Why NFTs — the explanation you can send to your friends
When someone mentions that they buy and sell jpegs to anyone outside of the NFT space, it is often met with a mixture of disbelief and outright derision (even within the crypto space and advocates of magic internet money).
Who could be so crazy as to believe that a pixel art jpeg would be worth hundreds of thousands, right?
If you see an NFT and think, “I’m pretty sure I have drawings on my fridge that my kid did that look better than this”, you wouldn’t always be wrong, either…
Perhaps your first introduction to NFTs was watching Paris Hilton and Jimmy Fallon waxing poetic about their Bored Apes.
Did you know that CryptoPunk #7523 sold for $11.75M?
What is going on, here?
The largest NFT marketplace, OpenSea, has over 600K users. That is a drop in the bucket in terms of a user base, yet OpenSea processed more than $3.3 billion worth of sales last month alone, generating roughly $82.M in revenue.
It is important to ask — what is behind this momentum that NFTs seem to be experiencing? A lot, it turns out.
If think NFTs are just about art, you’re wrong. If you think it is solely about status and a way for celebrities and insecure tech bros to flaunt their wealth, you’re wrong. If you’re curious and interested in hearing more, this article is for you.
The Innovation Adoption Curve
Historical comparisons are a great starting place.
In a piece from Newsweek (February 1995), Clifford Stoll wrote this about the internet:
“The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works”.
Of course, this opinion is laughable now.
When the internet was introduced, why did so many people think is was just a fad?
The answer is clearly seen in the adoption curve that new innovations follow.
In the early days of the internet (innovators phase), there wasn’t much available. There were lots of ugly, utilitarian homemade sites on esoteric topics. Online shopping hadn’t hit yet. There was no Wikipedia, no Amazon, no Google, no Facebook. People lacked the imagination on how this new tool would be used, because it was still being explored.
Back then, the value wasn’t readily apparent, so it made for an easy subject of ridicule.
This all seems obvious today, because it has become mundane.
The same will be true of Web3 and NFTs.
You Are Here
Now that we have some context for innovation cycles, where are we with NFTs? We are still in the “innovators” part of the curve.
The same sort of ridicule that the early internet went through is being applied to crypto and NFTs.
(Thanks to Troutster for posting this video. I grabbed this from his Twitter feed, so give him a follow!)
We are in a gold rush moment.
-Gary Vee
The reason that I brought up the dot com era is that it offers a great comparison. We’re in the dot com era, before the bust. What does this mean?A lot of NFTs are (probably) going to zero. There is too much irrational exuberance. It is too easy to ape into a project and flip it for an easy 3X the same day.
It is still the wild-west. There is a technological hurdle to overcome, just to participate (buying eth, use of metamask, allowlists, the minting process…all of this has become normal to everyone in the space, but represents a hurdle for anyone entering).
Security is a huge concern. Scams are abundant, and it isn’t unusual for people to lose thousands of dollars with one wrong click or connecting their wallet to the wrong site.
“Gas” fees on ethereum are a problem, and the probability of bots and gas wars on public mints are just something that will turn the majority of people away.
We’re still in the innovators stage, though. This is normal. These will all be resolved over time.
NFTs, the “consumer blockchain”, will continue to evolve, and the result will be massive.
Why NFTs
Now, we get to the meat of the discussion. Why do NFTs matter?
NTFs cover a range — from self expression to art, status, collectibility, video game assets, tokenization, and (what I consider to be the holy grail) community ownership.
We’ll go into each, in turn.
Self Expression
“People buy things to communicate. NFTs will be the scaled version of that.”
Everything we do is about expressing ourselves. The clothes we wear. The things we read and consume. How we decorate our home.
With the advent of social networks, this has extended to normal activities. Who cares what you’re eating or what you had for dinner? Who cares if you’re walking your dog in the park? Yet, these moments are being shared.
Why is the Twitter blue check mark important? Why are the number of followers and likes important? Your digital self expression and social currency is inextricably bound to social approval.
NTFs are no different. They are an expression of community, being part of a group, and expressing your interests.
Art
When confronted with “many people believe that NFTs shouldn’t have value”, Gary Vee responded,
“Yeah…people thought that Andy Warhol’s or Jackson Pollocks shouldn’t have value. People thought that sports cards shouldn’t have value. People thought that sneakers shouldn’t have value. The market will decide if something has value.”
Gary’s comparison to Warhol and Pollock is great.
NFTs are also fantastic for artists. Not only do they get the sale, but it can written into the contract that every time the NFT sells, the artist/creator gets a cut on the sale (4% seems to be fairly typical) in perpetuity.
It also builds a community around an artist and what they are producing.
Status
Is there status signaling with NFTs? Sure. There will always be some of that. The same could be applied to Gucci bags or rolex watches (are those still a thing?).
There is power behind brand. In the NFT world, Bored Ape Yacht Club is a good example of brand dominance.
Collectibility
Collectibility is an easy concept to latch on to. Baseball cards, comic books, and even sneakers have all shown to be collectible.
The collectibility of NFTs like CryptoPunks and BAYC makes sense, as some of the pioneers in collectible digital assets.
Using “comic books” as an example of collectibility is an apt one, since we have collectible comic books on the blockchain as well.
Video Game Assets
Anyone who has played an MMO like World of Warcraft should be able to see the value, here. Assets earned in game (through hours of game play) could be bought and sold.
There is already a lot of money spent on Call of Duty weapons, Minecraft skins, and a range of other goods.
Assets as NFTs on the blockchain would allow for easy exchange, creating entire consumer marketplaces and in-game ecosystems that have real world value.
Tokenization
A lot of NFT projects have been exploring tokenization. A most prominent example (in my mind) is CyberKongz and the $banana token.
Holding their NFT allows you passively generate that token. By holding their genesis NFT, they generate a daily allowance of 10 $banana. Minting baby kongz required $banana. At one point, $banana hit a peak over $100. As of this writing, it sits at around $18. The token is inflationary by design. The more of that token that is pumped in to the system (over time), the less value the individual token has. So, the project is then tasked with properly incentivizing the use of that token (and reason for holding it) and to build in a controlled burn mechanism to limit the supply.
One of the projects that I have written about before (Nuclear Nerds) is exploring “play to progress” tokenization. They are gamifying token use as part of a participatory NFT project.
I believe the Nuclear Nerds will be seen as the first true participatory NFT, and their approach will be studied by future projects.
Suffice to say that there is a world of possibilities to explore in tokenization.
In both of these cases, the NFT projects are exploring how they can bring further value to their holders.
Now, imagine the concept of tokenization being applied to existing companies.
What if Delta gave $skymiles as a token that could easily be bought, sold, and exchanged? What if those skymiles were easily swapped for $krogers tokens for in-store purchases or gas station purchases?
Entire brand ecosystems will come to fruition.
NFTs will be the visual representation of your patronage, and rewards can be claimed on the blockchain.
Is this probable? I would say it is inevitable.
Other Possibilities for NFTs
NFTs could easily be used as passes for sporting events and concerts.
Imagine holding an NFT for every concert you attended and being able to share it (being part of your self expression)? Imagine holding that NFT giving you future merch or concert benefits?
Imagine holding an NFT for a sports event that gets updated with a highlights reel. I was there when….
The best thing is that any sale or contract can be done this way. The blockchain is fundamentally a ledger. You know…boring accounting stuff!
Want to buy a car? Blockchain. Buy a home? Blockchain (minus the onerous paperwork). Each transaction will be logged on the blockchain.
In 80 years, this will seem mundane.
Those represent actual sales and activities, not just interest or browsing habits. You thought internet browsing was a marketing goldmine? Ha.
Community Ownership
I saved this one for last, because I consider this to be the holy grail.
We’ll start with an example:
Let’s say that there is a musician. You have attended her concerts, and you think that she is a phenomenal talent. What if she used an NFT project to raise money for her first album and touring? By holding this NFT, get to share in her success — through free concerts, exclusive songs, and even financial rewards?
Shared ownership of an IP or brand is a game-changer.
“What excites me about web3 is it truly creates a new opportunity to have a direct line of communication between IP creators and their end customers, which should now be viewed as community and collaborators vs. customers and revenue streams on a spreadsheet. ”
-Simon Goldberg, Nuclear Nerds
Here is another example:
Facebook has over 1B users participating in Groups. What is missing from these groups is ownership and shared upside for participating and growing the community or group.
That is the difference between Web2 and Web3. Web2 companies are capturing and keeping most of the value.
With Web3, there is a shared upside with the community members. This means that your members become true brand ambassadors. With NFTs, you get art. You get community. You get IP ownership. You are a partner in what they are producing, just by holding the NFT. Your members have a financial incentive to bring more people to your NFT, product, or platform.
The community becomes part of your brand.
Community. If you’re not building it, you’re gonna have a bad time over the next decade.
-Alexis Ohanian, co-founder of reddit, founder and co-partner at 776 capital
Web3 is going to be a huge disruptor for entrenched brands and traditional marketing. The best marketing will be when your community does your marketing for you. Traditional marketing will become as outdated and inauthentic as purchasing email lists.
This is why big brands are all desperately trying to enter the space, seem authentic, and find their place in it. To me, it mostly feels like this:
NFT’s, the new Kickstarter, with benefits!
I think the comparison is to Kickstarter is an apt one. Instead of just product though, you’re getting shared ownership.
A comparison could also be made between startups and NFT projects— you are pitching a viable product that someone wants, your team (and ability to execute on it), and the roadmap for your product.
However, the comparison ends there.
With startups, you are typically forced to raise money from accredited investors (people with a net worth over $1M). There are SEC regulations (reg A) that allow for smaller investors, but it requires you to deliver K-1s to all of those smaller investors…so, most startups don’t deem it worth their time.
For startups, you are intensely focused on building your Minimum Viable Product to test the market fit.
With NFTs, you are raising money from thousands of peers who will be your first-movers and brand advocates. You are intensely focused on building your Minimum Viable Community (to borrow the phrase from Alexis Ohanian). It is removing boundaries for creators, and leveraging their community to help them grow.
Web3 and NFTs represent the true creator economy that we’ve been looking for.
Why should we listen to you?
You shouldn’t. If you go to an anonymous source for your investment advice, I would strongly suggest that you reconsider your thesis.
However, there are a lot of public faces and venture capital firms that would better lend credence to what I’m saying.
You can listen to Alexis Ohanian or Gary Vaynerchuck. Join Twitter. Find a list for crypto and NFTs. See what the forward-thinking people are saying on the topic.
You can also just follow the money.
The venture capital firm, Andreeson Horowitz (invested in Facebook, Twitter, Airbnb, Stripe, and many others) is heavily invested in crypto. They also invested in Coinbase, which in turn invested in OpenSea. OpenSea processed more than $3.3 billion worth of sales last month, generating about $82.5 million in revenue. OpenSea has around 600K users, currently. Coinbase are themselves creating their own NFT marketplace. Coinbase has 70M users that they will introducing to the space. Imagine what will happen.
Conclusion
Remember, we are still in the “innovators” phase…but that is what makes this time so exciting.
If you invest in the right projects and/or spend time building in the space, you’ll be poised for something great as we hit higher levels of mass adoption.
Which are the correct NFT projects to get into? That is outside the scope of this article, but I would recommend taking the time to understand the space.
Discover projects. Join multiple discords. Interact with the communities. Filter out which ones are buoyed by hype and nothing more. Look for projects that are hyper-focused on generating long-term value for their holders. Choose people, projects, and products that you love. Choose projects where you are proud to be their brand ambassador.
Hopefully, this article has a good entry point from which to start exploring the space!
