After spending a couple months down a serious rabbit hole on NFTs and digital assets, I can give you a qualified definite maybe. I can even tell you where I think the more tangible and realistic opportunities are.
But I’ll also warn you that there is already a great deal of chicanery happening in the space, some of it going down right out there in public.
NFTs aren’t new, but they aren’t Bitcoin either
My entrepreneurial dive into NFTs and digital assets felt a lot like my time in the digital currency and blockchain rabbit hole of 2017. I have never invested in Bitcoin or any kind of digital currency, never had the FOMO. My fascination with both digital currency and digital assets stems from an entrepreneur’s curiosity for emerging technologies and emerging markets.
Back in 2017, I created my own alt coin, weighed the blockchain’s usefulness as a system of record, and poked holes in the privacy and flexibility promises of digital currencies. I played with all the business models, from ICOs to security tokens and everything in between.
I ultimately came to the conclusion that while there was a ton of promise in the blockchain, meaningful application of digital currency and digital assets was still some time off.
That time is not now, but it’s coming. NFTs are a step in the evolution of digital assets and thus, a step in fulfilling the blockchain promise. NFTs provide a system of record for both physical assets (Rally) and digital assets (TopShot, Rarible, Nifty Gateway), and always have. This isn’t new news.
What’s new — and what’s important to entrepreneurs — is that our collective brains are all starting to make that leap over the huge logic gap in how we determine the value of a digital thing.
In this case, we’re starting to answer the question: How do we assign value to something that doesn’t exist? Like a digital asset that only exists in the digital world. Like a weapon in a video game. Or a streaming audio file from our favorite artist.
This logic leap was already there to see if you were looking in the right places.
While we were all waiting for virtual worlds to spring up, Facebook was selling out of the Oculus. While we were laughing or wincing a the pop-culture references in Ready Player One, Minecraft was letting its players build their own blocky starter-kit societies. While we were debating the “realness” of Bitcoin as a currency, someone was paying 170,000 real dollars for a CryptoKitty.
Wait. What? Why?
Why indeed. That’s the $170,000 question.
If you’re an entrepreneur, you can’t help but wonder about the method of calculation on that valuation. Let’s throw out “bat-shit insane” as the obvious answer, and what we’re left with is speculation. In other words, the value of that digital thing was determined by the expectation that its value would increase over time.
That same speculation drove the great alt-coin rush of 2017, and some painful lessons resulted in a hardening of the rules of value for digital currency. Scarcity, supply and demand, ability to transact, tangible proof of ownership — these all became must-haves in the thesis of (almost) every token.
The digital coin is still only a coin in the virtual sense, and ownership is still only ownership in the virtual sense. But thanks to the implicit rules in the blockchain, documented by smart contracts, ownership in a virtual sense became “real enough.”
The same phenomenon is now happening with digital assets. Digital ownership of digital things is “real enough,” thanks to NFTs.
This is scary, but true. Why? Because all the value proposition of a digital thing is tied to speculation — the promise (made by someone or something) that the value of the asset will increase or at least hold steady over time.
So who is making that promise?
This is where valuations can get sketchy
Speculative value is not to be confused with value derived from usage — I wanted to say “utility” instead of “usage” but utility tokens are a thing too, and I don’t want to muddy the waters any more than necessary.
Usage value = I buy a hammer to hit a nail.
The value of that hammer is directly tied to the cost to make it + how badly I need the nail driven. I don’t care if the value of the hammer is going to go up over time.
Speculative value is tied to market value. Entrepreneurs know this calculation all too well. Your company is worth what’s gone into it + the speculative value of the investment in that solution once that solution reaches peak market saturation. Investors buy pieces of a company for one reason — they believe someone else will pay more for a piece of that company down the road.
Collectibles don’t have usage value. A painting sits on your wall, and its value is, for the most part, tied to how the painting makes you feel, not how well it can cover a hole in your wall.
Collectibles indeed have speculative value, and lots of it. You can buy a piece of a painting that sits on someone else’s wall. You may never see it in person, but you don’t care. You’re in it for the return on your share when someone else buys your piece of that painting for more than you paid for it.
When you get your head around that, it opens up the possibilities for digital collectibles. Once you don’t care about having the painting on your wall, it doesn’t really matter if the painting exists in the real world or not, as long as the rules of ownership apply.
Enter the blockchain, NFTs, and a system of record for ownership.
But here’s the problem, and it’s one that entrepreneurs need to solve. The markets for physical things are, for the most part, standardised and regulated. If you want to sell me piece of your company, the SEC will definitely be involved.
The markets for physical collectibles aren’t as regulated, but are somewhat standardised. If you want to sell me your Tom Brady rookie card or your Fantastic Four #1, there is at least an agreement of value based on some standard — scarcity, condition, proof of ownership — those are all taken into account and balanced across the trading card or comic book industry.
The markets for virtual assets are individually controlled by the smart contract that created the NFT.
Can you really buy a “piece” of a celebrity or their digital equivalent? No. What you’re buying is speculation, and you’re also betting on the integrity of the market maker.
Holy shit, that’s problematic.
There will be scams, there will be lawsuits, there will be all sorts of noise and chaos around these new markets as they struggle to exist as individual markets without any connection to a universal market.
Right now, the value rules for digital assets are being made up on the spot. Anyone who played around with digital currency in 2017 will testify that this is exciting, but maybe not a great idea in terms of risk vs. reward.
We just relearned this lesson the hard way with Gamestop. There’s no way Gamestop is worth any more than, let’s say $40 a share max. A lot of people are still holding $400-a-share bags of Gamestop because they believed other people would be compelled to pay more than that, in the form of either wilder speculators who never showed up, or a squeeze of shorts that turned out to be at least an exaggeration, if not a myth.
We can lose the foundation of a digital asset’s value being tied to a physical standard, but what we can’t lose is the line between speculation and reality, even if that reality is virtual.
Here’s where I think there is some entrepreneurial opportunity
Most of the action around NFTs currently swirls around creating the tokens, tying them to a digital asset, and auctioning them off. This is the digital currency ICO-equivalent phase of digital assets, where the quick FOMO money is made. The vast majority of these digital assets will devalue back into the bits that created them.
Organisation of digital assets has to take place at some point.
Someone is going to create an index, like the Dow Jones or the Nasdaq, once the standards of what a digital “asset” is gets more definition. Let’s call this an opportunity for the Coinbase of digital assets.
Since speculation is already a big part of the ecosystem, someone is going to “white-glove” the brokering of the assets. Let’s call this the Amazon of digital assets.
Tokenization of physical assets is going to produce some winners. There are dozens of ways this can change how physical assets are transacted and valued. Let’s call this the Robinhood of physical assets.
The technology behind NFTs and digital assets matured years ago, the productisation of digital assets is underway. It’s an exciting time to get involved as an entrepreneur. Just avoid the lure of the quick (digital) buck.
Joe Procopio is a multi-exit, multi-failure entrepreneur. In 2015, he sold Automated Insights to Vista Equity Partners. In 2013, he sold ExitEvent to Capitol Broadcasting. Before that, he built Intrepid Media, the first social network for writers. You can read more and sign up for his newsletter at www.joeprocopio.com
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