. Anybody can create an NFT collection and potentially sell it. If it succeeds, they can continue earning in perpetuity from sales on the secondary market.
British contemporary Damien Hirst recently employed artificial scarcity for his Empress NFT project. Anyone could have minted the project if they’d $3,500. Those who minted before the deadline determined the final supply for this project.
Digital artist Mad Dog Jones creatively employed artificial scarcity for his seven-figure NFT project Replicator. This cyberpunk NFT of a printer produces or replicates an NFT at a rate of one per month.
Each Replicator NFT also produces an additional NFT each month. The project will produce approximately 220 NFTs before minting out, but Replicator combines randomness with artificial scarcity. Some NFTs from this blockchain project jam much like a replicator and fail to produce anything, thus increasing scarcity and the floor price. It’s a form of digital, artificial scarcity, only achievable with NFTs.
Blue-chip NFTs aren’t easy to acquire for a good reason. The purpose of artificial scarcity is to imbue an NFT project with more value, encourage more people to buy it and drive up the floor price.
Critics of NFTs find this practice abhorrent, but the entire cryptocurrency asset class is built on the principle of artificial scarcity. Only 21 million Bitcoin will only ever be mined, for example. That constraint drives the price of a Bitcoin up over time. You could have got one for a couple of cents in 2009; now, one is worth tens of thousands of dollars on the open market.
Cryptocurrencies and NFTs are ideal modern examples of artificial scarcity. But artificial scarcity is an age-old technique of persuasion that practitioners of all types have employed for years. Think entrepreneurs, inventors, businesses, creators and even politicians.
Before going into more detail, it’s helpful to compare artificially scarce goods with finite real-world resources.
What Are Some Examples of Scarcity From The Real World?
Economists point to several key areas in the real world where the supply of a resource is scarce or fixed by its nature. For example:
- Labor: In times of high employment, companies find it difficult to hire the right people. Conversely, during a recession, workers struggle to find meaningful work.
- Land: Real estate in the center of London or New York comes at a premium compared to land outside of urban areas.
- Natural resources: Increasing energy consumption means part of the world is short on fresh water, clean energy or healthy food.
- Health care: The supply of doctors, nurses and hospital beds often exceeds demand from those in need.
- Power: California is notorious for its power shortages and brownouts. In October and November 2019, it even shut off power across 30 counties.
In some cases, the market controls the allocation of resources and in other cases, like in California, the government or private companies step in.
What Are Some Examples of Artificial Scarcity?
The $80 billion diamond industry is an age-old example of artificial scarcity. In the late 19th century, the De Beers Mining company bought up most diamond mines in South Africa and controlled subsequent supply with distributors to influence the price. When its founder Cecil Rhodes died in 1902, the De Beers company controlled 90% of the world’s diamond supply.
The Rolex watch is an example of real-world goods employing artificial scarcity. Personally, the prospect of spending five figures on a piece of jewellery to wear on my wrist is questionable, but I understand why others want to acquire and flex these types of luxury goods. The Rolex watch is a status symbol, and the company controls the supply to induce high demand.
Rolex hates watch flippers. Wannabe buyers of new Rolex watches must visit an authorized dealer and join a waiting list for several weeks or even months. The watch is associated with the buyer, and if you flip it, it’s exceptionally difficult to buy a new one again.
French man Louis Vuitton designed and sold the first of these luxury handbags in the late 1800s. Today, these leather bags sell for thousands of dollars. Customers buy them because of their iconic designs and because the brand is a sought-after commodity. The company also releases a set amount from particular designs each year.
Consider Pokémon cards. The rarest of them all, Pikachu Illustrator, sold for a reported $375,000 in February 2021. Those who don’t care about Pokémon would baulk at this price, but these cards have high value within the Pokémon tribe.
In 2014, a collector paid $3.2 million for a 1938 comic book cover that contained the first appearance of Superman. Today, only 50-100 copies exist.
Fans can also buy special edition comic book covers for an affordable price during a print run in the hopes of either selling it later or building a collection fellow fans will envy. It’s no wonder Marvel is turning many comic book covers and moments into NFTs via VeVe.
Stocks or shares in a traditional company represent another type of artificial scarcity. A set number of these stocks and shares are available for purchase on the open market. Larger investors, hedge funds, and the free market decide what these shares are worth and act accordingly. Casual investors can choose to buy these shares using somewhat more limited financial resources.
Copyright or patent is another example of artificial scarcity. An entrepreneur or creative finds an idea they want to protect from competition. It’s impossible to own an idea outright, but entrepreneurs can use legal frameworks to protect how they execute it.
McDonald’s founder Ray Kroc wasn’t the first person to come up with the idea of eating fast, cheap food on the go. It wasn’t his idea either. But, he executed on and branded the concept better than any restaurant owner before him. He said,
“I put the hamburger on the assembly line.”
Kroc built and systematized a franchise around this assembly line of hamburgers and franchises. He patented how he executed the idea to control the supply of fast-food hamburger restaurants using the McDonald’s brand.
Read more about the fast, good or cheap principle.
Digital marketers employ various forms of artificial scarcity to sell software and products online. Look at any high-converting e-commerce, software-as-a-service (Saas), or course sales page, and you’ll see this persuasion principle in action. Expect language like:
- Buy now
- 30-days only
- Limited-time offer
- Take out a free trial
- Claim your exclusive discount
- Don’t miss out
- Hurry, only three left in stock (popular with Amazon)
When I worked as a copywriter, we employed this persuasion technique to promote special offers, which usually led to higher sales.
I’ve also bought and sold dozens of online courses over the years as a student and course creator. I, like most students, almost always buy when the doors on a course are about to close. The thought of possibly missing the bonuses or waiting months to take a relevant course is often too much.
As a course creator, I’ve learnt from many failed launches that closing the doors on a digital product almost always leads to more sales than leaving a course open. It also drives more conversions on the last day of a launch.
Artificial scarcity encourages ideal customers to act. Nobody likes missing out on a deal! After all, those who don’t act either buy later or don’t represent a business’s ideal customer.
NFTs and Artificial Scarcity: The Final Word
A luxury object or collectible’s place in a social context gives it value. If a person’s tribe or inner circle enjoy Louis Vuitton handbags, Rolex watches or NFTs, that person is more likely to want one. We all want to feel a sense of belonging, and that sense of belonging is what NFTs sell (alongside rampant price speculation).
Suppose we like (another persuasion principle) a celebrity such as Eminem, Paris Hilton or Jimmy Fallon and see them using an NFT as their avatar. In that case, we’re more likely to feel FOMO. And NFT capitalize on FOMO. WGMI!
Read my guide to NFT terms.
Of course, you might not care about Rolex watches, designer handbags or overpriced JPEGs. Your tribe may abhor these luxury goods. In that case, artificial scarcity for the good or item in question is powerless. But look closely, and you’ll probably find at least one type of goods, service or product friends or family buy because of perceived high demand and limited supply.
Artificial scarcity is a key principle of market economics. A perception of limited supply encourages the market to perceive more value in the item and price it accordingly.
Nothing is inherently good or bad about artificial scarcity. It is simply a persuasion technique particularly suited for NFTs.
Once you’re aware that 5,555 or 10,000 NFTs is a construct, much like rare comic book covers or designer bags, you can decide how to use limited resources and whether you want to buy, admire or pass.
Find out more about NFTs and artificial scarcity in my video below.