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WTF is NFT?
February 2021 has seen the world abuzz with curiosity about NFTs (non-fungible token), unique digital collectibles that can represent anything from digital art, to music, to sports memorabilia.
People have paid hundreds of thousands of dollars for NFTs, immediately catching the imagination of artists. Beeple sold an NFT on Feb 24th for a mind-boggling $6.6 million, a record that was beaten in a matter of days on Feb 27th by musician 3Lau, who sold 33 NFTs for special edition vinyl records of their Ultraviolet album for $11 million (~$3.7 million was the single highest bid).
For context, 3Lau has 319K Instagram followers and 278K YouTube subscribers at the time of writing, a modest following relative to many household name creators and artists (henceforth “Creators”). This indicates that 1) emerging Creators have an opportunity to generate significant revenue directly from super fans, and 2) established Creators with even bigger audiences have an opportunity to disintermediate themselves and shift the power dynamics of entire industries.
What does this mean for the burgeoning creator economy?
Over the past decade, the Creator Economy has matured a lot (I will dive into this topic in the future), and an observation I made is that as Creators become successful in building a following, they reach a point where they require more than what aggregation platforms offer — more nuanced tools for creation, business management, community engagement, and monetization.
Fun fact: musicians make roughly $3222 per million streams on Spotify after the platform and other rights holders take their cut. So if you produce enough hits to generate 10 million streams a year on Spotify, you’re looking at a $32k annual income. This isn’t isolated to Spotify, it is in fact a common perception that aggregation platforms reap the bulk of the value from creators’ content.
NFTs give a direct path of monetization to Creators, and simultaneously offer a way for fans to buy equity in creative content that they enjoy and believe in. Implicitly, this means that fans not only show support, but also stand to gain financially if the the asset appreciates in value.
Logan Paul (internet personality), Justin Kan (cofounder of Twitch), Justin Roiland (creator of Rick and Morty) are just a few Creators who’ve started experimenting with NFTs in various forms, and I expect this trend will continue as better tools are built to make NFTs more accessible.
Creators and tinkerers looking for a primer on setting up NFTs can refer to simple guides such as this one.
So what’s behind this current craze?
1) Interest in crypto is at an all-time-high, so is crypto currency value.
2) There is a novel IP (Intellectual Property) approach to NFTs this time around.
In 2017, digital collectibles such as CryptoPunks and CryptoKitties were among the first consumer NFTs, but quickly fell off the map as the cryptocurrency market dipped and people moved on with their lives.
In 2021, Dapper Labs (makers of CryptoKitties) took a new approach by signing a deal with the NBA to mint unique digital moments that fans can bid on to own — NBA Top Shot, the new Trading Card Game equivalent. This is what propelled NFT to the mainstream.
The key difference maker for Top Shot’s mainstream popularity is attributable to the intersection of valuable intellectual property and pop culture (e.g. NBA). By combining artificial scarcity, exclusive sports content, and larger than life celebrities such as LeBron James, Top Shot captured the zeitgeist of this moment in history, and Dapper has already inked a deal with the UFC to build on its momentum.
Given its success, this “IP” playbook will be the most promising direction for the next wave of popular NFTs (Pokemon NFTs, anyone?).
3) Greed. Do the NFTs being sold today have real utility? I would argue no. The internet frenzy around Top Shot carries a clear tone of “how do I get in and make a dollar?” in the discourse. Even Top Shot fanatics are arguing for speculative future value instead of the joy they get from owning it. So it seems the human motivation behind the transactions of Feb 2021 boils down to the belief that “someone will be willing to pay more than what I paid”.
Where to next?
You don’t need to be psychic to see that the current NFT craze can’t be sustained. With CryptoPunk transaction volume (in dollars) dipping 85% from last week to today, it’s evident that without valuable IP and clear utility, the mainstream will walk away disillusioned. Yet, the technology is here to stay and the mass market concept has been seeded.
There’s enough hype and new entrants into NFTs that there’s still upside. It depends on who else gets in the game. Imagine if Creators such as Beyoncé, Ninja, and Charli D’Amelio release new limited edition content next week the same way that 3Lau did.
My intuition is that regardless of any gold rush in the next month or two, the medium-term destiny (1~2 years from now) of NFTs is a crash, as mainstream consumers lose interest in the speculative resale value of digital assets with no utility, and get back to their post-COVID lives.
Once NFTs are seamlessly integrated into transactions of physical and virtual goods with true utility to the buyer, there will be NFTs with tremendous value. Until then, and perhaps even then, think of buying NFTs as an angel investment in culture.
How will NFTs make sense long-term?
Without any real world utility, NFTs are not likely to be worth much over time. For NFTs to have lasting value, there must be a combination of speculative upside/emotional connection, and utility.
Examples of how NFTs can hold utility:
Virtual world assets — Limited edition item, unique transferrable character model that you can take to multiple virtual worlds that you spend time in.
Music / Content building blocks — NFTs provide room for more creative output by allowing creators to use existing media as Lego pieces for content. This is evident in the explosion of Tik Tok, which is often paired with music.
Bundled with a physical product —NFTs provide an opportunity to flip the convention that digital goods (i.e. MP3s, PDFs) are just pale imitations of a physical item (i.e. record, document). With NFTs, the original is the digital good, and copies can be made in the physical world (i.e. through 3D printing).
Consumption gating / partial access — I would argue that for lots of NFTs sold today, the value of the content is 100% in consuming it, and therefore for most people there’s no point in ownership. For these, there might be a future where content consumption is gated or partially restricted by NFT ownership.
Right to use — Weaving a few of the above concepts together, imagine a scenario where you own the NFT of a digital avatar (e.g. Pikachu) whose brand is widely valued, and embedded in that NFT is the sole legal right to use it for commercial purposes of producing physical goods in its exact likeness.
It’s too early to tell, but while suspicious of the near-term value of NFTs (because it’s primarily fueled by speculative greed), I’m bullish on the long-term prospect of what this distributed ownership model could mean for Creators, fans, and a connected global economy.
As NFT assets begin to naturally incorporate real-world utility, they will appreciate in value, and people who’ve leaned in will capture meaningful commercial gains. With strong financial incentive, people can move mountains to will something into existence, and NFTs are shaping up to be a tool that can fundamentally change the economic fabric of society.
If you enjoyed this or want to engage in a conversation, let’s connect on Twitter, where I’ll be sharing more thoughts on the latest in technology and creator economy.