NFTs Have Made Blockchain Consumer-Facing — Here’s What Comes Next
Faster transaction speed, Decentralized Autonomous Organizations (DAOs), personal tokens, and what they mean for brands
Welcome to the consumer blockchain. We here at the Lab have been closely following the development of blockchain technologies for a few years. Time after time, the decentralized applications they enable seem to run into the same set of barriers of low transaction speed, limited consumer-facing use cases, and long learning curves for people outside the crypto crowd. Thus, besides bitcoin, which has so far remained as an investment tool, blockchain kept waiting for its “aha moment” to become relevant and useful for regular consumers.
Over the past few months, however, the meteoric rise of Ethereum-based NFTs has renewed interests in applying blockchain technology for consumer-facing use cases, which, in turn, has shifted the focus from designing fully decentralized applications (aka “dapps”) to harnessing the blockchain’s upside potential to create user-friendly consumer products, such as NBA Top Shot and custodial wallets. In this piece, we’ll examine the recent changes behind this significant shift and offer our takes on what it all means for brand marketers.
Faster transaction speed: a prerequisite for consumer-facing applications
Transaction speed has long been a bottleneck for the mass adoption of blockchain-based technologies. For example, bitcoin has a speed of 7 TPS and the average transaction can take around 60 minutes, and ether has a transaction speed of 25 TPS and an average transaction takes about 6 minutes. Waiting 6 minutes (let alone an hour) for a transaction to process simply isn’t consumer-friendly in the digital age of instant gratification.
The reason why it takes so long for the two most popular blockchain to verify transactions lies in the minting process. Originally, the verification process (or consensus mechanisms) that blockchain used is called Proof of Work. In order for a new transaction to be added to the blockchain, miners will first verify the entire chain, i.e. all transactions ever recorded on chain, to confirm the chain in question is the proper chain to add the next transaction (block). Because it takes a lot of energy, computer power, and time to verify every transaction, it helps safeguard that that the chain is not easily tampered with. In a way, the slow transaction speed of blockchain is a built-in feature, not a bug.
However, as various blockchains continue to grow in size with each transaction, so does the time it takes to solve the cryptographic problem that produces the Proof of Work. Therefore, the transaction speed on blockchains that use Proof of Work at their core gradually slowed down to crawl; their limited capability to scale the speed and volume of transactions made them unsuitable for most consumer-facing use cases. When Dapper Labs launched Cryptokitties in 2017, the viral popularity of the game famously melted down the Ethereum blockchain, clogging up its network with a pile-up of unprocessed transactions.
In order for blockchain to reach mass user adoption, new solutions for verifying transactions are currently being explored. For example, the Ethereum blockchain, best-known for its support for smart contracts and currently hosts most NFTs, is implementing a new consensus mechanism known as Proof of Stake. Different from Proof of Work that hinges on competitive computing power, Proof of Stake replaces computing power for “staked ether” (think of a stake as a down deposit), and resultingly replaces miners with validators, who leverage their deposit for the opportunity to create a new block. Unlike miners racing against each other to verify the whole chain, validators no longer need to compete to make a new block; instead, they are chosen randomly by an algorithm, thus increasing the speed of transactions.
Meanwhile, crypto startups like Solana and Dapper Labs are building completely new blockchains that are better equipped to serve consumer use cases at scale, often with custom verifications processes that are designed to handle higher transaction rates and volume. Solana has pioneered a time-based verification process called Proof of History that currently allows for 50,000 transactions per second (within their test net). Dapper Labs, on the other hand, built a custom blockchain called Flow, which uses a multi-node architecture (similar to a production line) to speed up the transaction and verification process. NBA Top Shot, one of the most mainstream NFT marketplaces today, is built on Flow and has handled over 3 million transactions over the past six months.
Regardless of the methods they choose to pursue, the various stakeholders working on improving transaction speed on blockchain made it possible to develop mass-market blockchain products such as NFTs. Now that the NFTs have taken off in earnest, the pioneers and innovators are turning their attention to what comes next.
What Comes Next: DAOs and personal tokens
NFTs may only have been making headlines in mainstream media for about 3 months, but they have been around since at least 2017. The roughly four-year-long underground development phase shows the long runway for most emerging technologies to break through into the mainstream consciousness with consumer-facing use cases. Among the various blockchain applications currently bubbling below the surface of mainstream discourse, decentralized autonomous organizations, aka DAOs, and personal tokens stand out as two emerging blockchain products that are gaining traction and well-positioned to grow alongside the passion economy over the coming years.
Leveraging smart contracts encoded on blockchains to manage organizations instead of transactions, DAOs present a new way for communities to make decisions, fund projects, and share value on the blockchain. They work similarly to the community management tools (upvote and downvotes) used by social forms platforms such as Reddit and Imgur. The power of decision-making is distributed to each participating individual who has invested their crypto assets in the DAO, and those individual stakeholders get to vote on what they want an organization to do. Imgur users upvote the best content whereas a user in a Venture Capital DAO might vote on which project to finance next.
The difference between a DAO and a traditional organization is what happens after a certain amount of votes are reached. Due to their centralized structure, decision-making in traditional organizations is typically top-down, and the executives are only beholden to their shareholders, and not the communities they serve. DAOs, in contrast, deploys a decentralized organizational structure powered by smart contracts, allowing them to automatically carry out the wishes of the majority in the community.
Today, most DAOs are decentralized investment groups. DAOs such as interest rate protocol Compound and liquidity protocol Aave let cryptocurrency-owners earn profits on billions of dollars worth of pooled assets and share financial rewards and governance within their communities. Flamingo DAO is an NFT-focused DAO that aims to explore investment opportunities for ownable, blockchain-based assets.
In addition, startups like DAO Huas are building non-code tools for any creator, community or individual to start their own DAO. In the future, we could very well see DAOs that are designed to bring together digital creators and their audiences, sports leagues and their fans, or perhaps a publisher and its writers, and to give everyone involved a say in the decision-making process.
Besides DAOs, personal tokens present yet another promising consumer-facing use case of blockchain. Unlike a NFT, which ties its value to a particular piece of digital art or artifice, personal tokens seek to tokenize the minters themselves. Tokenizing personal or professional services by either a unit of time (e.g. an hour or a day) or output (e.g. a painting or an episode of podcast), personal tokens are fungible with a capped supply, offering buyers guaranteed access to the individuals that issued them.
If that sounds confusing, you can think of it as a “digital currency” issued by a private entity, often a single user, whose perceived influence and reputation among their peers would be the determining factor of its value. If one is great at what they do, and their clients appreciate the work they do, the market would naturally price their personal tokens at a premium. Meanwhile, by enabling clients to bid on their time, the market can help creators allocate their time to the project with the highest reward.
Due to their inherently creator-oriented characteristics, personal tokens are a prime example of the kind of Web3 distributed economy that many crypto-enthusiasts are eager to usher in. If personal tokens become widely adopted, it would potentially empower creators to allow their fans to bid for their time and output. For example, podcasters can set up a personal token where each unit is worthy of one episode they produce, and whichever fan buys and pays a unit of the said token would get to decide the topic of that episode in question (within reason, of course). Rally, BitClout, Roll are all startups helping creators make personalized tokens as a decentralized way to monetize their work and reward followers for their participation and loyalty.
Brand Takeaways: time to explore a new paradigm
For brands, DAOs and personal tokens open up an interesting new paradigm that may potentially bring consumers into the brand-building process as direct participants, ambassadors, and perhaps even stakeholders. That flips the current brand-consumer interaction model on its head, and offers new ways for brands to engage with their core audience and give back to a loyal follower base. For community members, these new applications of blockchain serve as technological tools to quantify the value they create for brands and thus be rewarded for the role they play in building a vibrant brand fan base.
Moreover, both DAOs and personal tokens have the potential to significantly alter the way influencer marketing operates. Because they can be deployed to change how communities are run and how users interact with them, everyone would be a micro-influencer in their own rights. Personal tokens may help eliminate the middleman and help influencers to directly monetize their fans, and fans may leverage creator-oriented DAOs to collectively yield their voting power over influencers. Instead of brands paying influencers to acquire fans, they would allow consumers to earn their tokens and influence brands. Successful brands are often lifestyle influencers at their core, so the same dynamic flip could theoretically apply if the products they offer are purely digital and thus freed from the constraints of physical production and distribution.
To prepare for this brewing Web3 reform led by consumer-facing blockchain applications, brands will need to learn a whole new method of online conversation, decision-making, and value creation. Moving forward, consumers are going to want to be rewarded for their participation in a more meaningful way and have their opinions taken seriously. Inevitably, this new decentralized paradigm would require brands to give up a certain amount of control and learn to let their customers participate in the decision-making process by way of tokenized ownership. It may be a difficult adjustment, but if “the customer is always right,” why not let the market decide which customer gets a say in brand-building and marketing?
Consumer-facing blockchain applications are rapidly developing and we here at the Lab are keeping a close eye on all the innovations that are popping up in the space. If you wish to start a conversation around the trends highlighted in this article and discuss how your company can best utilize emerging blockchain technologies, please reach out to our Group Director Josh Mallalieu at josh@ipglab.com.
