NFT’s: Back To The Future
Creating and trading digital art and moments is the most widely used application for NFT’s as of now. It’s important to note, though, we’re only one step past the starting line of an infinite race.
With a squint and some rose-tinted glasses, I can see a world where everything transactable is represented digitally and lives ‘on-chain’, possible as an NFT.
This could be a legal agreement, a house, your car or the next-door neighbour’s bottle of 1947 cheval blanc.
I look at it like this: Where there’s value, there’s a use-case for an NFT and for every NFT, there’s an opportunity for us to trade on-chain. Given incentives drive us; it’s easy to see how big this thing could become.
The true inflection point will be when more of the world’s value lies on-chain than off.
The underlying principles and multi-syllable buzz-words of cryptography driving this change are ‘permissionless’, ‘immutable’, ‘trustless’ & ‘frictionless’.
Which is the antithesis of so much of today’s infrastructure that we widely rely on and pay for.
Banks supposedly provide trust.
Law supposedly provides immutability.
Governments supposedly provide permissionless living.
Whether it’s Westpac Bank (bank), 2 Degrees (telecom), or Duncan Cotterill (law firm), these institutions are charged with and charge for providing us with the infrastructure to participate in our society.
What’s scary for these institutions and what they likely haven’t realised yet, is everything they provide can be handled by a few pieces of code on a blockchain.
For example, right now, you can lend to and borrow money from a blockchain application with better interest rates for savers and borrowers. You imagine what might be a hot topic between banks and their lobbyists.
The banks will be asking governments to make sure we have to ask them for permission to use our fiat on-chain. Quite ironic.
NFT’s are here to stay and are going to disrupt every nook and cranny of society. The institutions are going to hate it, and we’re going to love it.
That’s a glimpse into a broad and exciting future that might take decades to play out. Here and now, we’re stumbling through the beginnings of this NFT revolution, which I’ll attempt to lay out for you below.
So far, I’ve seen three clear steps towards the future. Gen 1, Gen 2, and soon to be Gen 3 NFT’s rely on status, access and value.
FIRST GENERATION NFT’S (Tradeable ART)
NTF’s digital art started a few years back with a bang, then lay dormant over the crypto winter of 2018, 2019 and kicked off again in late 2020.
Since then, the biggest shills of all (celebrities) have been tripping over each other to mint NFT’s and claim an easy cash grab.
Logan Paul, for example, sold a bunch of NFT’s featuring video clips of him for $30K+. Paris Hilton sold a drawing of her cat for $20k, and Grimes released a range of artwork NFT’s that netted her $6 million in less than 20 minutes.
Real creators (not that Grimes and Logan aren’t) like Kings of Leon have followed suit by releasing NFT’s of previously unreleased music.
On top of the upfront money, NFT’s excite these creatives because they offer a direct relationship (creator to consumer) to fans and perpetual royalties that they control.
Once an NFT is minted, it’s here forever. It can be sold directly from the creator to the consumer. Every time they’re traded, the creator gets a kickback like traditional licensing royalties are supposed to work. In 100 years, the great-grandchildren of Kings Of Leon will be profiting from their music NFT’s released in 2021.
Royalties aren’t new and already exist in most creative industries, but poorly structured and executed. For example, like most customer-facing businesses, my gym pays a licensing fee to a governing body to play music at my gym.
Out of the $1,500 we pay a year, I imagine <10% of that falls into the artist’s hands. Most of the money goes to wage and infrastructure costs of the governing body.
However, close to 100% of on-chain royalties reach the artist, and the artist even gets to set the royalty rate. Best of all the royalties are not disputable; all transactions are recorded and verified on a blockchain. So the greasy hands of the middle-men record labels go dry.
Because there are so many jumping on this bandwagon at the moment, Gary Vaynerchuck, like many others, thinks 98% of NFT’s will go to zero at some point.
At the moment, supply far outweighs demand and every week; new projects are becoming more innovative. They have better artwork, more utility, and more engaged communities, so most legacy projects will age poorly like the first smartphone.
SECOND GENERATION NFT’S (Community and Brand)
The next slowly emerging step for NFT’s is the brand and business play.
NFT’s can help you create a next-level community experience and form of engagement for true fans of your brand or business; this goes for everyone from creators to companies to non-profits and else.
Because NFT’s contain immutable and publicly verifiable meta-data, you can create an NFT that acts as a signalling tool ‘I belong to this club’ and a membership card that gives holders real-world utility.
Take a poker club, for example. Perhaps you have to own the NFT to play. By owning the NFT, you show you are part of a prestigious club (status signal), and perhaps certain businesses around town give club members discounts like a BMW dealership or a sports teams corporate box.
Gary Vaynerchuk launched an NFT project called VeeFriends. Which are hand drawn animals representing personality traits he likes. By owning the NFT, you get access to his community, and for the next three years, you also get access to his multi-day entrepreneurship conference held at Minneapolis stadium. Some of his NFT’s even give you access to him for 1:1 zoom calls or a tennis match.
So the value of this next generation of NFT’s is not the artwork; that’s an extension of brand ip; instead, it lies in the meta-data that gives you special rights and status signals.
THIRD GENERATION NFT’S (Business Building)
If tradeable art was the first-gen NFT and brand/business value capture was the second generation NFT, I think the next wave will be businesses built from NFT’s.
At the moment we are looking at NFT’s as a value add, a new revenue stream, another arrow a company or creator can add to their bow. But the OG play here that I think we are slowly waking up to, is making the NFT the business rather than the other way around.
Those in the know might say that’s what bored ape yacht club are already doing. As they’ve built community and brand around their NFT. But I think they’re only halfway there. Celebrities and influencers using bored apes as their twitter handle picture, as well as fomo are the main drivers of this project atm. When that changes, the value of the apes could be on the fast-track to zero.
A true NFT business won’t rely on celebrity endorsements, what’s cool or popular; it will have a customer base for which it fulfils a need and provides long-term value.
Rather than the NFT being a bolt-on, the NFT will be the gateway drug to the product or service, which bored ape yacht club and the likes could still do with cartoons, merch and so on. But those moves haven’t been made yet.
If this is all a bit vague, take Sorare, for example. They built a fantasy football league around NFT’s. They’ve mixed FIFA Manager, Fantasy Football and NFT’s to create a $3 billion company that is NFT first. Remove the NFT’s from this platform, and it’s dead. There is real value being created for football fans here; it’s not just a game or entertainment, but people can build real wealth by being a participant and NFT holder, and you have to own the NFT’s to participate.
Gary Vaynerchuk is trying this in a different context. He recently announced a pop-up restaurant he’s going to launch in New York, and the only way you can goto the restaurant is by owning the NFT.
In the future, I can see an NFT series being dropped that kicks off a merchandise brand. Or an NFT drop that leads to a private music festival.
The question is then not how can I add an NFT to my business. The question becomes how can I build a business from an NFT and, therefore, what group of people can I create something valuable for.