Next Gen NFTs

1/29/23

I’ve written before about existing forms of NFTs that were popular in the last bull run. Briefly you can lump them into the following categories:

1. Cultural Art. The first use cases of a technology often resemble something that came before. For the internet, the original websites resembled magazines. For NFTs the original use cases resemble art. When Snowden sells his 1 of 1 piece it has a high price tag and carries that price because of its cultural significance, not because of its pixels. However, I think there’s a pretty low revenue ceiling on this category of NFT and it’s going to be well served by companies like Christie’s. Physical art sales have an average resale time of about 25 years. The entire physical art and antique market has about $65B in trading volume. If you’re looking for another 10x opportunity, this isn’t where it is.
2. Community NFTs. These are your various Apes, Lions, Pandas, Owls, etc. Every house is valuable because of two things: its architecture and its surroundings. For community NFTs the surroundings dominate the value. They’re as valuable as the associated group makes membership desirable. In the last bull market these NFTs did shockingly well. I saw Ape images on shirts in malls, celebrities were on board, discussion of this hit late night talk shows, etc. I consider that a success. There’s some good dashboards for this market segment. If you look at all-time volumes they are astronomical (majority of $70B) and surely they created a lot of revenue for the exchanges positioned to capture it. However, if you look at the volume since May it does paint a very different picture. More recent time scales indicate we’re going to level off at about $2-$2.5B in volume. While that is encouraging and a great burner of gas, I don’t see the next 10x opportunity here either. Their time in the sun has passed.
3. Gamified NFTs. These are NFTs that are gated behind some type of action someone wants to incentivize. I predicted we’d see more of these over time and I still think we will. These started with Zapper quests but I’ve seen them now used by Rabbit Hole, Arbitrum Odyssey, and Optimism Quests just to name a few bigger examples. While I expect the number of these to 10x, they are usually minted for free so by design there’s little revenue involved.
4. Utility NFTs. These are NFTs that provide some type of technical capability on chain but otherwise their purpose is to be transferrable not sellable. Just like Gamified NFT’s I expect we’ll see a 10x in the quantity and use cases but I don’t see where the revenue will be made that I could invest in. There are many examples of this but here’s a few concrete ones:
   • An Alchemist Crucible that holds a collection of ERC-20s so they can be transferred cheaply in a single transaction.
   • A Uniswap v3 NFT. Similarly Maker could attach your vault position to an NFT so you could migrate debt between accounts without having to use something like DefiSaver to flashloan, repay, transfer, and borrow again.
   • A transferrable contract NFT. A good example of these are music royalty NFTs such as through Royal. Transferring the NFT changes who royalties are paid to. Debt servicers could similarly attach your mortgage to one of these.

If these aren’t where the next opportunity is have NFTs already peaked like utility tokens did in 2017? I think not, but the form of them will be different next cycle. Just as web2 innovated on web1 by adding interactivity, I think we’ll see the same occur for the next wave of NFT’s. Gone will be the hype for profile pictures and we’ll transition towards NFTs with steady demand and which produce revenue streams.

I don’t think the infrastructure will be there next bull market for real world asset NFTs like car or house deeds. Governments already have systems for those and even if it would reduce their costs that isn’t a metric they are optimizing for. So, I’m looking at informatic use cases of the blockchain that can remain in the digital realm to the point of delivery.

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NFT Ticketing

Chief among these I think will be NFT ticketing. Live events occur on a regular basis and the total addressable market cap here makes the art market blush. I particularly like this use case because it serves everyone better except the existing parasitic middlemen.

Just from a technical feature perspective, NFTs provide a provenance trail. If you gate NFT transfers to KYC’d customers then the venues can actually know who attended their events. This is obviously useful information which is lost now and it enables entirely new pathways to engagement between performers and attendees. For example there could be exclusive ticket sale rounds to whitelisted addresses based on previous event attendance.

Additionally there are trust and corruption issues with current ticketing approaches such as corrupt release mechanisms and opaque service charge fees. At the very least having the sale logic on the blockchain can add transparency and equal access to the process. Protocols like POAP and Funfair have already demonstrated provably fair lottery mechanisms when demand outstrips supply. Alternatively more market-like initial auction systems have been demonstrated by newer tokens like Gearbox which used 0xCider. Blockchains are demonstrably excellent at executing a provably fair, transparent process.

As to fees, a lot of the service fee charged by Ticketmaster actually goes to middlemen or the venue. It’s how they were able to grow to their current size: they stopped treating the attendee as the customer. There is a market opportunity here to reduce Ticketmaster’s cut of the fees though. That is still substantial. Ticketmaster’s revenue was $12.3B in 2022. It’s a rather perfect opportunity for some Defi mullet and we’re already seeing it start to happen even from Ticketmaster themselves.

Finally, unlike a normal ticket stub or plain digital record an NFT ticket can be associated with extra metadata (even after the event). A system like Ticketmaster could add some type of history system so you can view a collection of your previous events and event highlight reels for each but they haven’t in 20 years. By contrast, this is much more normal for NFTs already. Integrate this into a digital picture frame and you can have a place on superfan’s wall that cycles through highlights of the favorite games they’ve attended or that lets them build a digital gallery in something like Decentraland and compete with other fans.

So, there’s an opportunity here to improve the status quo for venues, performers, and attendees and the only one who stands to lose is a generally reviled middleman. I don’t think we’ll get as much push-back from the consumers here as we’ll see from Gamefi. However, stuff will need to be built.

The UX for buying tickets needs to be tailored to buying tickets. Customers need to see the layout of the venue for the seats being sold, be shown the context of the event, and be offered pathways to deeper engagement with that event’s community. All of these are UI centric changes that don’t require much contract code and are ripe for innovation. Adjacent to the chain, the NFT metadata stored on IPFS could be standardized for easier integration into navigation and viewing software.

On the blockchain and backend side the technology is already ready. I’ve personally used tokenproof at an event and the experience at the gate is excellent. Alternatively there is GET protocol which is an end to end solution running on Polygon with total ticket sales already in the millions. This stuff is just a spark away from the next bull run.

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Content Ownership

With the rise of Netflix and Apple Music came a service model where you will own nothing and you will be happy. While there’s certainly some economics at play here I think the real driver of adoption for this model was the undeniable convenience of digital storage and delivery. The ability to watch whatever you want, when you want, without commercials is a powerful selling point in a culture dominated by convenience.

However, there are a few sticking points with that model for consumers:

1. Content you like can disappear at any time.
2. They can revoke your account at any time and you lose access to everything you’ve purchased. You own nothing.
3. They are cracking down on password sharing and you can’t share the content itself through other means.

Most people are perfectly happy with this tradeoff. If content is removed, they’ll be annoyed but just find something else, bans are infrequent so far, and sharing crackdowns have only just started. That said, I do think there is some latent demand for content ownership in the digital age that hasn’t been served due to a combination of legal and technical issues.

On the legal side I have heard that there are concerns that if a distributor does just about anything to assist with the resale of content the SEC wants to make it a security. While I would find it amusing to watch the SEC argue that a My Little Pony DVD is a security the distributors just don’t want the fight. I can’t otherwise speak to the point. It’s secondhand knowledge and I’m not a lawyer.

On the technical side though, blockchains do offer some assistance. Content can be stored on a decentralized data availability layer cheaply enough to be viable. Filecoin and IPFS aren’t even the best examples. I think we’ll see the rise of an EigenLayer DA protocol that the caller can specify the data redundancy requirements for to dial in the cost to their needs. On this decentralized network storage medium the content can be stored in an encrypted form, even potentially protected by other complex rules enforced by the collateral EigenLayer holds.

Decentralizing the decryption key is more complicated. On-chain secrets are antithetical to public blockchain technology. Nevertheless, this is a topic of active research I need to read up on more. One solution in the interim is to build an off-chain component that guards the decryption keys but that won’t be fully decentralized.

Regardless of how it is solved, combining an encrypted data layer with a decryption key forms the backbone of a data license. If the whitelist mechanism is hooked up to an NFT, then you have a transferrable data license. This would facilitate the resale of content without the likes of Gamestop taking like a 90% cut and would provide a new revenue stream to content creators. If the data license supports time constraints, then you have an expiring data license. This facilitates rental content. These are capabilities I think consumers want that the industry has struggled to provide.

Combine the above with a sign in with Ethereum layer and your Ethereum address can be the host of your entire media library. A swipe from your phone can unlock content on any device you pair with just by sending it a signed message it can use to fetch the decryption key. The addressable market just for video game sales is larger than the entire NFT market to date. Steam made $6.4B in gross revenue just from game sales in 2021. Given their 30% cut, that implies $21B in sales. Digital books are another ~$1B. I can’t get isolated data for how much Amazon Prime Video, YouTube, Hulu, etc make on movie sales/rentals but physical DVD/Blue-Ray sales are another $2B so I imagine it’s much more than that. I’m not suggesting that the streaming service model is going away but if the pendulum can swing back even a few percent towards ownership that’s a sustainable industry that blockchains can host.

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GameFi

I’m going to define Gamefi as ownership and financialization of in-game items and separate from owning a copy of the game itself which would instead be covered by data licenses described above. There’s a growing market of games that are free-to-play or subscription based where ownership of the game is a legacy concept. Instead these games monetize lootboxes, trading cards, tournaments, and subscription items.

I think there’s a misconception that games need to jump into this with both feet or be entirely designed to be blockchain native. The absolute minimum a game needs to do add blockchain support is take a single in-game item, usually something like gold or a subscription item, and create a bridge to and from their database to a blockchain. You add a rest API that mints the item on the blockchain and deletes it from their database after some confirmations and which subscribes to the chain for a certain event and burns the NFT and adds it to their database. This is about a 5 day project for an intern. I’ve built one personally.

What you get as a game studio for this tiny integration is a monetary pathway from your company to your customer. That opens massive possibilities. Your usual Visa integration is a one-way valve. The alternative of having the customer link a bank account somehow is relatively terrifying from a GDPR perspective and rife with jurisdictional issues. A simple bridge to a blockchain outsources all the complexity and legal issues of any subsequent uses of bridged items such as secondary exchanges and any integration with the banking system. It also kills the typical black market that appears for any game for anything that is tradable. I used to trade gold on Ebay back in the days of Ultima Online. There was a huge friction point in the exchange not being atomic and in using Ebays dispute resolution system. People would get burned on both sides and a lot of value leaked to Ebay from buyers that could have stayed in the ecosystem and helped support the game somehow.

Right now MagicEden seems to have the lead here. Their Eden Games page showcases not just the NFTs, but the surrounding game they accompany. The experience resembles a Steam storefront with videos, a link to the game, and context about who created it and a description of the game. I could easily see them adding game reviews and community pages like Steam has as well. The NFT sale experience takes a backseat to a discovery experience here.

In terms of addressable market cap, loot boxes alone account for $15B in sales in 2020. Subscription fees for XBoxLive, PlayStation, and Nintendo are about $5B. Various other MMOs have another 10M subscribers with WoW being the largest player still in an increasingly fragmented space. Magic the Gathering Online makes over a $1B selling cards. Hearthstone is another $500M. There’s plenty of money here for a winner like Gods Unchained or for any of the big names to take that first plunge and make waves.

What I don’t think will succeed is this Metaverse concept I’ve seen discussed where some game item from one game is going to be importable to some other game. From a game designer perspective there’s just no reason to do this other than maybe for some cosmetic items as some kind of marketing play. NFT collections like Loot always struck me as a hype bubble. Maybe I’m just getting old though.

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Corporate NFTs

Whether it’s Disney or Starbucks, companies and franchises are showing interest in NFTs. Each company will want to manage their own frontend and experience but there are common blockchain rails here and a strong business to business outreach could seize this market niche.

• NFT’s that act like gift cards that can be burnt and redeemed for goods just like bridging items from games in the GameFi section.
• NFT vanity game item sponsorships like we see for sport gear sponsorships already; wear your Bankless swag while playing and receive advertising money.
• Systems like The Den on EVMavericks that can only be joined while possessing an NFT. This is a similar concept to airline private lounges adapted to the digital age.
• Customer engagement in design. Snapshot ranked choice voting polls of NFT holders for new cup designs, seasonal items, etc.
• Sweepstakes like McDonald’s Monopoly Game without the possibility of corruption.

In addition to pure NFTs are blockchain-integrated loyalty programs. Just like with Gamefi these enable a payment channel to the customer which opens up many possibilities for behavior incentivization beyond traditional loyalty systems which at best discount future purchases. Also it enables other fun like loyalty points markets, loyalty program vampire attacks, loyalty program cartels than span franchises, etc. All of these things are possible the moment you put something on chain just because of the Defi legos that have already been built.

There’s a lot of surface area here we haven’t even begun to explore. Not all of them are good, but they are coming. My lingering doubt here is where is the investment opportunity? Just like with Gamified or Utility NFTs above this doesn’t generate much if any money for exchanges. If there is serious money to be made here it will be in some kind of business to business relation between an NFT infrastructure platform and each brand.