Oct 24, 2021
WHAT the NFT?! @ Milken Institute
Explaining the NFT economy - at the “Davos of Finance”... with Pussy Riot?!
WTF?! A political anarchist, educating the world’s “titans of finance” at the 2021 Milken Institute Global Conference, about one of the fastest growing waves of value accruing in our lifetime?
What strange origin story exists here?
Information vacuums create wonderfully strange bedfellows. When first movers are on a fast moving wave, it doesn’t matter where they came from, everyone moves forward together. Some will navigate well and accelerate down the face of the wave. Others will get rolled, and dumped. The bigger a wave, the faster it moves, and the faster each of those outcomes can happen. This is a wave not to miss. Understanding its underpinnings may help the ride.
While a technologist and VC in practice, those that know me know I’m a closet economist, fascinated with behavioral economics as an Adjunct Professor focused on “Innovation and Economic Development” — this fascinating and powerful wave, at the intersection of blockchain and the human instinct to store, and to transact value in “items”- is building to a beautiful crescendo in the form of NFTs. Like ICOs, NFTs simply represent “the economic alignment of interest across communities of interest” — but with “hyper granularity” in the matching of supply and demand and thus much more authenticity in the determination of subjective ‘real’ value.
It was super fun to shake things up last week at the Milken Institute Global Conference as a key contributor to the Institute’s one and only ‘public panel’ on Crypto. As timing would have it, that panel, led by Staci Warden, was coincident with a couple of Bitcoin futures ETFs winning regulatory approval and Bitcoin hitting an all time high. Staci Warden’s panel “ The Year Crypto and Blockchain went Mainstream” was among the most popular at the summit — with so much demand that an overflow crowd had to watch it on video while at the physical venue.
This year’s MIlken Summit overall theme “Charting a New Course” is a rallying cry for both the world post Covid, and the Blockchain economy finding applications in what can become vast consumer markets. The great thing about the attendee group at the Milken Summit is that it’s a highly curated group of people that are typically at the forefront of their respective fields. Leaders at the intersection of asset management, philanthropy, government and ‘high finance’. Many are prominent leaders in their segments, and in some cases, THE pioneers in, and of their fields - in the spirit of the institute’s founder Michael Milken. The Institute’s founder literally revolutionized modern finance, and is using his power to empower others toward advancing the positive side of the human condition. This group is intellectually curious whenever there is an explosion of activity in anything related to finance. Unquestionably the explosive growth in current wave of NFT’s as a market and value exchange mechanism is exactly that — among the greatest waves of value accruing in our lifetime.
Following is a stream of thoughts on why what’s happening IS happening, and what it may portend for the future. Like the many small waves creating whitewash on a moving sea, there are many overlapping facets, all building with harmonic resonance into a game changing wave. I will later outline a subset of those thoughts in a ‘tweetstorm’ (that I will link to here) that may make them a bit more digestible. Each of these “rivulet thoughts” may be the basis for a follow up post, which I’ll link to in this piece should I actually get to write and post about each.
First, I’ll post some conclusions, followed by some explanations of ‘how I got there’.
- As a venture capitalist, we used to fund ‘products and services’ — we are now funding the creation of ‘micro economies’ and creating virtual, overlapping nations. Github, Roblox, Axie Infinity, Yield Guild Games are examples in various ways.
- NFT’s are a modern hybrid expression of a ‘store of value’ with facets of what makes currency, currency. (There exist subjective viewpoints on ‘what is currency’ from a monetary and social perspective). One view is that currency is ‘stored productivity’ or ‘stored economic activity’. In an oil economy one could safeguard the running of machines by storing US Dollars as a proxy for the oil. In today’s economy, the ‘tip of the spear’ of “economic productivity” is (generally speaking) youth — pushing 1’s and 0’s around on screens. The fueling and storage of that productivity is no longer based on long chain hydrocarbon molecules in the form of oil. It’s measured , stored and exchanged in electrons in the format of bits.
- There are fundamental differences in how markets form around NFT’s than they did around the ‘boom and bust’ ICO wave of 2017/2018. There are two main points of difference I’ll focus on here: 1) the hyper granular matching of demand and supply of a given item in an NFT ecosystem, elevates the price discovery from purely ‘base speculation’. Comparatively, the ‘market capitalization of an ICO’ is based on the last marginal trade of ANY buyer and seller, that may or may not have had authentic interest in ‘a token’ or ‘a share’. 2) Whereas ICO’s have tended to be marketed and traded on ‘expectations of something grand that might be delivered, someday’ (leaving open price collapses when expectations do or not meet reality or when the commodity speculative frenzy fades), NFT valuations typically involve granular, subjective emotional connection to an item, for what IT IS, resulting in more durable and sticky value NOT primarily built on expectations of milestones to come (that may be missed). The hype machine element, the potential disappointment factor, and the intensive speculative ‘madness of crowds’ expressing itself in hordes of traders ‘buying high to sell higher’, while a factor, are less a factor in pricing NFTs than ICOs.
- Technology is fundamentally ‘unlocking and empowering’ a generation of artists to open up levels of creativity of expression the world has not seen before. There is inherent value in the ‘new digital medium’. Certainly Van Gogh oil paintings from the 1880’s are unique and will always be valuable; as was the writing of Beethoven’s 5th Symphony in 1804. In the case of music, digital tools have opened up whole new use cases and genres unimaginable in the 1800’s that have created nearly a $Trillion of cumulative sales value — and still running at $23 Billion per year. NFT’s are an extension of this wave, applied to ALL forms of content, audio, video, and visual sill images.
- Anytime there is a lowering of friction to a use case (these days, the lower friction and scalability of use case is often technology driven) there is significant market expansion. There was a time where it was customary to transact by taking a chunk of gold out of one’s pocket, weighing it to assess transactional value exchange for another form of value. Once the friction was lowered by mapping ounces of gold to a pieces of paper, the velocity of value exchange grew millions-fold. The value of ‘traditional art’, while subjective, is hindered by ‘high friction’ purchase, storage and exchange mechanisms. The far lower friction of creating, showing, storing and exchanging art, digitally, is expanding the market substantially on both the production and consumption side, just as digital techniques totally changed the world of music for consumer and producers, catalyzing ~$1T of sales into an elastic market.
- One can view the ‘collections’ of Bitcoins and supply of Ethereum tokens as a SUBSET of NFT’s. A given BTC for example, can be seen as ‘ one in a limited edition collection of 21 million’. One could argue that those collections are simply a precursors to a more foundational wave we are now seeing in practice — the organization of ALL the worlds assets, physical or digital, into ‘accounted for collections’ of various sizes — an “Internet of Assets” — connected to a ‘context aware cloud’ to lower the friction to access, and transaction. Google did an amazing job ‘organizing the world’s information’.. creating and unlocking enormous value. If an ‘information click’ is worth a few cents, what is the value of ‘organizing the world’s assets?’ It is not impossible for the ‘value unlock’ to be 100X - 1000X larger if measured in ANY currency.
- While humans of this generation as well as the past 2 generations, are accustomed to ‘dollar dominance’ and the existence of a narrow set of strong ‘reference’ fiat currencies — a narrow dominating currency is the exception and not the rule to how humans transacted value across communities of interest for many millennia; we could be undergoing a ‘reversion to mean’ in how value exchange is segmented — what’s different now is the ability to form and hyperscale multiple communities of interest globally, instantly, and exchange value across that global spiderweb at the speed of electrons.
- Every brand is its own ‘community of interest’ and possibly without stating it — has their OWN ‘federal reserve’. Starbucks as a for example, has a ‘nation’ of 20,000,000,000 people with $2B of stored value in cyberspace, represented today, on plastic cards. Starbucks can ‘print money’ backed not by gold or oil, but by cups of coffee and their brand; someday, they and every brand may have their own Jerome Powell, Janet Yellen, or Alan Greenspan at a keyboard, driving the next generation dashboard that looks like Tweetdeck or Hootsuite or a Salesforce CRM with digital value exchange faucets attached.
- Among the reasons we see the growth rate we do in the value exchanged in NFTs is that Reed’s Law — that goes beyond Metcalfe’s law of V = 2(2–1)n/2 applies to this category at a high level. Multiple, overlapping communities of interest transacting value, have pro-cyclical spill over effects to each other. The rising tide lifts all boats, and the riders on each boat producing uplift, spill over to lift all others on any wave touching any other wave.
- We are witnessing the replacement of geographically limited, centuries old, ‘church based’ religions as the center of ‘value definition by communities of interest’ with digital communities. This is a double edged sword that has to be managed of course, as one can see in the rapid ‘flash mob’ cultivation of ‘transactional communities of interest’ to drive subjective (but VERY real) market value round everything from Gamestop, to Snapchat, to DWAC with a the $20 B valuation implicit even though it is yet to be operational on stolen code. DWAC is a great example of an ICO.. (purposeful head fake: it’s not an ICO, it is EQUITY— these terms are increasingly easy to interchange in the expression of value ‘of communities of interest’ ). Therein lies a question ahead for our collective society; how do we provide incentive for POSITIVE economic alignment of interest to do something good for this world, at a time that it’s clear that we really need to? (there will be more on this later; I’m doing my best to do this by being a catalyst for a number of communities such as our MetaGood / OnChainMonkey community, the XTC , WestTechFest, and others, leveraging the values we espouse at ACTAI Global.)
At the time of this writing, this piece seems to be getting to be a long read, so I will ‘hit pause’ here for the moment, shift to some fun photos, and segment the thoughts above into separate, shorter reads later. Some fun moments:
