NFTs: My experience with NBA Topshot
If you have been consuming any form of media in 2021, you will have heard of the term “NFT,” also known as a Non-Fungible Token. Other than having a cool-sounding name, NFTs represent the latest innovation in crypto. So this week, I investigated how organizations such as the NBA are monetizing NFTs.
Putting the fun back in fungible
Let’s start with the basics. What does ‘fungible’ mean? The word fungible isn’t anything new; essentially fungible represents something that can be interchanged for equivalent and consistent value. Currency is a great example of a fungible asset. The $5 bill in my pocket is interchangeable and, for all extensive purposes, is the same as the $5 bill in the cash register at a corner store. Money is not unique and therefore it is fungible.
Pushing this further, cryptocurrencies such as Bitcoin are also fungible. Trading a Bitcoin at a given instance with another will result in the same value being transferred with none the wiser (at a high level).
An asset is non-fungible when it is unique with its own values and is not interchangeable. Examples of non-fungible assets include serialized baseball cards (there can only be one), diamonds (every crystal structure is different), and paintings (there is only one Mona Lisa). You can make a copy of a non-fungible asset, but it will never be the same as the original. For example, a copy of the Mona Lisa is not the same as the original in terms of value and the asset itself.
But what is an NFT?
NFTs exist on the blockchain similar to other cryptocurrencies, which allow for a tamper-proof digital public ledger. However, unlike regular cryptocurrencies, NFTs cannot be directly exchanged with one another because NFTs are “minted” tokens that have had seller and product information uploaded that have been validated on the blockchain. This process is typically completed using the Ethereum blockchain and allows for the uniqueness of NFTs.
If you are curious about the inner details, this Reddit thread by U/MintableOfficial is a pretty awesome repository of knowledge on NFTs.
NFTs create verifiable scarcity and generate value through mainly intrinsic worth. There are several use cases for NFTS. In gaming, NFTs are used to trade user-created in-game assets, in digital art, they provide creators a way to monetize at scale, and provide authenticity and scarcity to collectibles and memorabilia. They are also used for rights management.
NFTs generate value for users by creating scalability with access to a global and unified audience while also maintaining the benefits of scarcity from traditional physical products (paintings, trading cards, etc).
I want to emphasize the word users as this is an important distinction from corporation-driven (eg. the game developer, the publishing agency, or the card/collectible printer). Of course, corporations will also benefit from NFTs, but the relative positive impact to users and creators can be more.
How the NBA uses NFTs
Sports fanatics love sports, and COVID-19 has redefined how we interact with sports. Live sports attendance is down (temporarily), game schedules are always changing, and the physical interactions from both playing and viewing sports are changed. Maybe it’s the lack of an outlet, but 2020 has also proved to be a record year for the market of sports trading cards and memorabilia.
Organizations such as the NBA, NFL, and NHL are always looking for new ways to monetize their product better, and the beta release of NBA Topshot is the immediate answer.
NBA Topshot consists of digital collectible moments tokenized on the Flow Blockchain, which runs on Ethereum. These moments are literal video-clips from games that include dunks, 3-pointers, and other scenes. There have been over $400M in sales through Topshot making this the most widely used NFT from the makers of Crypto Kitties.
I’m a sports fan, and I also love technology, so a friend and I loaded $300USD into our Topshot accounts and decided to give it a try!
Moments can be purchased via bank account, credit card, or cryptocurrency and are loaded into your Dapper account. There are limits to deposits and withdrawals of fiat currency and, generally speaking, cryptocurrency is preferred.
Once the Dapper account is loaded, there are two main avenues to purchase moments:
- A marketplace of resellers that function on the principles of supply, demand, and hype; or
- Through the purchase of limited release “packs” from NBA Topshot that vary in cost and contents.
The marketplace is reseller-focused, while packs are releases from the supplier (NBA Topshot). It’s important to note that packs are bought by entering a randomized queue before each “drop”. My experience so far has shown that demand greatly exceeds supply. This is the same as how a trading card market would work.
Supply is driven by the limited release of each moment with a unique serial number tied to special events, such as the game-winning Kawhi 3-pointer. Demand is driven by the intrinsic value the purchaser sees for each moment.
Externally, the market flow of transactions on Topshot can be viewed here, and a quick assessment of your holdings’ value can be found by typing in your username here.
My experience with NBA TopShot
So at the end of the day, some of you might be caring just about the numbers. My initial investment of $300 on NBA Topshot moments is now estimated to be valued at over $618; representing an ROI of over 100%.
I will preface that my experience with NBA Topshot was purely a gamble with no real expectation of return — I just wanted to try out NFTs (of course, it’s good to see something with a positive NPV). It has also been enjoyable to bring back the nostalgia of the elementary school glory days where trading cards were everything to me.
Now of course, there are some concerns I have with the platform and product.
- Transactions can be slow and can often take a long time to complete. This causes failed transactions as a result of the lag between what you see on screen and what has already occurred.
- Transaction caps and limits are enforced. This helps manage latency and prevents fraud/bots, but also (and potentially artificially) restricts supply and drives resale pricing up.
- There are outages and there is downtime. I understand that NBA Topshot is in beta, but some of these issues range from moderate to severe. For example, the 2021 All-Star initial drop failed and had to be rescheduled.
- The spread in the resale market can essentially be infinite. This is true for physical trading cards, but future automation (as with all markets) can lead to wonky market moves unless this is fixed.
- The value curve for each moment appears to track an exponential decline and I am not sure how this will evolve. Could be a pump and dump?
- There appear to be whales, as there are in any market, and I worry the market power they hold here is likely outsized.
- There is theoretically an endless number of moments as they are driven by actions taken by the players. NBA Topshot can control the serial number of each moment for each player, but each player will always continue to generate new and unique moments.
Looking forward
I want to reiterate that my experience so far with NBA Topshot is by no means investment advice, but I have thoroughly enjoyed the experience. Humans are collectors by nature, we collect objects, experiences, memories, and connections to shape and define who we are as people. This bias to collect is could be one reason why NBA Topshot is so successful, but Topshot is also a perfect mainstream usage of NFT technology. I believe that NFTs will continue to allow artists and creators to monetize their works digitally on a global scale, while also creeping over into the physical world where the idea of an NFT could be used to notarize and authenticate physical assets such as valuable painting.
Imagine the vault scene from the movie Tenet, but instead of having to move the art within the vault physically the transactions to transfer ownership are performed on the blockchain without having to move the art itself physically?
